RICHARD DUTU556 In this paper we revive an old explanation for Gresham ID: 832376
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MONEYCHANGERS, PRIVATE INFORMATION ANDGR
MONEYCHANGERS, PRIVATE INFORMATION ANDGRESHAMS LAW IN LATE MEDIEVAL EUROPEWaikatoEn este artículo retomamos una vieja explicación de la Ley de Gresham, quenos en la Edad Media, presentamos materiales que sugieren que los cambistas I wish to thank two anonymous referees for their comments on a previous draft. I wishto thank Jean Cartelier, Ghislain Deleplace, Lucien Gillard, John Humbley, Laurent Le Maux,and François Velde for stimulating conversations. Thanks to Christopher Mobley for revisingthe English version. Finally, I thank seminar participants to the Money and InstitutionsWorkshop at the University of Paris X and to the Money and Banking Research Group at theUniversity of Birmingham for their comments. The opinions exposed in this article are
thoseof the author solely. Department of
thoseof the author solely. Department of Economics, Gate 1 Knighton Road, Private Bag 3105, Hamilton, NewRICHARD DUTU556In this paper we revive an old explanation for Greshams law that rests on thetrafficking of coins by moneychangers. Focusing on the late Middle on money to make profit through billonnage and arbitrage operations. In bothmoney, There is not much agreement on the theoretical underpinnings of the Greshamslaw. It has been advocated that Greshams law applies only when there exists afixed exchange rate between two different currencies. If buyers cannot obtain apremium when paying with the good (undervalued) currency, they would preferto hold on to it or to use it for other purposes. It is therefore the fixed exchangerate that is suppo
sed to trigger Greshams lawThis view wa
sed to trigger Greshams lawThis view was recently challenged by Rolnick and Weber (1986). They arguedifficult to believe that Greshams law couldhave ever been relevant. Firstly, a fixed exchange rate policy at the mint wouldhave led to unbounded profits for money traders, and the ruin of the mint. Secondly,it is hard to believe that any sovereign was strong enough to enforce such a policy.They conclude that the law is fallacious and should be replaced by another onenon-par value rounding, monitoring, strict legal tender laws are too high. Werethese transaction costs not too high, price adjustments would naturally take pla-In Rolnick and Webers argument, it is supposed that the buyer and the sellerare well informed about, firstly, the quality of t
he good to be exchanged, andsecondly, fe
he good to be exchanged, andsecondly, fered in payment. What would happen Friedman and Schwartz (1963) p. 27, note. See also the article on Greshams law byBernholz and Gersbach in the . This argument was extensively advocated bymonometallists during the bimetallist controversy of the second half of the 19th century.RICHARD DUTU558texts and to show how they support an information-based version of GreshamsThe article is organized as follows. Section 2 reviews the institutions of the4 quote and comment, respectively, the made on moneychangers. Section 5 discusses how asymmetric information and2. «CHANGERS AND MEN COMPETENT IN THE KNOWLEDGE OF SILVER AND2.1. An During the Middle Ages, money was very complex due to the concurrentPrices were expressed i
n moneys of account. But payments were s
n moneys of account. But payments were settled in coins.the end of the Carolingian era and the 13th century, all the rulers alsoof Saint Louis, coins struck in the kings mints were legal tender throughout theterritory of his vassals, and local coinage started to disappear little by little. Atthe beginning, these royal moneys were large silver coins, especially the silverbasis from the end of the 13th century by Italian commercial cities: Florence, Veniceand Genoa. This last type of real money, i Greshams law was not a finding of Sir Thomas Gresham. Nor was he the inventor of thesaying that «bad money drives out good money». Actually, it is Henry D. Macleod, a 19thcentury Scottish economist, who misattributed the law to Gresham. And it is Jevons who
forgedthe now famous adage a few years
forgedthe now famous adage a few years later. A detailed discussion of the chaotic birth of Greshamslaw can be found in Fetter (1931). in France, in Italy, in Germany. See, for instance, Castaing-Sicard (1961) for a case study of Languedoc seigniorial coinage.RICHARD DUTU560the scene a bit later, by the times of the Commercial Revolution. They appeared all This is certified by an act of Louis VII from. Various decrees from Philip the Fairconfirm the exclusivity granted to the moneychangers for currency operations.Moneychangers played a central role in the city and in exchange. Their workwas composed of several activities. Firstly, to exchange large denomination coinsMoneychangers were thus the main metal suppliers for the mints, thanks to the. S
ometimes they changed moneys fromyears a
ometimes they changed moneys fromyears and good references were needed to become one of them. Sometimesmoneychangers also took deposits and lent money. Most of them were located intotal population of the city. There Tours in 1344, 39 in Chartres by the end of the 13th century, and 84 in Toulousevaried widely from one country to another, or even from town to town. For somemoneychangers, their work was scrupulously supervised by the ruler, who fixed Chevalier (1973, p. 153). Landry (1910, preface, p. XIV). Luchaire (1885, p.120). See for example the studies by Bigwood (1921-1922), Favreau (1964), and Guerreau Spufford (1986). Chevalier (1973, p. 155) presents an opposite viewpoint, based on a study by M. Boudeton the Auvergne Region, writing that the eq
uipment was not expensive: 6 livres, 5 s
