by Felix Martin
This vulnerability was more than a theoretical risk. Medieval sovereigns had few ways of raising revenue apart from the proceeds of their personal domains: levying direct or indirect taxes was far beyond most feudal administrative capabilities. Seigniorage was therefore a uniquely attractive and uniquely feasible source of income—and medieval sovereigns happily indulged in it. Under normal circumstances, when seigniorage was levied only on the gradual increase in the coinage supply demanded by a growing monetary economy, the revenues were relatively modest. But when the need arose, a sovereign could raise enormous sums by crying down or even demonetising altogether the current issue of the coinage and calling it in for re-minting off a debased footing. In 1299, for example, the total revenues of the French crown amounted to just under £2 million: of this, fully one half had come from the seigniorage profits of the Mint following a debasement and general recoining.20 Two generations later, the recoinage of 1349 generated nearly three-quarters of all revenues collected that year by the king.21 When such large sums could be raised, it is hardly surprising that there were no fewer than 123 debasements in France alone between 1285 and 1490.22
The remonetisation of Europe over the so-called “long thirteenth century,” from the late twelfth to the mid-fourteenth century, therefore generated two phenomena that would eventually come into conflict. The first was the emergence of a class of individuals and institutions whose wealth was held, and whose business transacted, in money—a politically powerful “money interest” beyond the sovereign’s court. The second was the growing addiction of sovereigns to the fiscal miracle of the seigniorage—a miracle which grew in proportion with the increasing use of money. The more activities were monetised, and the more people were drawn into the money economy, the larger the tax base on which seigniorage was levied. As sovereigns were to discover, this apparently magical source of fiscal financing did in fact have limits. They were not technical, however, but political. At some point, the new money interest was bound to assert itself against the sovereign’s perceived excesses. This point was reached in the mid-fourteenth century. It produced the first work in the Western canon on a topic that was thereafter to receive considerably more attention but become considerably more obscure: monetary policy.
THE BIRTH OF THE MONEY INTEREST
In the summer of 1363, the fortunes of the royal house of Valois—the rulers of the Kingdom of France—were at a low ebb. Seven years previously, the king, Jean II, had suffered a calamitous defeat at the hands of the Black Prince of England at Poitiers, and been led across the Channel as a prisoner. Fortunately for Jean, the medieval understanding of captivity—for kings at least—was indulgent. He whiled away his time in England hunting and feasting with his hosts, enjoying his large court, and lodging on the Thames at the Savoy Palace—then, as now, a byword for high living. In the meantime, his French lands, with his eldest son the Dauphin Charles in nominal command, descended into near anarchy. At last, in 1360, a treaty was struck, under which Jean would return to France to raise a ransom of three million crowns while his second son, Louis, was confined in Calais as surety for the English. Reluctantly, Jean bade farewell to the Savoy and returned to his ravaged kingdom. His hardship was not to last long. In 1363, news reached Paris that Louis had escaped his captors, breaching the terms of the treaty. Jean was overcome by a sudden bout of noblesse oblige and lost no time in volunteering to return to his imprisonment in England. He died a year later, and the dilapidated Kingdom of France passed into the hands of the Dauphin for good.
King Jean’s return to England in 1363 had astonished the French establishment—but they had quickly realised that it also presented them with a golden opportunity to brainwash his heir. Here was their chance to end the French crown’s fiscal folly, and especially its reliance on the evils of excessive seigniorage. In the course of his war with the English, Jean had tested new extremes in this respect. In 1355, the year before Poitiers, there had been no fewer than eight devaluations, and even then the year had ended with the king forced to declare a moratorium on his debt service.23 What was needed was to convince the prince that in the emerging era the age-old practice of milking the seigniorage would do more harm than good. The Dauphin was young and hopefully impressionable, but he was no fool. What was required was an advocate—a brilliant logician, economist, and rhetorician—who could marshal the most cogent arguments available from the schools and apply them to the real world. This was a tall order: the academic orthodoxy of the day placed more value on infinitesimal disputes over the precise meanings of classical texts than on scientific enquiry, let alone its application to policy. Luckily, there was an exception to this general rule: the newly appointed Grand Master of one of the most prestigious schools in Paris, the College of Navarre. His name was Nicolas Oresme. He accepted the assignment at once.
Oresme was a Norman from Lisieux who had come to Paris in the 1340s to study under the great scholiast Jean Buridan. Since then, he had proved himself the outstanding scholar of his day, making major contributions in many disciplines, from mathematics and astronomy to philosophy and theology. It was for the tract that he addressed to the Dauphin Charles in around 1360, however—Tractatus de origine, natura, iure, et mutacionibus monetarum (“A Treatise on the Origin, Nature, Law, and Alterations of Money”)—that he would be best remembered.24 The Treatise was both a powerful work of analysis and a powerful work of persuasion. Oresme stated clearly the two disputes it sought to untangle at its outset: was it right that the sovereign should manipulate the monetary standard? And if it was, then in whose interests should he do so?
