Nathan Sussman

The Bank of England co-organised a ‘History and Policy Making Conference‘ in late 2020. This guest post by Nathan Sussman, Professor of International Economics at the Graduate Institute of Geneva, is based on material included in his conference presentation.

The monetary system is going through significant changes: the rise of cryptocurrencies, negative interest rates, and the decline in the role of traditional banks as intermediaries. History offers policymakers and academics useful case studies that can serve as distant mirrors beyond the study of crises and policy responses to them. Medieval Europe was a period of monetary experimentation and development. The rulers of this period faced similar challenges to those of modern central banks: competition with private monies, no recourse to interest rates as policy tools, and limited use of inside money created by deposit banks. This post draws on my research on monetary policy in late Medieval France to demonstrate the principles that guided policymakers in addressing these challenges.

Monetary theory and policy in Medieval France

Royal monetary policy was conducted by practitioners recruited from the moneychangers and nascent banking community. However, the overall strategy was promulgated by royal advisors drawn mainly from the University of Paris (Gandal and Sussman (1997)). Sometime before 1355, Nicholas Oresme published ‘De Moneta’, the first modern monetary treatise (The De Moneta of Nicholas Oresme). According to Orseme, money serves as a medium of exchange to reduce transaction costs in trade. Universal acceptance is best achieved if it has a stable and publically known value. Moreover, the national currency belongs to the people, and the state’s role is to regulate it to benefit the people. This is done by ensuring money is produced according to the strictest standards and avoiding manipulating it to the king’s benefit (inflation tax).

Around 1360 Oresme became an advisor to King Charles V and became the first academic economist to hold such a position. While De Moneta was likely the first monetary treatise of his time, it builds on (and cites) earlier traditions dating back to Aristotle’s Politics. It is also likely that his ideas on money were not entirely foreign or novel for the government. Therefore, we can safely assume that monetary theory and policy in 13th and 14th century France are not anachronistic terminologies.

Public versus private money

In the decentralised feudal monarchies of Europe, coinage was a private order institution (Spufford (1988)). The weak monarchy had limited sources of precious metals and could not circulate large quantities of its coins. Moreover, it hardly collected taxes, which made it difficult to increase its stocks of precious metals and made it impossible to force the use of royal currency by requiring their use in tax payments. Therefore, the king had to compete with private currencies, and the triumph of the royal currency was mainly achieved by providing a superior good.

As Oresme put it very clearly, a universally accepted medium of exchange lowers transaction costs and facilitates trade. As the French economy emerged from the economic low point of the early middle ages, cities and interregional trade grew. A demand for a currency accepted outside of local feudal jurisdictions emerged. This was perhaps a necessary condition for the emergence of national money, but not a sufficient one. The king responded to the challenge by offering private mintmasters to produce royal coins in a franchise system. Since the metallic content of coins is subject to asymmetric information, the crown’s advisors designed a mechanism predating McDonald’s to ensure the production of standardised royal coins throughout the kingdom (Gandal and Sussman (1997)). Since an accurate assessment of coins’ quality could only be achieved by melting coins down, the crown enjoyed economies of scale in assessing samples of coins produced at its mints (Gandal and Sussman (1997)). The crown, therefore, had a comparative advantage in monitoring coin quality. Just as Oresme advocated, the crown produced coins that uninformed people could trust.

After successfully competing against private monies and achieving wide circulation, the dominant position of royal currency was cemented by the concomitant adoption of the royal coins’ unit of account. The economy became more and more monetised, and feudal contracts in kind were commuted to cash denominated in livres tournois, the royal unit of account. Royal judges were instructed to prefer settlement of contractual disputes denominated in livres tournois using the currently circulating royal coinage. Thus, the preferential treatment of the state currency by the legal system, rather than its acceptance in tax payments, proved vital in upholding the dominant position of the state’s currency.

The principles of conducting monetary policy in the absence of an interest rate tool

Medieval monetary policy operated without a central bank. As a result, the monetary authorities could not set interest rates. Instead, monetary authorities established a flexible exchange rate between reserve currency – bullion – and cash (coins). The real cost of cash, rather than precious metals, was the intrinsic value of the precious metal (bullion) paid as seigniorage charge for minting the coin at the royal mints.

Furthermore, the mint established an exchange rate between precious metals and the unit of account (nominal balances). In France, the exchange rate was not a hard peg and as modern monetary open-economy monetary theory predicts, flexible exchange rates allow the pursuit of active monetary policy.

Cyclical adjustments to the money supply were usually made by changing the seigniorage rate. During a recession, the crown would lower the costs of converting bullion to cash to increase the money supply and vice versa. Since the domestic supply of precious metals was relatively stable, to maintain price stability and prevent deflation in periods of secular economic growth, the crown increased the exchange rate between the unit of account to bullion (devalued the unit of account). A similar policy, employed most effectively in Florence (Cipolla (1982)), was to vary the exchange rate between gold coins (international reserve currency) and the domestically used silver coinage by increasing only the exchange rate between the unit of account to silver.

Moral hazard and monetary policy

The success of Medieval monetary authorities in securing an almost monopoly position for royal currency in France and their mastery in using the exchange rate between bullion and currency to pursue monetary policy created a moral hazard for the monarchy. The French crown successfully engaged in repeated episodes of inflation-tax financing of wars (Sussman and Zeira (2003)). In the absence of an independent monetary authority, price stability was sacrificed for fiscal objectives during the Hundred Years War. These developments prompted Oresme to write the De Moneta to remind the king that national money was a public good that should not be abused without consent. In a remarkable resemblance to the British resumptions of the gold standard at pre-war parities in 1819 and 1924, Charles V adhered to Oresme’s counsel, stabilised the royal coinage, and refrained from using inflation tax until the end of his reign.

Lesson from the Medieval French monetary experience

The historical record shows that state currencies dominate private currencies in general public use for two main reasons. First, states enjoy a comparative advantage in establishing reputation and commitment and therefore are best suited to provide a medium of exchange – a public good – at the lowest cost. The debate about the environmentally unfriendly blockchain verification technology used by cryptocurrencies exemplifies this. Second, the state has a monopoly of the legal system that allows it to provide a legal – contracting – advantage to the state’s unit of account. Then, as now, the legal status of private (crypto) currencies is key to their ability to function as a medium of exchange rather than a financial asset (Rogoff (2017)).

The comparative advantage of the state in circulating a national medium of exchange creates a moral hazard. Historically, private currencies and competition from foreign currencies were a constraint on the state’s opportunistic behavior. However, this did not prevent occasional recourse to inflation tax. Only the independence of monetary policy from fiscal considerations, as Oresme advocated, can prevent this from happening.

Finally, the Medieval experience, which was not unique to France (Cipolla (1982)), shows that monetary policy can be conducted without going through the banking sector. This should be comforting news to central bankers in a world where the role of banks as financial intermediaries will decline (Benes and Kumhof (2012)). It also predates solutions to monetary policy at the effective lower bound based on the distinction between reserve money and the medium of exchange (Agarwal and Kimball (2015)). In the modern version, the government could vary the amount of reserves private institutions are required to hold against the issue of (digital) cash.


Nathan Sussman is a Professor of International Economics at the Graduate Institute of Geneva.

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