Wednesday, February 11, 2015

The Emergence of the State Monopoly over Money

Just as it is possible to construct a theory of the emergence of money based on principles of agent preference and action, so too is it possible to build a theory of the state monopoly of money with such principles.

Both history and theory converge on the conclusion that money was by no means a creation of the state. Money arose as agents confronted difficulties associated with barter. Instead of bartering directly, agents began to accumulate some goods for the purpose of indirect exchange. Depending on time and place these goods have come to include shells, oats, cows, and the more commonly recognized silver and gold. As agents converged upon common goods for exchange, the commodities began to act as moneys: goods that act as 1) a medium of exchange, 2) a store of value, 3) a unit of account, and 4) a standard of deferred payment. The emergence of money allows for the beginning of specialization that is characteristic of a human economy. A more robust civilization can then be supported. It is at this point in our story where we left off last post.

As society converged to gold and silver for facilitating commerce, this presented an opportunity for the ruling class and those aspiring to comprise it. It is an obvious observation that an increase in money, all else equal, is equivalent to an increase in wealth, and therefore, power. The role of money minting, then, commands an appreciable amount of power. As in any market, this power increases with the establishment and enforcement of monopoly privilege.

There is no a priori reason that we should expect a monopoly on money to occur. In his essay, “An Evolutionary Theory of the State Monopoly over Money", David Glasner argues.

For the production of a good to be a natural monopoly, the technology must exhibit economies of scale that ensure that the average cost of production is always lower if one for produces the entire output of an industry than if two or more firms with access to the identical technology divide the output. But even if the state were the lowest-cost producer of money, it would not necessarily enjoy the economies of scale required for the existence of a natural monopoly.

Printing of the seal of the sovereign on money is in no way evidence that the state was required for monetary stability. The seal of the sovereign may have given “traders more confidence in the weight and fineness of coins.” The sovereign, however, was “seeking not to improve the monetary system but only to exploit profit opportunity implicit in this premium”. A theory of the state monopoly is mistaken if it seeks to justify the monopoly by an argument based on the public good (not to be confused with the category known as public goods). While such an argument is not excluded from comprising part of the explanation, the core of the explanation must also consider the motives of agents close to power and involved in coining.

Glasner offers one clear explanation for the emergence of state monopoly: defense. He is not so naïve as to try to describe the process of this emergence as involving high-minded principles that guided the sovereign to attempt to stabilize and improve the monetary system. Competition for power is fierce. Any leader, elected or unelected, faces competition from numerous agents who would prefer to have the power for themselves and their own allies. One regime is always at risk of being displaced by another. A weapon that an agent or team of agents might potentially use is their influence over the money stock.

Minting a large quantity of debased coins might enable a private mint owner to finance an attempt to overthrow an incumbent sovereign. To be sure, such a debasement would violate the mint owner’s promises about the content of the coins he was issuing. But upon becoming the sovereign, the owner could avoid any legal liability by annulling his legal obligation to those he had defrauded.

A mint-master who sought to overthrow the existing regime could inhibit money’s role as a unit of account by debauching it while increasing one’s wealth in the process.  Given this threat, monopolization of the production of money is not only an opportunity for a sovereign to profit, but also to keep political competitors at bay. A sovereign might well feel justified, then, in establishing not only a monopoly over the mint, but also establishing legal tender monopoly.

This sort of problem appears to be reflected in the writing of Nicolas Copernicus. In his “On the Minting of Money”, he argues,

It would be advantageous therefore for there to be only one common mint for all Prussia, in which every type of money would be stamped on one side with the insignia of the lands of Prussia: they should have a crown at the top, so that the superiority of the kingdom would be recognized. On the obverse, the insignia of the duke of Prussia could be seen under the crown above it.

A charitable interpretation suggests that Copernicus was worried about mint-masters in Prussia threatened the stability of the Prussian empire by minting debauched currency. If this was the case, the defense argument may have been at the forefront of Copernicus’ mind. It is also possible that Copernicus had in mind that Prussian leadership would consider his suggestions. Whether or not a mint-master would successfully destabilize the ruling regime before going out of business is another question entirely. Hume seems to have had something similar in mind, though his worry concerned the extension of credit by private banks, as opposed to dishonest coinage. Not only did he suggest that a single bank should regulate the credit stock – presumably the Bank of England – he even suggested that it is the job of the sovereign to ensure its modest increase.