Oresme’s answers were revolutionary. Traditional scholastic thought held that money was part of the feudal domain of its issuer and that the minting authority could therefore do with it whatever it liked. Since the sovereign owned the Mint, the only interests to be considered were those of the sovereign. Oresme introduced a radically different perspective. Money, he said, is not the property of the sovereign but of the entire community that uses it. In a world in which the use of money had spread far beyond the settlement of royal expenses—a world in which private transactions were extensively conducted, and private wealth widely held, in monetary form—the issuance of money constituted an essential public service and should therefore be operated in the interests of the public at large. Naturally, Oresme’s idea of the public at large was somewhat selective. He was, after all, a spokesman for the great feudal landowners of the church and the aristocracy, whose rents and savings had been newly transformed from obligations in kind into monetary wealth. It was these people, whom Oresme unblushingly dubbed “the best classes of the community,” who suffered most from the scourge of redistributive seigniorage—and in whose interests the sovereign should manage his money. The sovereign, Oresme pronounced, “is not the lord or owner of the money current in his principality. For money is a balancing instrument for the exchange of natural wealth … [i]t is therefore the property of those who possess such wealth.”25
This vantage point gave Oresme a new perspective on the merits of the sovereign’s manipulation of the standard—the great bugbear of the new moneyed classes. On the one hand, Oresme was quick to point out, this was basically a problem. In the normal course of things, the sole reason for such manipulation was for the sovereign to levy seigniorage from his subjects. “Can any words be too strong,” he asked, “to express how unjust, how detestable it is, especially in a prince, to reduce the weight without altering the mark?”26 Both social justice and economic efficiency required a more reasonable and predictable monetary system. But as a wily and circumspect pamphleteer, Oresme realised that to campaign for the abolition of the seigniorage altogether—by bringing the tariffed, nominal value of the coinage exactly into line with the market value of the precious metal that it contained—would never fly. He therefore recommended a more moderate course. In exchange for the benefit of using the sovereign money, the community should bear both the costs of minting and a modest seigniorage, so that the sovereign co
uld continue to enjoy “a noble and honourable estate, as becomes princely magnificence or royal majesty.”27
Yet Oresme was aware that this proposed monetary reform begged a further question. Eliminating—or at least strictly regulating—seigniorage would certainly reduce the sovereign’s room for discretion in the management of money. But if the sovereign’s choice of the level of seigniorage was not to determine the quantity of money in circulation, what should? In theory, there was a simple answer to this question. If the standard were simply to be fixed and immutable, then private demand for coinage could set the quantity of money. If people wanted coins, they could bring silver to the Mint and have it coined, with only minting costs and a minimal seigniorage tax to pay. The problem was that this laissez-faire solution was unlikely to work in practice, because there was no reason to suppose that the arbitrary supply of precious metal would necessarily accord with the demand for money.
There was, Oresme concluded, a limited role for sovereign monetary policy after all. In extreme cases, debasement might be necessary—but only in order to ensure that the supply of coined money was sufficient to meet the needs of the community, and only on the instructions of the community: “if [the community] trusts the Prince with [the debasement of money], within a reasonable limit … the Prince would not undertake it as main author, but as the executor of a public ordinance.”28 At all other times, the sovereign’s monetary policy should consist of trying to discover new sources of precious metal to augment the supply of coined money. “It was this consideration,” Oresme wrote, “that led Theodoric, king of Italy, to order the gold and silver deposited according to pagan custom in the tombs, to be removed and used for coining for the public profit, saying: ‘It was a crime to leave hidden among the dead and useless, what would keep the living alive.’ ”29
Oresme had uncovered a genuine and profound paradox that would, as we shall see, haunt monetary thought over subsequent centuries. There had to be a means of restraining the sovereign’s inveterate impulse to fund his innate profligacy for free via seigniorage. There needed, that is, to be a rule governing the issuance of money: the standard should not be infinitely flexible. But if such a rule resulted in periodic dearths of money, it would impose an undesirable constraint on commerce. This would seem to call for someone to have the discretion to adjust the supply of money in response: the standard should not be immutably fixed either. Oresme did not resolve this paradox—recommending that the sovereign resort to grave robbery was hardly likely to catch on as a mainstay of policy. He did, however, introduce the innovative idea that in considering monetary policy’s ability to redistribute wealth and incomes and its ability to stimulate or stifle trade, it was not the sovereign’s fiscal needs that should take priority, but the wider community’s commercial well-being.
