Renovatio Monetae : When Gesell Taxes Worked

Gesell taxes on money have recently received attention as a way of alleviating the zero lower bound on interest rates. Less known is that such taxes were an important method for generating seigniorage in medieval Europe for around two centuries. When a Gesell tax was levied, current coins ceased to be legal and had to be exchanged into new coins for a fee. This could occur as often as twice a year. Using a cash-in-advance model, we analyze under what conditions agents exchange coins and the tax generates revenues. A key result is that the system broke down because of increases in scal spending, and not because non-cash alternatives, e.g., bartering, became more costly. We also analyze how prices uctuated over an issue period