Archive for the ‘Economics’ Category

On Bail Outs and Bail Ins

OnBailOutsAndBailIns  <– PDF version

Are you tired of seeing the government rescuing wealthy bankers from their errors with your tax money?  Are you tired of watching banks creating questionable securities, then making large profits by selling them to unsuspecting customers based on risk ratings that were bought and paid for by the banks who created the suspect securities?  Meanwhile, when the bad securities crashed, the bankers took your tax money from the government to continue and expand their gambling racket.  Are you tired of watching your friends and neighbors lose their houses and jobs while the politically well-connected bankers are compensated and rewarded for failure?  In short, are you tired of seeing these Wall Street losers line up to take bailouts to save them from their own incompetence while the taxpayers take the loss?  Well cheer up chumps, in addition to future recurring bail-outs, there will come a day when you will be “invited” to “participate” in a bail-in.  Here’s how the scam will work.

When you make a deposit at a bank, you receive in return a demand deposit in the form of either a savings account or checking account entry.  Likewise, when you purchase a certificate of deposit, you receive a document, which is, like the savings and checking accounts, a receipt showing that the bank owes you the deposited amount upon presentation of a claim.  In other words, the bank does not sequester the money you deposited; it simply issues you a future right to a certain amount of money in the future, namely, the amount you deposited in one of the account types.  You are actually lending those assets to the bank, and the bank may do with it as it pleases.  The bank is merely obligated to fulfill its promise return it to you upon demand, and likewise with all other depositors.  The bank therefore keeps a small amount of cash on hand to disburse to its depositors from day to day; the rest is loaned out at a profit to the bank.  (Yes it’s true: banks make their profits by lending out something they do not actually own: your deposit).

But what if the bank engages in shady real-estate transactions, or lends money to people who refuse to pay back, or who cannot pay back; or if the bank over-extends itself through highly leveraged investments that decline in value?  There may come a time when the bank’s cash flow is insufficient to meet the daily demands by its depositors; in that case, it will have to obtain more capital to cover those losses and make good on its promises to the depositors.  But what if it cannot raise the required capital?  Remember, banks do not make money by risking their money; only by risking yours.  The CEO of the bank is not going to pony up $300 million of his own money to cover the depositors: he will inform the government that a bailout is needed.  If enough banks make the same mistakes, and the entire cartel becomes insolvent, then they get a very large bailout because they can claim that the entire financial system will collapse.  So it becomes an extension of the old rubric, which goes: “If you owe the bank $100 and can’t pay, you have a problem.  If you owe the bank $1,000,000 and can’t pay, the bank has a problem”.  To which we now add, “If the banks owe $1,000,000,000,000 and can’t pay, then the taxpayers have a problem.”  Hence the need for the government to bail out the bankers; the funds to do so are created by the central bank (the Federal Reserve in the U. S.), and the repayment is made by future tax increases to pay off the new debt created by the central bank.  A bail-out is when the bank is rescued by some external entity, usually the central bank acting on behalf of the government.

A bail-in is different.  A bail-in is when bankers are rescued by internal entities, which is to say, the depositors.  This is done by getting the government to allow the banks to refuse to honor claims by depositors, or prevent risk of capital loss to the bank by depositors demanding their own property back.  The bankers are unable to understand the colossal nerve of depositors, demanding to exercise their rights, formerly issued by the bank, to retrieve their own property on demand.  To the bankers, you are nothing more than an ingrate if you still insist that the bank uphold its end of the deal.  A bail-in is manifested by “capital controls”, (not on the banks since they do not risk their capital), but on its depositors.  It comes in the form of limitations upon depositors on how much can be withdrawn per day or week; a prohibition on the cashing of checks, limitations on how much currency can taken out of the country, limitations on overall volume of transactions, etc.  It matters not that a depositor needs money to pay for groceries or the mortgage: what matters is that the bank, by exercising a bail-in, gets to keep their money as long as it needs to, thus avoiding default, until it can coerce, bribe, or intimidate a government or other banks to give it a bail-out.  Now banks do not have the legal power to invoke a bail-in unilaterally: it has thus far required a conspiracy with the government to transfer such a power to the bank; for which consideration, the politicians are of course rewarded with favorable loan terms or even forgiveness of existing loans.  A bail-in generally does not permit the banks to pilfer the contents of “safe deposit” boxes, but it would be naive to exclude such a future possibility.

