‘The Big Problem of the Petty Coins’, and how it could be solved in the late Middle Ages

In this paper, the problem of why low-purchasing power silver coins depreciated relative to high-purchasing power gold coins is examined. The standard explanation by Sargent and Velde is refuted. It is argued that the relative stability of gold was due to the demand from consumers able to detect debasements and to choose other suppliers; the rulers’ fear of a loss of reputation therefore allowed them to commit to monetary stability. Consumers of silver were less able to detect changes in the standard and therefore willing to accept debased coins, which meant that rulers could not easily commit to preserving stable silver currencies. The problem could be solved by establishing an independent agency responsible for monetary policies. As infringements of these agencies’ autonomy would be obvious to a wider audience, rulers could then commit to respecting monetary stability. Data on the standards of urban and princely currencies supports the conclusion that this mechanism solved the problem of maintaining the stability of low-purchasing power silver coins.[...]