How Governments Seized Control of Money
In discussions surrounding of the world’s monetary systems today there is usually one thing almost everyone can agree on: that money should be controlled by the organizations we call “states” or “sovereign states.” Nowadays when we say “the US dollar” we mean the currency issued by the US government. When we say “the British pound” we mean the money issued by the regime of the United Kingdom.
This assumed need to have state-issued money has not always been the reality, of course. Indeed, the history of the rise of the state is a history replete with efforts by states to replace private-sector money with state-controlled money.
The reasons for this are numerous. Control of the money supply—usually complemented by intervention in the financial sector—allows states much more flexibility in expanding state spending and state borrowing. Perhaps most importantly, this allows states to spend prodigiously in times of war and other “emergencies.”
As we will see, this struggle between the state and private finance has been a long one. It took many centuries for regimes to secure the sort of legitimacy and regulatory power necessary to claim a monopoly over money. And even today, states are still somewhat constrained by the realities of international competition between currencies. They are also constrained by the continued existence of quasi monies that function as stores of value—such as gold, silver, and cryptocurrencies. Yet, it is impossible to deny that the state has made enormous gains in recent centuries when it comes to taking control of money.
The order of these events also remind us of another important aspect of states and money: the rise of states was not conditional on kings and princes seizing control of the production and regulation of money. Rather, the causation runs in the other direction: as states became more powerful, states used that power to also take control of money.
Early Efforts to Control the Money Supply
In the ancient world, the despotic empires of old—under which we could include the Roman Empire—were careful to mint their own money and to control whatever primitive “financial systems” existed. The Romans famously devalued their currency for long periods of time—most notably under Diocletian—leading for the ruin of many Roman citizens.
According to David Glasner, the “prerogative of the sovereign over the coinage was preserved after the fall of Rome.”1 But this was only in theory. The civil governments of this period were far too weak to enforce a monopoly on money. Martin van Creveld writes, “Given the decentralized nature of the political system and its instability, European Rulers during the Middle Ages were generally in no position to imitate their oriental counterparts” in the Persian, Mongol, and Chinese empires.2
Moreover, there wasn’t that much money to go around in western Europe. Coins were often in short supply, and the agrarian nature of western Europe meant much trade was done through bartering.
That began to change in the later Middle Ages as Europe urbanized and began to produce an increasing agricultural surplus. Driven largely by Italian bankers who set up “branch offices” in France, Spain, and the Low Countries, a financial system took shape, which included the production of both coins and bank notes.
Yet, the monetary system was dominated by the private sector, and Van Creveld reminds us a sizable amount of money in this period
was produced not by the slowly emerging state but by private institutions. Before 1700, attempts to develop credit systems succeeded only in this places where private banking and commerce were so strong as to virtually exclude royal authority; in other words where merchants were the government. … Common wisdom held that, whereas merchants could be trusted with money, kings could not. Concentrating both economic and coercive power in their own hands, all too often they used it either to debase the coinage or to seize their subjects’ treasure.”3
The kings of Europe sought to control the money nonetheless. One of the earliest meaningful attempts materialized in England where monarchs early-on developed a more centralized and cohesive national regime. Thus, after the early date of 1222 in England, “money-changing and trade in bullion was a strictly enforced royal monopoly exercised by the Royal Exchanger.”4 Enforcement consisted of government officials engaged in acts designed to “suppress private trade in precious metals, to purchase or confiscate foreign coins, and to deliver them to the Tower of London mint for recoinage.”5
It’s unclear how well this was enforced, but such concerted efforts at national regulation were far more haphazard in much of Europe.
For example, the French state—the largest and most centralized state on the continent, sought in earnest to take control of the money supply by the sixteenth century. The results were mixed. Efforts to hammer together a national monetary regime began in the late Middle Ages, yet “France was not unified monetarily. Silver circulated in the west after the middle of the sixteenth century—gold coin before—and copper, infiltrating from Germany, in the east.”6
In practice, national kings needed to buy off uncooperative nobles with monopoly privileges, rights to tax, and the sale of titles. Kings relied on manpower supplied by nobles to carry out royal prerogatives. As late as the sixteenth century,
Although in principle, only kings had the right to coin precious metals, in practice, they farmed out this privilege, as also their right to exploit the royal domains and to collect taxes, because European kings, apart from those in Prussia, had only limited bureaucratic staffs. Achieving a central monopoly of their coinage would take another two centuries. Moreover, national borders were porous, and foreign coins circulated freely. A French edict in 1557 counted 190 coins of different sovereigns in use in France.7
The lack of national monetary monopolies in most cases did not stop nascent European states from engaging in two centuries of state building during this time. By the sixteenth century, France was already building an absolutist state even in t
Article from Mises Wire