Lest you think this is all idle speculation, be advised that it already happened in Cyprus in 2013.  When the Cypriot national banks got into trouble, it negotiated a bailout with the IMF and other European central banks, but the deal was contingent upon the government of Cyprus to allow a bail-in binding on depositors.  So, in March of 2013, Cypriot depositors were saddled with the following restrictions on their own property [1, 2], some of which are still in effect:

a.  withdrawals limited to 300 euros per day

b.  cashing of checks prohibited

c.  Persons exiting Cyprus could take no more than 1000 euros with them

d.  Payments or transfers to foreign accounts limited to 5000 euros per month

e.  A 9.9% tax levied on depositors with balances greater then 100,00 euros, and a 6.75% tax on deposits less than 100,000 euros

What happened when the government imposed these violations of rights upon its own citizens in order to save the incompetent and/or corrupt bankers?  Did the people reach for the pitchforks and torches and descend upon the bankers and politicians?  No; they patiently waited in long lines like sheep; they raised no protest at the violation of their rights; they did not question the merits of the government’s actions against them.  You may be sure that this quiet acquiescence did not go unnoticed by the bankers and their political cronies.  When U. S. banks get in trouble again, as they are sure to do, it will create the perfect excuse for the government to restrict most cash transactions, allow the banks to prosper without risk, and track your every economic move electronically.

[1]  BBC News Europe, “Cyprus eases some bank restrictions after bailout”, 29 Mar 2013,

[2]  Edward Harrison, “Cyprus’ Bank Deposit Bail-In”, 16 Mar 2013,


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The Politics of the “Fiscal Cliff”

ThePoliticsOfTheFiscalCliff  <– PDF version

So the elections are finally over and our illustrious federal officials now turn their attention to the so-called “fiscal cliff”.  At issue here is whether the Bush-era tax cuts will expire, along with the Social Security withholding reduction enacted in 2010 as a temporary stimulus measure.  The “fiscal cliff” came about per an interim agreement reached last year, as a result of the debt-ceiling escalation in Aug 2011 and the subsequent failure of Congress to come to a consensus on a fiscal policy.  The idea behind the interim agreement was simple: impose across-the-board spending cuts of $1 trillion over ten years and let the Bush-era tax cuts expire on 1 Jan 2013 unless a long-term fiscal policy is enacted.  The $1 trillion in spending cuts, spread over ten years, result in $100 billion in cuts every year, split approximately equally between defense and non-defense.  This was regarded by its designers as so abhorrent that it would provide sufficient motivation for Congress and the President to actually make a deal.  But the negotiations since the election have not been going too well; and of course both sides are busy blaming each other.

I will review the situation, and show how the Republicans, contrary to conventional wisdom, actually hold all the cards here.  First, a few undisputed facts:

1.  The President campaigned successfully on two notions: that tax rates must go up for the wealthy, and must come down for the middle class.  He has said the marginal rates on the wealthy should go back to the 1990’s; in other words, from 35% now to 39.4% as they were in theClintonera.

2.  If the “fiscal cliff” occurs, tax rates will go up for both the wealthy and the middle class.

3.  The long-term fiscal problem of the nation cannot be solved by spending cuts alone, nor by tax increases alone; a combination of the two is necessary (i.e., a comprehensive package).

4.  The history of past “comprehensive” reforms, as enacted under Reagan and Bush, Sr., shows that the Democrats always insist on tax increases immediately, with a promise of spending cuts in the distant future.  Of course, politicians being who they are, those cuts never happen.  It is safe to say that no Democrat in Congress will ever vote for any bill that actually cuts spending in the near term unless he is forced to do so.

5.  No Democratic President will sign a bill that results in immediate spending cuts, unless he is forced to do so (like Bill Clinton).

6.  If anything bad happens to the economy, the propaganda wing of the Democratic Party (i.e., CNN, CBS, ABC, NBC, and PBS; plus the major newspapers led by The New York Times) will blame the Republicans; if anything good happens in the economy, they will give Mr. Obama all the credit.

7.  The Democrats and their propaganda wing have long held that the Republicans are the party of the rich (conveniently ignoring the fact that tax provisions favoring the wealthy were passed mostly by Democratically-controlled Congresses over the last 50 years).

8.  The Democrats and their propaganda empire have claimed that the Republicans are holding the middle class hostage to protect the rich.

9.  Mr. Obama has stated that he will only accept a “fiscal cliff” deal if it raises tax rates on the wealthy.  He has claimed the wealthy are those with incomes over $250,000.

