The Big Problem of Small Change Book

This book opens up new vistas on the intellectual and economic history of Europe, all by paying close attention to the nature of small, rounded coins.

The "big problem of small change" was much bigger than one would expect. Originally, when there was only one coin in Western Europe, the Carolignian penny, manufactured beginning around 800, there was no problem. The old quantity theory of money applied, meaning more pennies in the economy meant higher prices, and fewer pennies, lower prices. Yet when the penny proved insufficient for larger trades, beginning in 1200 courts and counts introduced higher denomination coins, usually called "grosso" or some variation on such, which was some multiple of the small coin. Now, with two coins in the market, there was a tendency for small coins to be hoarded during shortages and (paradoxically) for the smaller coin to depreciate in value. This lead to chronic inflations, and often futile attempts to re-establish the relationship between the two coins, through forced legal tender laws. The higher minting cost of small coins per unit of silver made the shortages more severe and the inflations more devastating.

The solution to the big problem was the "standard formula," first articulated by Sir Henry Slingsby in the 1660s. Instead of counting everything in units of the small coin, countries counted from the larger coin (say, the pound or the dollar). They also made the small coin no longer worth its actual content of silver, but made it a mere "token" valued relative to the large coin at the discretion of the prince. By the 1700s, this standard formula was largely in place, thanks partially to new screw-presses and milling technology that made counterfeiting "tokens" more difficult. This represented a crucial and unappreciated step towards pure fiat money.

Sargent and Velde fill their book with algebraic equations describing the nature of their price and coin theories, but they also go into detail on the legal and intellectual underpinnings of this shift. They show how the old Roman law doctrine saw coins as mere metals, and said people could shift any prince's stamped metal for another, as long as the amount of metal was the same. But French jurist Charles Dumoulin in the 16th century said the real value of a coin was its "aestimatio," its value in exchange. This allowed a king to decide that a "franc was a franc," and allowed discretion of the king to prevail in setting coin rates. In the "Mixt Money Case" of 1604 in England, a court allowed James I to give any money any value, just as he could turn a "mean person" into an honorable one.

If one's scared of the math, there is still plenty of food for thought in this book through its economic and intellectual history. The book shows how seeming minor changes in the world of thought and mechanics have real influence on the economies and fates of nations.