Category Archives: Monetary History

A panel proposal that never was

The Virtues and Vices of Making Money in America

The functioning of a capitalist economy necessitates means of payment and vehicles for credit with which business can be conducted and expanded. The seasonality of agriculture, industrial production, and the nature itself of trade require money and credit to lubricate market exchange.

When talking about money in a historical perspective, instances of virtue follow very closely moments of vice. In the American case, for example, when the thirteen colonies became independent virtue was to be delivered in the promise of sovereign money issued directly in the continent. Nevertheless, the monetary experiments handled by the states in the period of Confederation led to a rather vicious situation, similar to countries enacting beggar-thy-neighbor trade policies. Virtue came again with institutional reforms adopted under the guidance of Alexander Hamilton and the rise of the First Bank of the United States, but soon concerned actors voiced the potential vice carried by the monopoly of issue. After the War of 1812-1815 the Second Bank of the United States emerged to guide the financial development of an industrializing nation, but this came with the cost of limiting the availability of money and credit for the ever-emerging peripheral regions of the country.

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“A fluid, ever-evolving, and organic process of improvement, misstep and improvement”: The Long Road to Monetary Union in the USA

A piece on the monetary unification in the United States.

The NEP-HIS Blog

Politics on the Road to the U. S. Monetary Union

Peter L. Rousseau (, Vanderbilt University


Abstract: Is political unity a necessary condition for a successful monetary union? The early United States seems a leading example of this principle. But the view is misleadingly simple. I review the historical record and uncover signs that the United States did not achieve a stable monetary union, at least if measured by a uniform currency and adequate safeguards against systemic risk, until well after the Civil War and probably not until the founding of the Federal Reserve. Political change and shifting policy positions end up as key factors in shaping the monetary union that did ultimately emerge.

Review by Manuel Bautista Gonzalez

In this piece published in NEP-HIS 2013-04-13, Peter Rousseau argues for the need to complicate the widely-held, simplistic view that political union is a necessary condition for…

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Mexican Silver in China, 19th century

On Chinese Monetary History, 1800-1949

The NEP-HIS Blog

Money and Monetary System in China in the 19th-20th Century: An Overview
Debin Ma (, Department of Economic History, London School of Economics (Great Britain)


Abstract: This article provides an historical overview on the development of Chinese money and monetary regimes between about 1800 and 1950. It develops a simple conceptual framework based on the relative costs of assessing the inherent value of the currencies of different denomination. Based on this framework, I develop a historical narrative that ties important political and institutional changes with the evolving structural changes in the Chinese monetary regime marked by the vicissitudes in the use of copper, silver currencies and paper money in both the private and public financial sectors from the Opium War in mid-19th century to the end of the Civil War in the 1950s.

Review by Manuel Bautista González

China was the first country to have coins, or the first along with Lydia in…

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Early American Monetary History

On Puzzling Colonial Money

The NEP-HIS Blog

Chronic Specie Scarcity and Efficient Barter: The Problem of Maintaining an Outside Money Supply in British Colonial America

Farley Grubb (, University of Delaware (United States)


Abstract: Colonial Americans complained that gold and silver coins (specie) were chronically scarce. These coins could be acquired only through importation. Given unrestricted trade in specie, market arbitrage should have eliminated chronic scarcity. A model of efficient barter and local inside money is developed to show how chronic specie scarcity in colonial America could prevail despite unrestricted specie-market arbitrage, thus justifying colonial complaints. The creation of inside fiat paper monies by colonial governments was a welfare-enhancing response to preexisting chronic specie scarcity, not the cause of that scarcity.

Review by:Manuel Bautista González

Farley Grubb

“Assuming money rather than explaining it allows economists to do money-price-output analysis without caveats” – Grubb 2012: 22

This paper distributed in NEP-HIS 2012-05-22 embeds institutional, regulatory and market constraints within a transactions cost model to account for the chronic specie scarcity affecting British colonial…

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The Challenges of International Economic Multilateralism

On International Policy Coordination

The NEP-HIS Blog

International Policy Coordination: The Long View

Barry Eichengreen (, University of California at Berkeley (United States)


Abstract: This paper places current efforts at international economic policy coordination in historical perspective. It argues that successful cooperation is most likely in four sets of circumstances. First, when it centers on technical issues. Second, when cooperation is institutionalized – when procedures and precedents create presumptions about the appropriate conduct of policy and reduce the transactions costs of reaching an agreement. Third, when it is concerned with preserving an existing set of policies and behaviors (when it is concerned with preserving a policy regime). Fourth, when it occurs in the context of broad comity among nations. These points are elaborated through a review of 150 years of historical experience and then used to assess the scope for cooperative responses to the current economic crisis.

