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 the midst of ongoing currency competition. By the mid-seventeenth century, of course, the state had come into its own with absolutism gaining ground in France, Spain, Sweden, and other parts of the continent. In England—although the Stuarts failed to achieve their much-desired absolute monarchy—the state progressed far in the direction of a centralized, consolidated state during this period. Indeed, by the mid seventeenth century, Europe’s Thirty Years’ War—what might be called western Europe’s first era of “total war,” ended with the consolidation of the state system throughout western Europe.
Indeed, war and state-building—two things that were often one and the same—drove efforts to build government revenues through debasements of the coinage. It was war with Scotland that drove Henry VIII to began a multiyear period of debasing the currency in 1542, which continued into the reign of Edward VI. War drove other monarchs to similar ends, and on the continent Charles V devalued the gold taler in 1551. In the seventeenth century, European monarchs engaged in “progressive debasement …in anticipation of the Thirty Years’ War.”8 Ultimately, “Many princes in the sixteenth and seventeenth centuries did a roaring business in currency depreciation.”9
The Effects of Continued Monetary Competition
Spain, France, and other rising states of the period accomplished all this without establishing true monopolies over the money supply. Yet currency competition limited what states could get away with. Even if national states had been able to solidify de jure monopoly control of money within their own borders, the sovereign’s money still faced competition from currencies in neighboring states and principalities. Just as dozens of different types of coins circulated within France, it was always possible for merchants, financiers, and more mobile classes of individuals to move their wealth in such a way as to avoid using the more heavily devalued currencies.
Thus, monarchs were cognizant of the risks that devaluation brought. “Too much” debasement of the currency could cause merchants, and even residents, to flee to competing imported or black-market currencies. Practical limitations controlled how much a regime could debase its currency. Thus, when Henry VIII began his campaign of debasement, he combined it with a broader wartime policy of confiscating goods and church property, and compelling forced loans.10
In the seventeenth century, the ability to escape debased national currencies was further facilitated by the advent of the Bank of Amsterdam. Established by the city of Amsterdam in 1609, the Bank—technically a “government bank”—to calculated the values of the “no fewer than 341 silver and 505 golden coins” circulating in the Dutch Republic. The bank helped merchants identify which coins were “good” and which were debased.11 The bank then provided credit based on coins’ “real value” regardless of the coins’ claimed nominal values. The bank issued coins known as bank guilders which became the “the world’s most used currency at the time,” or perhaps even a “reserve currency” of a similar status to the US dollar today.12 This was not due to any moral righteousness on the part of Dutch politicians. It is likely that the Dutch regime would have also preferred to manipulate its own currency for gain. But the smallness of the Dutch Republic and its reliance on foreign trade greatly limited the regime in this regard. Thus, the Dutch were essentially forced to be become a reliable, competitive financial center in order to compete with larger states.
Asserting Control over the Banks
Control of the coinage was only one aspect of states’ fights to control money.
After all, much of the money being handled by Europe’s banks during this period was in the form of “bills of exchange” which facilitated the movement of funds across Europe without the need for physically moving metallic money. These bills began to function as money as well, and even as states were asserting greater control over coinage in the fifteenth and sixteenth centuries, “private institutions were thus beginning to develop paper money.”13 According to Kindleberger,
Begun early in the thirteenth century, the functions of the bill of exchange expanded in the sixteenth century as it became successively assignable, transferable, negotiable, and form the 1540s, discountable, thus bridging time and space and serving as private money (as distinct form specie, which was the money of the prince).14
Banks proved to be essential, providing access to money in many cases since even as late as the eighteenth century in many places, coinage was in short supply. This may have been especially acute where wage work replaced subsistence farming and agricultural barter. The new breed of employers needed money of various types.15 Bank-created paper money thus served an important role in providing a medium of exchange when coins were either unreliable or unavailable.
This diminished the dependence on the use of the sovereign’s coinage, and princes came to view these banks as troublesome competitors. Moreover, banks—unlike ordinary consumers—had the knowledge and the means to more carefully evaluate regime money and to accept devalued coins only at a discount.
Unhappy about the fact banks could often do an end run around the king’s coinage, states then sought to compel payments in metals which the sovereign could more easily control. Glasner writes:
The tension between the state monopoly over coinage and private banking is manifested in legislation that was frequently enacted to restrict the creation of notes and deposits by banks. In the fifteenth century, for example, hostile legislation in the Low Countries … caus[ed] virtually all banking activity to cease.16
The downside of crippling a polity’s banking sector is sizable, so eventually the state abandoned this strategy and learned to love paper money. But getting the public to accept government-issued paper money would be a long uphill battle.
Van Creveld places the first government attempt at paper money in the 1630s when the Spanish duke of Olivares, in need for funds for—yet again—the Thirty Years’ War, confiscated silver and provided “interest-bearing letters of credit” in their stead. Given the reputation of princes for debasing the currency by this time, this paper money swiftly depreciated. Only a few years later, Sweden attempted a similar scheme, but this also quickly failed.
