The Big Problem of Small Change.

• Author: Yeager, Leland B.

Thomas J. Sargent and Francois R. Velde Princeton: Princeton University Press, 2002, 405 pp.

Thomas Sargent of Stanford University and the Hoover Institution and Francois Velde of the Federal Reserve Bank of Chicago have expanded their article of the same title from the Journal of Money, Credit, and Banking of May 1999. They tell the fascinating story of how monetary authorities groped slowly over many centuries toward the ultimate solution to recurrent shortages of small change. The solution is to issue minor coins as mere tokens with no pretense at metallic contents worth anywhere near their face values and, further, to keep those tokens interconvertible at fixed rates with the definitive money (e.g., full-bodied gold coins under a gold standard). This "standard formula", as the authors call it, following Carlo Cipolla, may seem trivially obvious nowadays, but it was not always so. Furthermore, it became a stage in an intellectual process that eventuated in the rationale for modern fiat money.

Sargent and Velde attribute perhaps the first clear statement of the formula to Sir Henry Slingsby, master of the London Mint, in a 1661 memorandum to King Charles II; but Slingsby's proposal was not implemented for over a century. The long delay was not due merely or especially to intellectual failure. Implementing the solution had to await advances in the technology of coinage. Mere token coinage would have offered great profit opportunities to counterfeiters, and identifying counterfeits would have been difficult when primitive minting techniques produced crude and irregular coins. Counterfeiters could reap no special profit, however, by using gold or silver to imitate official coins. Centuries of ineffectual groping with the problem had consequences worse than mere inconvenience in retail trade. Failure to solve it contributed to a secular upward drift of price levels. Monetary conditions can be important for countries' prosperity or stagnation. The authors (pp. 275-76) quote Thomas Macaulay's History of England, from the Accession of James the Second on the consequences of underweight currency in 1695, when

It was mere chance whether what was called a shilling was really a tenpence, sixpence, or a groat ... [I]t may well be doubted whether all the misery which had been inflicted on the English nation in a quarter of a century by bad Kings, bad Ministers, bad Parliaments, and bad Judges, was equal to the misery caused in a single year by bad...