Review by:Manuel Bautista González


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“Pieces of eight” without nationality

“Pieces of eight” anticipated the American dollar as a global currency. And paper money has always been accompanied by concerns that it will fuel inflation. The highest-denomination banknote ever issued, it turns out, comes not from Zimbabwe, as you might expect, but from post-war Hungary, where notes were issued in 1946 worth 100,000,000,000,000,000,000 (100 quintillion) pengo. Nearby you can see a poster printed on Zimbabwean banknotes advertising the Zimbabwean, a newspaper, with the slogan “It’s cheaper to print this on money than paper”. At the time, it was.

via The British Museum’s new money gallery: From shells to mobile phones | The Economist.

Is Money Substitutive or Complementary? East Asian Monetary History in Global Perspective

Until the late 19th century nine out of ten humans across the world made use of multiple systems of money in everyday life. The importance of small denomination coinage, the imaginary usage of silver by weight, and the prevalence of local paper monies in East Asia show that, depending on the situation, money worked in complementary ways rather than substitutive. Economists, anthropologist, numismatist and historians, whose research covers Asia, Africa, the Americas and Europe will discuss this issue and help to explore why it is that a single unified currency cannot ever dominate the entire world.

via CEAS | Events.

Some comments on Friedman and Schwartz’s The Great Contraction

Apologies for the delay in my commentary. I was thinking on how better to explain the historiographical relevance of the Friedman and Schwartz book and I thought it would be necessary to explain the theoretical background that becomes crucial to understand the (ravaging) critique of the Federal Reserve in The Great Contraction. Bear with me, please!
Friedman and Schwartz’s The Great Contraction is the reprint of a chapter of their work A Monetary History of the United States, 1867-1960, published in 1963 as part of a collection dedicated to the study of business cycles. This explains why they opt to name the Great Depression a contraction: for them, this is an episode in the much larger history of the business cycles in the US.
When published, A Monetary History proved to be the major piece of empirical evidence supporting the revival of the quantitative theory of money in the version advocated by Friedman and originally developed by Irving Fisher (1867-1947). The quantitative theory of money, in its most basic incarnation, is based on a national accounting identity, namely, that the nominal product (and income) will be identical (≡) to the amount of money in circulation in a given period of time.
Let P indicate the price level, Y the level of income, M the amount of money in circulation, and V the velocity of money, i. e., the number of times the numeraire circulates within an economy:
P Y ≡ M V
When the identity is used to predict the price level in any given time series, we will have equation (1), which states that the price level should be a direct function of the amount of money in circulation and the velocity of money, and that the price level will be an inverse function of the level of product in the economy.
(1) P = (M V) / Y
If an economy has an increased amount of means of payment, this will lead to an increase in prices, all the other variables constant: this has to occur since an excess in the money supply can only be accommodated through the loss of purchasing power of existing money.  If the velocity of money accelerates, inflation will also happen, since the same money is being used more quickly to purchase the same goods. If an economy faces an increase in product or income, without a corresponding increase in the amount of money in circulation, prices will have to adjust downwards, and deflation will happen, since the amount of money in circulation is insufficient vis-a-vis the new level of goods available and thus the purchasing power of money has to increase to accommodate the rise in output.
Now, for monetarist economists, the question is, what is the behavior of these variables? Monetarists thought the velocity of money (V) was constant (k), since for them this variable was affected mostly by technological change  and institutional practices. They also thought that the price mechanism operated without frictions: if prices and wages adjust instantly, then the economy is always producing an optimum level of output, corresponding to its potential (Y*). Thus we have equation (1′)
(1′) P = kM / Y*
Now, equation 1′ adequately shortens the monetarist dictum, that is, inflation is first and foremost a monetary phenomenon. The price level in the economy will be primarily a function of the amount of money in circulation. If this amount drops, as it happened in the Great Depression, prices will fall. If the amount of money in circulation increases, prices will rise. Equation (1′) shows that inflation (or deflation) is largely a problem of monetary authorities.
Now, why are falling prices worse than rising prices? Deflation is probably the worst of all economic phenomena in that it increases the amount of indebtedness in real terms. If someone borrows 100 dollars today, and prices rise (i. e., inflation happens), when that person repays her debt, she will repay less in real terms than he actually borrowed, for the same amount of money can purchase less goods than it did before (thus lenders charge an interest rate higher than the expected inflation to cover the inflation risk). However, if someone borrows 100 dollars today, and prices fall (as they did due to depressed consumption and investment demands in the Great Depression), when that person repays her debt, that debt will actually be higher in real terms, for the same money can buy more goods than it did before. This is known as the debt deflation problem, and was also studied by Irving Fisher. The increase in real indebtedness in households and firms drags an ailing economy for it further diminishes the propension to demand consumption goods or to invest in capital goods.
