Cover image for The big problem of small change
The big problem of small change
Sargent, Thomas J.
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Princeton, N.J. : Princeton University Press, [2002]

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xxi, 405 pages : illustrations ; 27 cm.
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HG922 .S27 2002 Adult Non-Fiction Central Closed Stacks

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The Big Problem of Small Change offers the first credible and analytically sound explanation of how a problem that dogged monetary authorities for hundreds of years was finally solved. Two leading economists, Thomas Sargent and François Velde, examine the evolution of Western European economies through the lens of one of the classic problems of monetary history--the recurring scarcity and depreciation of small change. Through penetrating and clearly worded analysis, they tell the story of how monetary technologies, doctrines, and practices evolved from 1300 to 1850; of how the "standard formula" was devised to address an age-old dilemma without causing inflation.

One big problem had long plagued commodity money (that is, money literally worth its weight in gold): governments were hard-pressed to provide a steady supply of small change because of its high costs of production. The ensuing shortages hampered trade and, paradoxically, resulted in inflation and depreciation of small change. After centuries of technological progress that limited counterfeiting, in the nineteenth century governments replaced the small change in use until then with fiat money (money not literally equal to the value claimed for it)--ensuring a secure flow of small change. But this was not all. By solving this problem, suggest Sargent and Velde, modern European states laid the intellectual and practical basis for the diverse forms of money that make the world go round today.

This keenly argued, richly imaginative, and attractively illustrated study presents a comprehensive history and theory of small change. The authors skillfully convey the intuition that underlies their rigorous analysis. All those intrigued by monetary history will recognize this book for the standard that it is.

Author Notes

Thomas J. Sargent is Berkley Professor of Economics and Business at New York University and Senior Fellow at the Hoover Institution.
Francois R. Velde is Senior Economist at the Federal Reserve Bank in Chicago and Lecturer in Economics at the University of Chicago

Reviews 2

Publisher's Weekly Review

From Charlemagne's introduction of the silver penny in 800 AD to about the middle of the 19th century, small denomination coins were a headache for governments (due to production costs and constant shortages and depreciations); it was often more profitable for owners to melt down the small coins to make larger denominations. In The Big Problem of Small Change, Stanford University economics professor Thomas J. Sargent and Federal Reserve Bank economist Franeois R. Velde describe how economists finally solved this problem by introducing fiat money (coins whose value was symbolic), paving the way for modern forms of currency and credit. This elegantly written, scholarly work will appeal to those interested in financial history or monetary theory. ( Feb.) (c) Copyright PWxyz, LLC. All rights reserved

Choice Review

Recently, several good-quality, useful studies have been published that use historical experience to deepen economic understanding and assist in the formulation of improved modeling of economic processes. This work is, arguably, the best to date. Sargent (Stanford Univ.) and Velde (Federal Reserve Bank, Chicago) have gleaned European monetary history--the experiments and practices of monetary authorities, technological developments in coinage, as well as the thinking about money--over a millennial period ending with the 20th century. History shows this was a process of groping, of trial and error, with the actors having no clear picture of what arrangements were needed for success. The process was one of incremental discoveries leading to social adaptations, painfully slow and error ridden. The authors use this perspective to create a rigorous economic model that is able to accommodate more completely the features of actual monetary systems. Their methodological design serves as a template for the conduct of research in economics as an empirical science. They have done it just right. Their book is strongly recommended. Upper-division undergraduate through professional collections. J. Murdock emeritus, University of Missouri--Columbia