10.  The Republicans have thus far admitted that revenue increases are necessary and are willing to do so by removing some loopholes used by the wealthy and limiting some deductions.  They do not want to raise tax rates on the wealthy due to a “tax pledge” made some years ago.

Here are a few observations and applications.  First, consider the cuts in the “fiscal cliff” legislation.  The cuts are across-the-board, without the necessary and prudent prioritization that rational people would do.  However, let’s be realistic: it actually imposes spending cuts immediately, and for that reason alone is probably the best that our ruling elite can do as things stand presently.

Secondly, the wealthy already pay a large portion of income taxes.  So, if revenues are to be increased via the Republican preference (closing loopholes and limiting deductions), or increased by Mr. Obama’s preference (raising marginal rates), the wealthy are going to pay more either way.  In reality, the best thing for the nation is the Republican way, since it will do more to promote fairness in the tax code, and limits the ability of Congress to punish their enemies and reward their friends through the tax code.

Third, if we go over the “fiscal cliff”, taxes will go up for those of us in the middle class.  So taxes will go up — what else is new; and how will it matter all that much?  State and local taxes of all types have been going up all along.  Recall that the Social Security withholding reduction was intended to be temporary anyway (it was also a bad idea).  The increase in taxation via federal marginal rate increases is small compared to the already-occurring increases in the cost of living due to the Federal Reserve’s currency-printing machine.  If either side truly cared about the middle class, perhaps they would take action to restrain Mr. Bernanke.

Fourth, although most Republicans were dumb enough to sign “no-tax” pledges at the urging of Mr. Grover Norquist, the simple fact is that both the expiration of the Bush-era cuts and the repeal of the Social Security withholding reduction are already accomplished facts if a deal is not made.  They cannot be accused of raising taxes if they allow law per a vote already taken in 2011 to occur.  Only a moron would sign such a pledge anyway; since when did Mr. Norquist assume the authority to supersede the needs of the nation and the powers of Congress contained in the Constitution?  If Mr. Norquist wishes to be emperor, perhaps he should run for the office.

Fifth, the “smart money” has known for months that our ruling elites are incapable of anything better than the impending “fiscal cliff”.  As for the future of the stock market, the “smart money” managers have probably already priced-in the effects.

Sixth, if one is going to be accused of something, one may as well do it.

With these facts and observations in mind, it seems to me that the Republicans hold all the cards here, and it is possible to get true reform that actually helps the nation.  Mr. Obama needs to score political points by raising taxes on the wealthy (it won’t solve the fiscal problem, but he needs to score points).  He won re-election, so let him have his political points.  The increases on the wealthy are his most famous political need, but not his most important one.  Many of his supporters are middle-class.  He needs a tax cut for them much more than he needs a tax increase on the wealthy.  The Republicans in the House should immediately pass legislation that raises marginal rates on the wealthy to 50%, with no corresponding demands for spending cuts and no other conditions subject to objection.  This is far above the rates that prevailed in the Clinton era.  In fact, they should pass a series of bills that raise rates on the wealthy to 60, 70, 80, or 90%, and let the Senate Democrats and the President choose the one they want.  This turns the argument around while costing the Republicans nothing: taxes are going up on the wealthy either way.  If the Democrats think those marginal rates are too high, it will be incumbent on the Democrats to negotiate lower rates for the wealthy to protect their friends in the tall buildings in Manhattan.  If the Democrats do not really want higher rates on the wealthy, by all means they shall have their “fiscal cliff”.  If they settle on the new rates for the wealthy, Mr. Obama will have his political points, but leaves the Republicans in control of what he needs more (the middle class tax cut).  Then the Republicans can actually do what they’ve been accused of: hold the middle class tax cuts hostage — not to protect the rich, but to get spending under control and thus stabilize and secure the nation’s long-term financial health.  They should demand immediate spending cuts in return for an immediate reduction in tax rates for the middle class, thus forcing the Democrats to do what is necessary but have never done before.

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How Obama Gets Re-Elected in 2012, Part 5

HowObamaGetsReElectedIn2012_Part5   <== PDF version

Now that the respective nominating conventions are over, it is safe for the mainstream media to start the traditional mantra “the Democrats are running unopposed”.  Governor Romney’s odd rhetorical missteps haven‘t helped his cause.  While there continue to be debates about the merits of one poll as against others, the fact remains that media will continuously seek ways to help the Democrats get elected or re-elected.  This year is no different.