It was not until 1694 with the Bank of England—that is, after more than 300 years of modern state-building—that the foundations were laid for a true note-issuing central bank. And even then, the Bank of England did not begin as an institution that creates money and did not have a monopoly on issuing bank notes until 1844. Rather, the Bank of England initially financed the government deficit by issuing shares. These shares, not surprisingly, were very popular given the fact the bank also enjoyed a monopoly on government deposits.17
A national bank in France, The Banque Royale, followed in 1718. But like the Bank of England, the Banque Royale did not possess a functioning monopoly on issuing bank notes. This did not stop the French bank from printing a great many notes, however, and it did so, sparking a financial crisis in the wake of the Mississippi Bubble.
Central Banks and the Gold Standard
It was not until the nineteenth century that Europe’s states established and wielded the sorts of central banks and money-issuing powers that we now associate with state monopoly powers over monetary systems: “By 1870 or so, not only had [central banks] monopolized the issue of notes in most countries but they were also beginning to regulate other banks.”18
The rise of these central banks throughout much of Europe provided states with unprecedented powers in terms of issuing new debt and financing explosive government spending in times of emergency. The regulatory role of central banks further solidified the regime’s control of their financial systems overall.
Ironically, however, it was also in the nineteenth century that states faced mounting opposition to state monopoly powers in the form of the classical gold standard.
This was a result of the rise of laissez-faire liberalism in the nineteenth century which was especially notable in Britain, France, and the US. Increasingly in western Europe, the liberals and the commercial class insisted on an “obligation to maintain the convertibility of gold or silver at a fixed parity.”19 These formal definitions of a currency’s value in metals were important in that they made it easier to see the extent and effects of government manipulation of the currency. That’s all to the good, but it offered no challenge to the state’s growing monopoly over money. After all, the gold standard could be—and repeatedly was—suspended for reasons of war.
In other words, it would be a mistake to regard the era of the classical gold standard as a period of state weakness in financial and monetary matters. On the contrary, the classical gold standard was built on a firm foundation of state power limited only by legislation. The legitimacy of the state’s prerogative to ultimately oversee the monetary system was not in question. By the end of the nineteenth century in Britain, and in many other key polities, the days of privately-issued bank notes and privately minted coins were over. (The US lagged this trend somewhat but the outcome was eventually the same.) That is, there were no institutions left that could realistically challenge the state in terms of issuing and creating money.
The nineteenth century did present obstacles to state’s ability to inflate and debase the currency, but states nonetheless remained very much the victors over private money, private banks, and private mints. It should not surprise us that the classical gold standard was soon followed by the gold exchange standard, a system thoroughly dominated by state actors. The total abandonment of precious metals soon followed.
In many ways, this change to state-dominated monetary systems was a reversion to the “traditional” way of doing things before the collapse of the Roman Empire. The era following the end of Roman despotism lacked states able to establish monopolies on coinage and money production. Yet, as civil governments grew into increasingly powerful states, they also asserted themselves as masters of money and finance. Few now question this state of affairs.
1. David Glasner, “An Evolutionary Theory of State Monopoly over Money,” in Money and the Nation State: The Financial Revolution, Government and the World Monetary System, edited by Kevin Dowd and Richard H. Timberlake. (New Brunswick, NJ: Transaction Publishers, 1998) p. 27.
2. Martin Van Creveld, The Rise and Decline of the State (Cambridge: Cambridge University Press, 1999), p. 226.
3. Ibid., p. 226.
4. John H. Munro, “The Medieval Origins of the Financial Revolution: Usury, Rentes, and Negotiability” in The International History Review, Vol. 25, No. 3 (Sep., 2003), p. 548.
6. Charle P. Kindleberger, “Economic and Financial Crises and Transformations in Sixteenth-Century Europe”, in Essays in International Finance, No. 208, June 1998. Princeton, NJ, Princeton University. p. 5.
8. Ibid., p. 6.
9. Ibid., p. 6.
10. Charles P. Kindleberger, Essays in History: Financial, Economic, Personal (Ann Arbor: University of Michigan Press, 1999), p. 76.
11. Jan Sytze Mosselaar, A Concise Financial History of Europe (Rotterdam: Robeco, 2018) p. 53.
12. Ibid., p. 54.
13. Van Creveld, Rise and Decline, p. 226.
14. Kindleberger, “Economic and Financial Crises,” p. 19.
15. T.S. Ashton, The Industrial Revolution:1760-1830 (New York: Oxford University Press, 1964) p. 69-70.
16. Glasner, “An Evolutionary Theory,” p. 28
17. The Bank was created as a result of the financial crisis of 1672 during which—in spite of the advantages of the state’s longtime monopoly on coinage—Charles II suspended altogether the payment of coins to his creditors. He eventually paid his debts, but the episode raised calls for created a “public” bank that would lower risk and guarantee the payment of the government’s debts.
18. Van Creveld, Rise and Decline, p. 233.
19. Glasner, “An Evolutionary Theory,” p. 38.