The good policy of the magistrate consists only in keeping it, if possible, still increasing; because, by that means, he keeps alive a spirit of an industry in the nation and increases the stock of labour, in which consists all real power and riches.

Again, this seems to be a case of an economist acting as a policy wonk. Perhaps Hume should have looked north to the hills of Scotland to notice the relative stability of its freebanking regime. (The end of Hume’s life coincides with the early years of relative stability under the free banking regime in Scotland.) Economic stability promotes political stability. Hume’s emphasis on internal stability and progress fits well with Glasner's theory.

               Defense is important both to the internal politic and in foreign affairs. While the former likely served as the primary impulse for state monopoly, the latter was served by it.  Even in a regime that typically promotes policies supporting sound money, major wars tend inevitably to devalue the currency. When a nation enters into war, the monetary system becomes a tool by which resource can be coordinated toward the war effort. Glasner mentions that this was a recurring theme in the ancient world. We also witness this in modern and early modern wars. Whether one considers the depreciation of the continental during the American Revolution or that of the British pound during the Napoleonic wars or the widespread suspension of the gold standard during World War I, modern governments have a habit of funding wartime expenditures via monetary inflation much like their counterparts in antiquity (Hawtrey 1947, 69, 92-105; Webster).

Whatever the cause of a fall in a currency's value and whether or not that fall in value is justified by circumstance – such as war – the effect of manipulation of the monetary unit alters the composition of the money stock in circulation. When devalued money of a particular nominal value circulate alongside coins of the same denomination but of different, more highly valued composition, there arises a an increase in the costs of barter. Agents engaged in exchange must consider the value of a coin’s metallic content. For example, imagine that we have two coins that weigh 1 oz and have different compositions. Coin A is 4 parts silver and 1 part gold (or in other words, 4/5 of an oz silver and 1/5 oz gold). Coin B is 4 parts gold, 1 part silver. Assuming that gold is worth more than silver, coin B is worth more than coin A. Since it is convenient to trade with coins of the same denomination, agents will continue to trade with coins of this 1 oz denomination, but they will tend to remove the coins with more gold from circulation. These coins serve as a store of value – defense against inflation – while the cheaper money is employed as a medium of exchange. Of course, coin A might also serve as a store of value, but the chance of continued devaluation makes ownership of the coin A more attractive for this purpose. This outcome is typified by Gresham’s law.

Having considered the emergence of a state monopoly over money, the analysis has been primarily concerned with premodern and early modern institutions. This leaves us to consider whether or not a state monopoly over the production of money - at least base money - is justified. Glasner closes by suggesting that, in the least, the state can no longer claim that a needs of national defense justifies for the monopoly as monetary policy has come to be a tool for the promotion of "high employment and economic growth." Thus, we have an explanation of the emergence of a state monopoly over money rather than an explanation of its continuance in the modern era.


  1. Your David Glasner link takes me to ?? an advertisement for a book you edited, maybe?

    Looks like the Copernicus link goes to the same place.

  2. I am citing sources as they appear in the two volume macroeconomics anthology that I helped to edit and compile. Citations that come from the compilation link to the anthology. When it is officially released, I'll be sure to post so that interested readers can access it.

  3. My initial thought was that you had an error in the link, as sometimes happens. Later I realized you probably did it on purpose. Silly me.

    "In the seventh century, the right of coinage, the royal prerogative par excellence, passed over to the episcopal or monastic churches or to private persons; the treasury perhaps still collected part of the profits of coining. Mints multiplied in the cities, "chateau" (castra), vici, and even mere villas. The history of the coinage shows in a striking fashion the disintegration of the royal power." -- Ferdinand Lot, in The End of the Ancient World and the Beginnings of the Middle Ages.

    "the royal prerogative par excellence"