Denationalisation of Money: The Argument Refined

VII. THE LIMITED EXPERIENCE WITH PARALLEL CURRENCIES AND TRADE COINS

So long as coins of the precious metals were the only practicable and generally acceptable kinds of money, with all close substitutes at least redeemable in them (copper having been reduced comparatively early to subsidiary token money), the only different kinds of money which appeared side by side were coins of gold and silver.

The multiplicity of coins with which the old money-changers had to deal consisted ultimately only of these two kinds, and their respective value within each group was determined by their content of either metal (which the expert but not the layman could ascertain). Most princes had tried to establish a fixed legal rate of exchange between gold and silver coins, thereby creating what came to be called a bimetallic system. But since, in spite of very early suggestions that this rate be fixed by an international treaty,1 governments established different exchange rates, each country tended to lose all the coins of the metal it under-valued relatively to the rates prevailing in other countries. The system was for that reason more correctly described as an alternative standard, the value of a currency depending on the metal which for the time being was over-valued. Shortly before it was finally abandoned in the second half of the 19th century, a last effort was made to establish internationally a uniform rate of exchange of 15 between gold and silver. That attempt might have succeeded so long as there were no big changes in production. The comparatively large share of the total stocks of either metal that were in monetary use meant that, by an inflow or outflow into or from that use, their relative values could probably have been adjusted to the rate at which they were legally exchangeable as money.

Parallel currencies

In some countries, however, gold and silver had also been current for long periods side by side, their relative value fluctuating with changing conditions. This situation prevailed, for example, in England from 1663 to 1695 when, at last, by decreeing a rate of exchange between gold and silver coins at which gold was over-valued, England inadvertently established a gold standard.2 The simultaneous circulation of coins of the two metals without a fixed rate of exchange between them was later called, by a scholar from Hanover where such a system existed until 1857, parallel currencies (Parallelwährung), to distinguish it from bimetallism.3

This is the only form in which parallel currencies were ever widely used, but it proved singularly inconvenient for a special reason. Since for most of the time gold was by weight more than 15 times as valuable as silver, it was evidently necessary to use the former for large and silver for the smaller (and copper for the still smaller) units. But, with variable values for the different kinds of coins, the smaller units were not constant fractions of the larger ones. In other words, the gold and the silver coins were parts of different systems without smaller or larger coins respectively of the same system being available.4 This made any change from large to small units a problem, and nobody was able, even for his own purposes, to stick to one unit of account.

Except for a few instances in the Far East in recent times,5 there seem to have been very few instances of concurrent circulation of currencies, and the memory of the parallel circulation of gold and silver coins has given the system rather a bad name. It is still interesting because it is the only important historical instance in which some of the problems arose that are generally raised by concurrent currencies. Not the least of them is that the concept of the quantity of money of a country or territory has strictly no meaning in such a system, since we can add the quantities of the different monies in circulation only after we know the relative value of the different units.

Trade coins

Nor are the somewhat different but more complex instances of the use of various trade coins6 of much more help: the Maria Theresa Thaler in the regions around the Red Sea and the Mexican Dollar in the Far East, or the simultaneous circulation of two or more national currencies in some frontier districts or tourist centres. Indeed, our experience is so limited that we can do no better than fall back upon the usual procedure of classical economic theory and try to put together, from what we know from our common experience of the conduct of men in relevant situations, a sort of mental model (or thought experiment) of what is likely to happen if many men are exposed to new alternatives.

 

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7 In 1582 by G. Scaruffi [57].

8 A. E. Feaveryear [16], p. 142.

9 H. Grote [23].

10 For a time during the Middle Ages gold coins issued by the great commercial republics of Italy were used extensively in international trade and maintained over fairly long periods at a constant gold content, while at the same time the petty coins, mostly of silver, used in local retail trade suffered the regular fate of progressive debasement. (Cipolla [11], pp. 34 ff.)