uipment was not expensive: 6 livres, 5 sous, 6 Chevalier (1973, p. 154).RICHARD DUTU562technique. The difference between two coins was not easy to detect, however, andonly experts were able to distinguish between them and to exploit the information.contents. This situation could occur, for instance, if the ruler decided to weakenabout it. He had to pledge never to disclose the information. If the secret waswas disclosed. But the mint masters and moneychangers worked closely together.The secret of the weakening could not be kept very longAlternatively, there could be a the best coins and paying with the bad. However, even if moneychangers wereidentical coins differently, take advantage of the situation and sell both of them at the same price. It wasu
ndoubtedly advantageous for them to acce
ndoubtedly advantageous for them to accept a good coin at the price of a badby changers who weigh coins one by one and keep the heavier ones, have them 23. The same condemnation is toon the changes in money carried out by the King of Poland, he wrote:sort out ancient coins, melt them again and then sell them to the silverer,always receiving from inexperienced persons more money with the same See Landry (1910) or Rolnick, Velde and Weber (1996). Note that the wear of coins or As noted by Bigwood (1921) on Belgium, previous moneychangers were often elected as Velde (2001, p. 28).RICHARD DUTU564According to Dumas-Dubourgs study of early 15th century Burgundys money,bemoan the sorting out of coins by simple merchants. As the intrinsic content of coins
started to become public information, mo
started to become public information, moneychangers were no longer the only ones toand getting profit from them. In a court report it is noted that:«De Huguenin Pelletier, from Cusery, and his son Jehan Pelletier, bothmerchants, because they have confessed that they have received severalpennies from which they took the best and the strongest and brought thempennies from which they took the best and the strongest and brought them31As moneychangers lost their private information, the trafficking of money«We have heard that several changers, bullion transporters, haberdashers,carried or had someone carry, and still carry every day a big amount ofgold or silver out of the Realm into the earldom of Savoy and into someother countries, causing great damage t
o our money.»moneychangers were no longe
o our money.»moneychangers were no longer the only ones to glean money from billonnage.However, It is here that Rolnick and Weberbetween price or quantity adjustments. Enforced legal tender laws were also veryefficient in activating Greshams law.4. GUILTY OF ARBITRAGEoney, there existed a second meansto make profit for well-informed people. Rather than different intrinsic contents,De Huguenin Pelletier, de Cusery, et Jehan Pelletier son fils marchans, lesquelx, pource quilz ont confessé que, ou fait de leurs marchandises, ilz ont receu pluseurs deniers desquelxpour en avoir prouffit et aussi à plusieurs autres foiz par pluseurs marchans dont ilz ont eu depour en avoir prouffit et aussi à plusieurs autres foiz par pluseurs marchans dont ilz ont eu d
e» Archives de la Côte-dor, quoted by D
e» Archives de la Côte-dor, quoted by Dumas-Dubourg (1988, p. 177).ou fait porter et font chacun jour hrs de nostre royaume en la Comté de Savoie et en plusieursautres pays de lEmpire et ailleurs, grant quantité de billion tant dor comme dargent, enéloignat et délaissant nos monnaiyes ausquelles porter.». Guerreau (1974).RICHARD DUTU566According to Lippos book of account, there were many such opportunities ofabout one transaction: «Lippo takes from Florence cried down silver Florentine) worth 453 florins. He sells them in Sienna at a slightly higherprice 459 florins that he takes back with him. He has made a profit from theIn Burgundy, the transportation of frequent activity as well. As in the case of billonnage, arbitrage was noted byDumas-D
ubourg at the beginning of the 15th cent
ubourg at the beginning of the 15th century. Merchants or moneychangersfrom the moneychanger Odot Molain: «Odot took money from his masters countrys country»from occurring between various places of trade. However, contrary to Tuscanmoneychangers, coins transportation schemes for their most part operated illegally.undervalued currency. Of course, there was no full disappearance of the goodcan be presented as a demonstration of Greshams law: the locally undervalued A similar story can be found in Days work on monetary circulation in medieval Tuscany(Day, 1968). had disappeared six month later. This might be the result of Lippos fellow workers. On other occasions, Lippo also made profit from the lower price of metals prevailingin the cities where he
travelled. Dumas-Duburg (1988, p. 177).
travelled. Dumas-Duburg (1988, p. 177).RICHARD DUTU568the good penny started to take precedence on the market. In this example, theand moneychangers were free to set exchange rates, which is why Greshams lawthe only ones to take advantage of the situation. The good penny eventuallyscarcer, bolstering its value. The good penny was eventually ousted, but this took severalyears and was due to speculation rather than to arbitrage.Greshams law, well-advised sovereign to set Greshams law into effect deliberatelywas a good way to attract bullion through the melting down of the rival coins.s study of 14th century monetaryVilvorde,ged with minting coins identical to her nephews, but with slightly less metal.rbitrage occurred because everybody, not arbi
trage public information but it was not
trage public information but it was not costly since Vilvorde and Malines wereno more than a few miles apart. The Duchess had been clever enough to set upher mint just near her nephews, thus facilitating the transport of metal from FlandersIn the Middle Ages, Greshams law was also a matter of information. This articleaims at providing evidence to that old story. Testimony from contemporary sourcessuch as scholastics, court reports or monetary ordinances show the role playedRICHARD DUTU570ASTAING, M. (1961): Circulation Monétair. Toulouse: Cahier de lAssociation Marc Bloch de Toulouse,HEVALIER, B. (1973): «Les changeurs en France dans la première moitié du XIVème siècle»,Economies et Sociétés au Moyen Age. Mélanges offerts à Edouard Perroy, N. (19
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