The next phase of the Presidential race is the series of joint press conferences, laughingly referred to as “debates”.   The paid Democratic operatives/moderators will of course make 90-second speeches about the evils of “predatory capitalism”, then follow up with a question to Governor Romney demanding he explain in 15 seconds why he hates the working class so much, and does he feel bad about all those defenseless foreign workers he exploited when Bain Capital invested in Chinese companies while laying off American workers.  President Obama, on the other hand will be faced with “tough” questions such as “Do you like ice cream, and if so, what is your favorite flavor?”  Mr. Obama can then re-assure us that he likes vanilla and chocolate equally, and that anyone who says differently is a right-wing race-baiter.

But that is not Mr. Romney’s biggest problem.  As I alluded to in an earlier edition of this series, Mr. Romney’s main problem is that he is unable or unwilling to lay out a consistent set of policies (translation: ones that do not directly contradict the policies announced during the nominating campaign).  His secondary problem is that he appears to be weak and vacillating in describing the things that differentiate him from Mr. Obama.  He will no doubt come fully armed with every variety of gentlemanly wet noodles to match up against Mr. Obama’s Chicago-style ideological gunfight.  It will be a hostile environment, but Mr. Romney should emphasize the significant differences between Mr. Obama and himself, and ignore the rudeness of the Democratic Party’s hand-picked audience.

The first of these is the basic difference in their experience.  The difference between Mr. Romney, businessman, and Mr. Obama, community organizer, that that a businessman can read numbers.  Mr. Obama seems unfazed by consistently high unemployment and the $6 trillion addition to the national debt.  Mr. Obama has claimed that the private sector is doing well; proving that he believes 8% unemployment (14% true unemployment) is evidence of a successful economic policy.  Mr. Romney can say that while he might be a dumb businessman, he at least knows that the present course cannot be sustained because the numbers suggest the middle class is shrinking and the debt will further reduce future economic opportunity.

Secondly, Mr. Romney, businessman, knows the importance of keeping track of the competition, which requires monitoring of trends and activities in the industries, looking out for both opportunities and risks.  On the other hand, one can prepare a daily Presidential Security Brief, but you can’t make Mr. Obama read it.  Perhaps if Mr. Obama had been paying attention, the fiasco in Libya could have been averted.  Mr. Romney can say that he may be another out-of-touch CEO, but he at least knows enough to listen to the advice and threat assessments made by his expert subordinates.

Speaking of the fiasco in Libya, Mr. Obama insisted for ten days that the killing of four American employees was the work of a mob angry about a video.  Let me get this straight: Mr. Obama, who claims to be familiar with the Moslem religion, and shows respect for all religions equally, believes that regular Moslems engaging in a peaceful protest will spontaneously invade a consulate, kill people, and burn it to the ground?  Peaceful Moslems went berserk over a video?  If Mr. Obama believes that, then he must also believe we are at war with all of Islam, not just the radical lunatic fringe.  Here is the third difference: Mr. Romney can say that he may be a white-guy Mormon, but he at least knows that we are in a shooting war with only a small contingent of Islamic retards, not the entire faith.

The Bolshevik communists ran a dictatorship in the Soviet Union for over seventy years.  During that time, the official price of bread was fixed at 10 kopecks (100 kopecks to a ruble).  The plan was that the dictatorship, founded on the centrally planned economic theory of Karl Marx, would provide bread for all citizens at 10 kopecks.  There was only one small problem: even with the entire agricultural workforce consigned to slave labor under collective top-down management, and with every other available resource (including the army) enlisted to aid with harvest and production, the dictatorship could not produce bread for 10 kopecks.  Hence, for over seventy years, the official price remained unchanged, but there was never any available to buy except on May Day, the dictator’s birthday, and other important economic milestone anniversaries.  Mr. Obama’s health care plan will turn into the same thing: health care is getting “cheaper”, except that premiums are actually going up now.  When Obamacare comes into its full fruition, health care will be “free”, except you won’t be able to get a doctor’s appointment because they’ve all been forced out of business, not being able to provide the service for the price the government dictates.  Here is the fourth difference: Mr. Romney can say that he might be a rich profit-taker, but he at least knows that everything of value must have a price, and that price is best regulated by free competition, not by top-down central planning as was bread in theSoviet Union.

Mr. Romney, even with all his other weaknesses, does have some significant advantages compared to Mr. Obama.  I am doubtful he will find the will to bring them up and defend them against the sneering media.  If he doesn’t, he will lose by allowing the Democrats and their media allies to frame the debate.