11 G. Tullock [58] and [59]; compare B. Klein [35].

12 A convenient summary of information on trade coins is in Nussbaum [50], p. 315.

• 1In 1582 by G. Scaruffi [57].
• 2A. E. Feaveryear [16], p. 142.
• 3H. Grote [23].
• 4For a time during the Middle Ages gold coins issued by the great commercial republics of Italy were used extensively in international trade and maintained over fairly long periods at a constant gold content, while at the same time the petty coins, mostly of silver, used in local retail trade suffered the regular fate of progressive debasement. (Cipolla [11], pp. 34 ff.)
• 5G. Tullock [58] and [59]; compare B. Klein [35].
• 6A convenient summary of information on trade coins is in Nussbaum [50], p. 315.
• 7The multiplicity of coins with which the old money-changers had to deal consisted ultimately only of these two kinds, and their respective value within each group was determined by their content of either metal (which the expert but not the layman could ascertain). Most princes had tried to establish a fixed legal rate of exchange between gold and silver coins, thereby creating what came to be called a bimetallic system. But since, in spite of very early suggestions that this rate be fixed by an international treaty, governments established different exchange rates, each country tended to lose all the coins of the metal it under-valued relatively to the rates prevailing in other countries. The system was for that reason more correctly described as an alternative standard, the value of a currency depending on the metal which for the time being was over-valued. Shortly before it was finally abandoned in the second half of the 19th century, a last effort was made to establish internationally a uniform rate of exchange of 15 between gold and silver. That attempt might have succeeded so long as there were no big changes in production. The comparatively large share of the total stocks of either metal that were in monetary use meant that, by an inflow or outflow into or from that use, their relative values could probably have been adjusted to the rate at which they were legally exchangeable as money.
• 8In some countries, however, gold and silver had also been current for long periods side by side, their relative value fluctuating with changing conditions. This situation prevailed, for example, in England from 1663 to 1695 when, at last, by decreeing a rate of exchange between gold and silver coins at which gold was over-valued, England inadvertently established a gold standard. The simultaneous circulation of coins of the two metals without a fixed rate of exchange between them was later called, by a scholar from Hanover where such a system existed until 1857, parallel currencies (Parallelwährung), to distinguish it from bimetallism.
• 9In some countries, however, gold and silver had also been current for long periods side by side, their relative value fluctuating with changing conditions. This situation prevailed, for example, in England from 1663 to 1695 when, at last, by decreeing a rate of exchange between gold and silver coins at which gold was over-valued, England inadvertently established a gold standard. The simultaneous circulation of coins of the two metals without a fixed rate of exchange between them was later called, by a scholar from Hanover where such a system existed until 1857, parallel currencies (Parallelwährung), to distinguish it from bimetallism.
• 10This is the only form in which parallel currencies were ever widely used, but it proved singularly inconvenient for a special reason. Since for most of the time gold was by weight more than 15 times as valuable as silver, it was evidently necessary to use the former for large and silver for the smaller (and copper for the still smaller) units. But, with variable values for the different kinds of coins, the smaller units were not constant fractions of the larger ones. In other words, the gold and the silver coins were parts of different systems without smaller or larger coins respectively of the same system being available. This made any change from large to small units a problem, and nobody was able, even for his own purposes, to stick to one unit of account.
• 11Except for a few instances in the Far East in recent times, there seem to have been very few instances of concurrent circulation of currencies, and the memory of the parallel circulation of gold and silver coins has given the system rather a bad name. It is still interesting because it is the only important historical instance in which some of the problems arose that are generally raised by concurrent currencies. Not the least of them is that the concept of the quantity of money of a country or territory has strictly no meaning in such a system, since we can add the quantities of the different monies in circulation only after we know the relative value of the different units.
• 12Nor are the somewhat different but more complex instances of the use of various trade coins of much more help: the Maria Theresa Thaler in the regions around the Red Sea and the Mexican Dollar in the Far East, or the simultaneous circulation of two or more national currencies in some frontier districts or tourist centres. Indeed, our experience is so limited that we can do no better than fall back upon the usual procedure of classical economic theory and try to put together, from what we know from our common experience of the conduct of men in relevant situations, a sort of mental model (or thought experiment) of what is likely to happen if many men are exposed to new alternatives.