Money creation in the precious metal coin money age
As stated earlier, the history of coinage (from now on meant to be standardized precious metal, and named, coins, used by count) has a long and rich history. As our main issue here is new money creation, we fast forward to later AD periods, and attempt to answer the questions: how did additional money enter circulation (which applies to the earlier periods) and how did new money creation "out of thin air" take place (which applies to later periods)? The phenomenon of money creation then had a number of forms (the obvious one, de-hoarding, is ignored here because the amounts are small):
• New ore discoveries and mining.
Before we consider these forms of money creation, it is necessary to pronounce that gold was generally in short supply and highly valued relative to silver. Gold was therefore mainly used for large trade transactions and was later kept by banks and even later by central banks as reserves. International trade credits were settled by the physical transfer of gold. Silver became the principal coin money type.
Strong evidence of this fact is found in medieval Europe42. During the reign of Charlemagne (also known as Charles the Great and Charles I, c742-814), who had consolidated a large part of Europe under his rule (called the Carolingian Empire), the role of silver as the medium of exchange was entrenched. This move was started by his father Pepin and ".Charlemagne completed his father's work and gave it its final form." Scholars call the monetary system he created "silver monometallism".
It was in this period that one of the world's main currencies appeared: the pound. The long history of the pound and the fact that a significant episode of new money creation emerged in London in the seventeenth century are the reasons for this text's focus on Britain from here on forward (except in certain cases, as in the following paragraph).
As regards the money "creation" form of pillage, Morgan provides a fine example. He informs us that there is reason to believe that as Alexander the Great spread his wings in Europe he took possession of large amounts of the treasure hoards of the rulers he subdued and that ".this sudden increase in the supply of money was associated with a violent rise in prices. If this were so, it would be a very early example of monetary inflation, but the evidence is too sparse to be conclusive." He did not elaborate on the sparse evidence.
Counterfeiting was an issue over the ages, including in the coin era. However, we need not belabour this issue because the amounts counterfeited were probably not large enough to cause inflationary episodes. What is interesting about this limited form of money creation is the penalty associated with counterfeiting: according to Pirenne: ".. .the prospect of being boiled alive [did not] deter counterfeiters from the temptation of exploiting a state of affairs so favorable to them"
New ore discoveries and mining
New silver ore discoveries and the mining thereof added to the stock of coins, that is, new money was created. Silver deposit discoveries in Europe were rare, and most of the new silver came from elsewhere. The discovery of America yielded new silver. The Spanish conquerors relieved their new subjects of silver and gold, and in the sixteenth century they opened new mines in the New World which added a steady supply of silver. The Potosi mine (then in Peru, now in Bolivia) yielded the largest amount of silver. As was to be expected, inflation came to pass. Morgan tells us that the new Spanish silver metal ".spread over the whole of Europe and, everywhere, the increase in the supply of money was associated with rising prices."