This new perspective on money led to a radical political conclusion. For if monetary policy was to be directed at the public interest, it implied that the community—rather than the sovereign alone—should control it. The Treatise’s conclusion could not have been more blunt: “the community alone has the right to decide if, when, how, and to what extent [money] is to be altered, and the prince may not in any way usurp it.”30 What is more, it clearly implied more general limits on the sovereign’s power, and was not afraid to acknowledge these as well: “he is greater and more powerful than any of his subjects, but of less power or wealth than the whole community, and so stands in the middle.”31 And in case the message was not clear enough, Oresme rounded off with a chapter discussing the likely fate of a sovereign that chose to ignore it. The portent of its ominous title can hardly have been lost on the Dauphin: Quod tyrannus non potest diu durare—“That a tyrant cannot last long.”32
Persuasive as Oresme’s arguments may have been, they were not obviously effective. The problem was that there was no way of forcing sovereigns to listen while there was essentially no alternative to sovereign money. There was certainly extensive use of small-scale credit and even of local token currencies in the Middle Ages. But the perennial constraints on the monetisation of private credit and the fragmented political geography of the day meant that the only viable general-purpose money was that issued under the authority of the sovereign. Indeed, the creditworthiness and political authority of sovereigns themselves was typically so weak that coins minted from precious metals remained the dominant form of money. When even the sovereign’s money required portable collateral in the form of its precious-metal content, what hope could there be for issuers of a lower political and economic standing? Sovereigns therefore retained a practical monopoly on money issuance—and they knew it. The emerging money interest could hire the best brains in Europe to make the case that the sovereign should restrain his seigniorage and manage his money instead with their interests in mind—and in Oresme they had done just that—but they had no means of forcing the sovereign’s hand. As an issuer of money, he simply had no serious competition.
As so often in the history of monetary thought, however, Oresme’s arguments were becoming obsolete almost as they had been expressed. Outside of the traditional sources of sub-sovereign wealth and power—the aristocracy and the church—the commercial revolution was beginning to build a new mercantile class. Its practices may not have enjoyed the nice theoretical apparatus of Oresme—but then the merchants did not need scholastic logic to justify their activities. They were busily rediscovering an invention that would turn monetary society on its head in a way in which Oresme’s brilliantly argued tract never could. That invention was the bank.
6 The Natural History of the Vampire Squid
THE MYSTERIOUS MERCHANT OF LYONS
In around 1555 there arose a scandal in the city of Lyons.1 An Italian merchant had settled there and proceeded to make himself prodigiously rich in a remarkably short space of time. By itself, there was nothing particularly surprising about that. Lyons was one of the great commercial cities of France, and of Europe. It was no stranger to the business of international trade, or to the wealth that it could bring the enterprising merchant. Indeed, the magnificent fair it hosted four times a year was said to have been founded in Roman times, and by the mid-sixteenth century it was the greatest mercantile gathering in all of Europe.2 It was the manner of the Italian’s success that had caused a stir. He had come to the fair bringing no merchandise whatsoever; nothing, in fact, but a single table and an inkstand. He looked more like an itinerant scholar than a merchant, and had spent his days doing nothing more strenuous than signing his name to pieces of paper brought to him by fellow merchants. And yet by the end of the fair, a few weeks of such decidedly undemanding activity had made this pallid and bookish fellow astonishingly rich. The explanation was obvious: the man was a fraud.
The uneasiness of contemporary observers at this strange spectacle must have been brewing for some time: it was not an isolated case. It was indeed true that fairs like that at Lyons had once been grand occasions for Europe’s great merchants to convene gigantic versions of the markets held on a weekly basis in villages and towns across the Continent. They had been the principal places of trade for the high-value luxury goods whose exchange across national boundaries was the most dynamic aspect of the medieval economy—as well as for myriad local transactions in small-scale and usually perishable goods. But in the course of the long thirteenth century, the organisation of cross-border trade had changed: the business of exchange had been subjected to a division of labour. The heads of the merchant houses no longer travelled with their goods. They remained at home, and kept agents permanently resident in their main export markets, while professional hauliers would transport cargoes by land or sea as contracted. The merchant became concerned primarily with the legal and financial aspects of international trade—the change of title to the goods, and to the money received in return; and the financial calculus of balancing revenues received in one currency with expenses incurred in another. The tedious business of getting the goods from one place to another was farmed out to a lesser class of busi
nessmen.3
One result of this changing organisation of commerce was a gradual evolution in the nature of the mercantile fairs. Once upon a time, a fair like Lyons had operated for its duration as a great pyramid, incorporating the mass of local retail trade at the base, the commerce of wholesalers and international traders in the middle, and the netting out of the accounts accumulated at these lower levels at its apex. But over time, these periodic gatherings of Europe’s merchant class came, as the great French historian Fernand Braudel put it, “to concentrate on credit rather than commodities, on the tip of the pyramid rather than the base.”4 Less and less were they opportunities for the physical exchange of goods. More and more, they were occasions for the clearing and settlement of credit and debit balances accumulated in the course of international trade over the preceding months. Between fairs, payments for international imports were generally made not in coin, but on credit, using bills of exchange—credit notes sold by the pan-European merchant houses to their clients, who could then present them to their suppliers in foreign cities in payment for goods. By 1555, the primary role of the fair of Lyons was as a clearing house for the credit and debit balances accrued by the merchant houses of Europe against one another in issuing these bills of exchange to finance trade. It had become the most important market in Europe not for goods, but for money.