In Friedman and Schwartz’s view, deflation was a result of a restrictive monetary policy on the part of the Federal Reserve System. Had the Fed increased the monetary supply enough, deflation would have been avoided, and enough inflationary pressure would have been a good thing improving the expectations of both households and firms. In their view, a policy rule that works as an anchor to inflationary expectations is the best way to go if an economy is to have a public agency overseeing monetary matters: their revision of the US experience prior to the creation of the Fed in 1913 allows them to advocate instead for an economy whereby money is supplied by private intermediaries, without central regulation.
Now, a critique can be advanced on the Friedman and Schwartz position, in the sense that the Federal Reserve System was operating under the gold standard. The gold standard was a commodity-based monetary system where all countries ultimately exchanged gold to settle their trade and investment accounts with one another.
If the US had a trade superavit, or an inflow of investment from the rest of the world, the US would receive an inflow of gold: this augmented gold stock would increase the monetary supply and put an inflationary pressure on the domestic economy, a pressure that could be neutralized if the Fed retired sufficient liquidity from the system or decreased the reference rate of interest, encouraging investors to take their funds to other countries with better rates (and in turn stimulating the economy through a reduction of financial costs). If the US had a trade deficit, or an outflow of investment to any other country, the US would have an outflow of gold: the reduced existences of gold would diminish the amount of money in circulation and this would amount to a deflationary pressure unless the Fed provided sufficient liquidity or increased the rate of interest to attract foreign capital (and increasing the cost of lending, thus depressing the consumption and investment demand).
The main advantage of the gold standard (the almost stable exchange rates between national currencies) is that it provided a monetary mechanism that accommodated the expansion of liberal capitalism before World War I, the main disadvantage was the adjustment mechanism led to very volatile rates of inflation (and deflation).
The convenience of the gold standard was almost unanimously accepted in academic, business and political circles, and thus a deviation from this intellectual and policy consensus on the part of the Fed officers as proposed by Friedman and Schwartz is hard to think of. This argument is thoroughly developed by Barry Eichengreen in his book Golden Fetters. The historical actors were unaware of what is now called the “trilemma” of monetary policy: if an economy with fixed exchange rates wants to have free circulation of foreign capital, the economy must renounce to an assertive domestic monetary policy, and accommodate passively the performance of its external sector.
Friedman and Schwartz also criticize the performance of American central bankers with regards to their most important role during crises: that of providing liquidity. Any bank is run with a fundamental liquidity problem: their liabilities are highly liquid (let’s say deposits), whereas their assets are highly illiquid (let’s say, loans and investments). If a bank faces a run in the form of all depositors claiming the return of their money, a bank can only return a limited amount of money, for it only holds the necessary cash to conduct its daily operations. What the Fed should have done as a central bank is to act as a lender of last resort, a function first theorized by Walter Bagehot (1826-1877), an editor of The Economist: in critical conjunctures, a central bank must provide unlimited liquidity to troubled banks so that a crisis of liquidity does not turn into a crisis of solvency. The Fed did not perform much of this, but again, one must mention the intellectual and policy consensus in favor of the “liquidationist” position: many businessmen, financiers and politicians were convinced of the need to get rid of what they saw as the “weakest” competitors in all markets, in what echoes the libertarian creed of today.
The 1930s were a decade of learning for central bankers everywhere, and in my view, before we blame them directly for the worsening economic conditions, we must take into account what the intellectual consensus limiting expansionary monetary policy was, as well as the larger institutional framework regulating the international monetary system of the time.

The European Debt Crisis in an American Fiscal Mirror

First post. A comment on an article by C. Randall Henning and Martin Kessler written for the NEP-HIS blog edited by Bernardo Bátiz Lazo. Enjoy.

The NEP-HIS Blog

Fiscal federalism: US history for architects of Europe’s fiscal union

By C. Randall Henning ( and Martin Kessler (


Abstract: European debates over reform of the fiscal governance of the euro area frequently reference fiscal federalism in the United States. The “fiscal compact” agreed by the European Council during 2011 provided for the introduction of, among other things, constitutional rules or framework laws known as “debt brakes” in the member states of the euro area. In light of the compact and proposals for deeper fiscal union, we review US fiscal federalism from Alexander Hamilton to the present. We note that within the US system the states are “sovereign”: The federal government does not mandate balanced budgets nor, since the 1840s, does it bail out states in fiscal trouble. States adopted balanced budget rules of varying strength during the nineteenth century and these rules limit debt accumulation. Before introducing debt brakes for euro area member states, however, Europeans should consider three important…

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