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Metallic money and inflation February 11

Metallic money and inflation February 11. Seignorage in France around 1420 Historical context Seignorage method Data A simple model Inflation in Spain in the 16 th century Introduction to Habsburg Spain. Seignorage at the time of Joan of Arc. Around 1422 (before J. o. A: 1428)

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Metallic money and inflation February 11

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  1. Metallic money and inflationFebruary 11 • Seignorage in France around 1420 • Historical context • Seignorage method • Data • A simple model • Inflation in Spain in the 16th century • Introduction to Habsburg Spain

  2. Seignorage at the time of Joan of Arc • Around 1422 (before J. o. A: 1428) • National emergency: • Invasion right and left • No tax base • Seignorage • Inflation

  3. Similar case: Austria, 1920 1815-1918

  4. Austria • Tax base shrunk • Large administration concentrated in Austria • Expenditures through money creation • inflation reached 140 percent between 1922 and 1923

  5. Monetary system in the Middle Age • As in the roman empire, bimetallic system (gold, silver) • one livre (pound) = 20 sols (shillings) • Each sol = 12 deniers (pence/(denarius)) • Some additional complications • Livre tournois (from city of Tours, on the Loire, SW of Paris) • Livre parisis (from Paris), worth 25 percent more, but less used.

  6. Technology • Simple technology • small shop • biggest equipement furnace • easy decentralization • but: • variation from mint to mint • imitations

  7. Mints • 24 mints • private activity which is regulated • profits turned to the king • direct control of the king (no legislation) • each mint buys the silver (gold) on the market and pays with the coins it produces • makes the coins according to specifications

  8. Seignorage with coins • The mint has instructions to make coins (mix of silver and copper), • Coins are defined by two numbers • Degree of fineness F: fraction of silver in the mix • Number of coins N per pound (or unit-weight) of mix. • The face value of the coins (written on its face) f • Operation of the mint • Buy the silver on the market, at the price P • Mix with copper using the degree of fineness F • Divide each pound (or unit-weight) of silver in N coins. • Take one pound of silver • The weight of the mix is 1/F • The number of the coins is N/F • The total face value of these coins is L=f.N/F : the par value of the coin

  9. Profits • P market price of silver (for a unit weight of one marc) • L - P = gross profit (per marc [ pound ] of silver) • Net profit is • L - Q - brassage cost (i.e. production cost other than silver)

  10. When does a coin circulate ? (used for exchanges • When its intrinsic value is smaller than its face value • Suppose the price of silver is P livres • Intrinsinc value of the coin: v = F.P / N • The coin circulates only if v < f • Condition equivalent to P < f.N / F

  11. Market price of silver P Example % Mint par L • 1 livre = 240 deniers • f = 1/12 • Intrinsic value of the coin in 1418 : v = F.P / N = 0.444x9/80 = 1/20 < 1/12 the coin circulate • Verify L > P • Profit (gross) • Profit (net) • Intrinsic value of the samecoin in 1422 : • Price of silver • Intrinsic value v = 1/2 • Does the coin circulate?

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