Book: Money, Prices & Civilization in the Mediterranean World 5th To 17th Century, by Carlo Cipolla

[lethargic_man]

This little book (the main text is only 66 pages) is an interesting introduction to how monetary systems were run differently in the Middle Ages.

For example, we think (or at least I did) of inflation (or, more strictly, flation -- my brother tells me the USA was run on a deflationary basis a century ago) as a characteristic of the way modern economies work, but of mediaeval currencies as being much more stable, only occasionally suffering from inflation.

However, the truth is more complex. For much of mediaeval times, the unitary currency units in the west Mediterranean (gold bezants, florins, etc) were stable, but the fractional currency units (pennies) were not, and suffered from inflation, leading to the number of pennies exchangeable for a gold coin increasing over time. (The solution to this was ingenious, but not discovered until after mediaeval times.) This led to there being essentially two parallel economies, one favouring bulk dealers, the other small buyers, one favouring creditors, the other debtors.

Ever thought the system of pounds, shillings and pence was confusing? (Which system, of 12d to the shilling and 20/- to the pound, was introduced by Charlemagne, I learned.) It wasn't half as confusing as the way people took to dealing with this variable currency. When contemporary accounts talk about a shilling of account, they mean 12d, regardless of how many pennies a shilling coin was worth. So far so good? Now repeat and cook at Gas Mark 6 for several centuries:

The ghost penny equal to ¹/₃₈₄ of the real florin was not only different from, but also more valuable than the real penny, which was always a smaller and smaller fraction of the real florin. And therefore the ghost shilling which represented 12 times the ghost penny (or ¹/₂₉) of the real florin) was a unit different from and more valuable than the ghost shilling which represented 12 times the real penny.

There; that should teach you to appreciate the currency systems we've got today! :o)

Comments

Deflation

[lethargic-man.livejournal.com]

Most of the histories I've read mention inflation; I've come to think of it as a constant rather than an occasional phenomenon.

My question is: is it a constantly predominant phenomenon? In times when markets were small and slow and poorly interconnected, other factors may have come into play, swamping the effect of inflation.

As for running a economy under deflation - I'm just back from the pub, but I can't see how this could work in the long term. Any kind of long-term borrowing would become incredibly risky: whatever you put the borrowed money into, the return would have to outstrip deflation and cover the interest (whereas with inflation, the return only has to cover the difference between inflation and interest).

But surely interest rates will take deflation into account. If, say, flation is -1%, and lenders wanted a 1% commission (let's consider simple interest for simplicity's sake), they'd lend at 1% over 99% (the price after deflation is taken into account), not 100%; in much the same way that if flation is 1%, they'd lend at 1% over 101% (the price after inflation is taken into account).

Disclaimer: I am not an economist (my brother, who brought up the subject of deflation in the first place, is).

Wikipedia (http://www.wikipedia.org) (which, as anyone can edit it, you should always take with a pinch of salt, but I am insufficiently motivated at present to reboot into Windows to consult my Encyclopaedia Britannica) says (http://en.wikipedia.org/wiki/Gold_standard), inter alia:

Opponents of the gold standard such as Keynesianists argue that the gold standard creates deflation which intensifies recessions as people are unwilling to spend money as prices fall, thus creating a downward spiral of economic activity. The gold standard also removes the ability of governments to fight recessions by increasing the money supply to boost economic growth.

Some opponents of the gold standard thus argue that an expanding economy with a supply of gold that increases more slowly than the economy expands would cause a tiny, but steady, deflation. It is believed by gold standard opponents that this gradual deflation would throw the economy into recession.

However, a near century-long period of deflation has already occurred in Britain while on the Gold Standard during the 1800s . During that century the price, in gold, of goods and services in Britain was halved. The gradual century of deflation did not cause a century of recession. Quite the contrary, the British empire during that period was the undisputed economic power of the world.

However critics of the gold standard say that this may well have been due to the fact that Britain was able to import cheap raw materials from the Empire and manufacture goods more cheaply than its competitors, allowing it to run trade surpluses.