Table of Contents

List of Illustrationsp. xiii
List of Tablesp. xv
Prefacep. xvii
Acknowledgmentsp. xxi
Part I A Problem and Its Cure
1. Introductionp. 3
Paper and gold
The enduring problem of small change
A model
Supply side: the mint
Demand side: the coin owner
Price level determination
A history
Structure of subsequent chapters
2. A Theoryp. 15
Valuation by weight or tale
A basic one-denomination theory
Multiple denominations
Interactions of supply and demand
Economics of interval alignments
Perverse dynamics
Spontaneous debasements: invasions of foreign coins
Costs and temptations
Opportunity cost
An open market operation from Castile
An open market operation for the standard formula
Transparency of opportunity cost
Trusting the government with b[subscript i] = 0
3. Our Philosophy of Historyp. 37
History and theory
Clues identified by our model
Our history
Part II Ideas and Technologies
4. Technologyp. 45
Small coins in the Middle Ages
The purchasing power of a small coin
The medieval technology: hammer and pile
Production costs and seigniorage
The screw press
The cylinder press
Other inventions
The steam engine
Counterfeiting, duplicating, imitating
Technologies and ideas
5. Medieval Ideas about Coins and Moneyp. 69
Medieval jurists as advocates of Arrow-Debreu
Romanists and Canonists
Construction of the medieval common doctrine
Sources and methods of the romanists
Money in a legal doctrine of loans
Tests in a one-coin environment
Multiple currencies and denominations
Multiple denominations
Multiple metals
Fluctuating exchange rates: the stationary case
Multiple units of accounts
Overdue payments and extrinsic value
Trends in exchange rates
Debasements and currency reforms
A question from public law: setting seigniorage rates
Sources of the canonists
Debasements and seigniorage rates
Qualifications, exceptions, and discoveries
Early statement of double coincidence
Romanists repair the breach
Canonists versus romanists on seigniorage
Another breach
Philosophers help
The cracks widen: debasements and deficit financing
Concluding remarks
6. Monetary Theory in the Renaissancep. 100
Precursors of Adam Smith
Debt repayment, legal tender, and nominalism
Dumoulin the revolutionary
Dumoulin's impact
Dumoulin the conservative
Fiat money
Fiat money in theory: Butigella
Double coincidence of wants revisited
Other formulations
Fiat money in practice
The conditions for valued fiat money
Restrictions on fiat money
Limited legal tender
Quantity theory
Lessons from the Castilian experience: fiat money
In Spain: Juan de Mariana (1609)
Forecasting inflation
In France: Henri Poullain (1612)
Concluding remarks
Part III Endemic Shortages and "Natural Experiments"
7. Cluesp. 123
Shortages of small change and bullion famine
Shortages and invasions of coins
Ghost monies and units of account
Free minting
The evidence
8. Medieval Coin Shortagesp. 131
Shortages elsewhere
Concluding remarks
9. Medieval Florencep. 139
Turbulent debut of large coins in Tuscany
The Quattrini affair
Ghost monies as legal tender and unit of account
Florentine ghost monies: details
Concluding remarks
Appendix A Mint equivalents and mint prices
Appendix B A price index for fourteenth-century Florence
10. Medieval Venicep. 160
Four episodes
Piccolo and grosso, 1250 to 1320
Evolving units of account
Silver and gold, 1285 to 1353
Adaptation of units of account
Soldino and ducat, 1360 to 1440
Rehearsing fiat money
The torneselli in Greece
Expansion near Venice
Concluding remarks
Appendix Mint equivalents and mint prices
11. The Price Revolution in Francep. 186
Relative price change as inflation
Disturbances to coin denominations
A three-coin model
Supply: movements in the relative prices of metals
Demand: within the intervals shortages
Anatomy of money and inflation
Types of coins and units of account
The price level
Supply: the relative price of gold and silver
Debasement of billon coins
Mysterious movements in exchange rates
Evidence of small coins shortages
Policy responses
Perception of the problem by the authorities
Unit of account and legal tender
Units of account and international trade: the fairs of Lyon
The reform of 1577
Collapse of the reform
Concluding remarks
Appendix Mint equivalents and mint prices
12. Token and Siege Moniesp. 216
Precursors of the standard formula
Medieval tokens
Siege money
Convertible token currency: an early experiment
First attempt at standard formula
Part IV Cures and Side-effects
13. The Age of Copperp. 227
The coinage of pure copper
Experiments in many countries
14. Inflation in Spainp. 230
Elements of the standard formula
The Castilian experiment
Monetary manipulations
Crying down coins
Theory of the Castilian tokens
Additional notation
Multiple regimes
More learning: aspects of indeterminacy
The evidence
The end of the token coin experiment
Comparison with inflation during the French Revolution
Unintended consequence for Sweden
Concluding remarks
Appendix Money stocks and prices
15. Copycat Inflations in Seventeenth-Century Europep. 254
France: flirting with inflation
The Ottoman empire
16. England Stumbles toward the Solutionp. 261
Free-token and other regimes
Laissez-faire or monopoly: England's hesitations
Private monopoly (1613-44)
The Slingsby doctrine
Government monopoly
The Great Recoinage of 1696
The monetary system under the Restoration (1660-88)
The crisis
A model with underweight coins
The Locke-Lowndes debate
The Great Recoinage
Locke: genius or idiot?
17. Britain, the Gold Standard, and the Standard Formulap. 291
The accidental standard
Laws and ceilings
The guinea and legal tender laws
Newton's forecasts
Gold becomes the unit of account
Underweight coins
Neglect the pence
Implementation of the standard formula
18. The Triumph of the Standard Formulap. 306
Germany's monetary union of 1838
Bimetallism versus the gold standard
Bimetallism in a small country
Worldwide bimetallism
Passage to gold
The United States
The Latin Monetary Union
Free riders in monetary unions
The accident of 1873
The standard formula limps into place
19. Ideas, Policies, and Outcomesp. 320
Evolutions of ideas and institutions
Our history
Major themes
Beliefs and interests
Units of account and nominal contracts
Small change and monetary theory
Currency boards, dollarization, and the standard formula
Learning by markets and by governments
Part V A Formal Theory
20. A Theory of Full-Bodied Small Changep. 335
21. The Modelp. 337
The household
Production of goods
Production of coins
Analytical strategy
The firm's problem
Implications of the arbitrage conditions for monetary policy
Interpretations of [sigma subscript i]
Full-weight and underweight coins
The household's problem
22. Shortages: Causes and Symptomsp. 350
Equilibria with neither melting nor minting
Stationary equilibria with no minting or melting
Small coin shortages
Small coin shortage, no minting or melting
Permanent and transitory increases in [xi]
Logarithmic example
Money shortages bring inflation
Shortages of small coins through minting of large coins
Shortages through melting of full-weight small coins
Perverse effects and their palliatives
23. Arrangements to Eliminate Coin Shortagesp. 366
A standard formula regime
Variants of the standard formula
The standard formula without convertibility: the Castilian experience
Fiat currency
24. Our Model and Our Historyp. 373
Glossaryp. 375
Referencesp. 377
Legal Citations Indexp. 393
Author Indexp. 395
Subject Indexp. 399