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The Control and Manipulation of Money, Part 1

TheControlAndManipulationOfMoney_1    <== PDF version

Money only has one purpose: to serve as a common denominator that facilitates transactions.  Under the barter system, in which items are traded directly, a horse could be exchanged for so many bushels of corn.  The difficulty is that the owner of the horse may not actually need as many bushels of corn as the horse will bring; if he trades for more corn than he needs, he has to find some other way to dispose of the excess corn.  The owner of the corn may have difficulty finding someone who has a horse to trade for corn, and may find he cannot obtain the type of horse he needs, but must be satisfied with the one that is offered.  The concept of money solved the barter problem: the owners of the horse and the corn can both sell those items for money to other parties.  The former owner of the horse can then buy as much corn as he needs from the new owner of the corn using money from the sale of the horse; the former owner of the corn can use the money from the sale of his corn to buy the particular horse he needs.  The former owner of the horse may find he money left over for something else.  Money therefore, is simply a method to resolve all transactions into a common medium; it facilitates transactions because every potential transaction can be expressed in terms of the common exchange, that is, by the concept of price.  Price is nothing more than the means to assign a value to an object in terms of money.

The utility of money as a convenient method of exchange is clear enough.  But, what is it that induces the owners of the horse and corn, which are items of true value, to trade those items for money?  The answer is simple: those owners must have confidence that the money has some recognized value.  This is in fact the most important aspect of money: the people must have confidence that they will be able to trade it for what they want; otherwise, no price can be established.  The owners of the horse and corn will exchange them for money only if they know the money obtained can be traded for what they want.

Throughout history, several different forms of money have existed.  The first type is when the money itself was made of some material that was recognized to have universal value. The best form of money had the following attributes: a) not degradable; b) divisible into small amounts; c) permanent (not consumed in transactions or use); d) uniform everywhere; e) easily recognized; f) homogeneous; g) reasonably rare (so only fairly small quantities were required for transactions); and h) reasonably compact.  The combination of these attributes led societies to adopt various metals as the monetary standard, usually silver, gold, and copper.  These three metals also had the properties that only small amounts were added to the supply over time from mining new supplies, and could be alloyed with other metals to improve durability.

The one great attribute of metallic money, if constrained to always operate on the basis of weight, is that it cannot be directly faked.  An ounce of silver is an ounce of silver.  People knew that trading tangible items of value for gold and silver entailed minimal risk because everyone else would be willing to trade that gold and silver for other items of tangible value.  So, metallic coins were invented, and it may be said that this is the type of money in which the medium itself was inherently valuable; i.e., it was a commodity.  This type of coinage worked because those materials were recognized as being of value in their own right.   Metallic coins can be counterfeited by altering the weights, but only if a series of clever ruses are employed [1].  The first of these tricks is that a government assumes a monopoly power of coinage, or appoints certain organizations to have that monopoly power.  That way, only the authorized mint can decide what units of coinage will be created.  The second trick is to define a unit of measure by a name unrelated to the weight of the metal, such as a denier or a shilling.  Hence the basic monetary unit is called by some generic name unrelated to the weight, although it may be originally defined as a certain weight.  The third trick is to reduce the weight of metal in the coins while calling it the same name.  Thus the person with the monopoly over the minting of the coins keeps the difference between the defined weight and the weight actually put into the coins.  The fourth trick is to issue an edict that all the coins bearing the name of the unit are to be regarded as equal in value; the full-weight ones and the light-weight ones alike. Edicts and laws of this type are known as legal tender laws.  It requires the people to pretend that the amount of metal in every coin is the same, since each coin is called by the same name.  Ultimately the smart people (like the governments and their monopoly minters) keep part of the actual money for themselves, while the dumb people (like you and me) must accept the debased coin as if it possessed the full weight as originally defined.   Over time, it took more of the light weight coins to buy the same tangible object, and we say that the light weight coins were “inflated” through debasement compared to their original definition.  A few historical examples of debasement of metallic coinage will serve to illustrate the concept.

The most recognizable silver unit is the English pound.  The pound was defined by King Offa of Mercia in 757 AD as a physical Mercian pound of pure silver that came to be known as the “tower pound”.  It weighed 349.9144 grams, which is equivalent to 5400 troy grains (15.4325 troy grains per gram).  There were 20 shillings to a pound, and 12 pennies to a shilling.  Thus a penny was defined as 1/240th of a “tower pound” and was equivalent to 22.5 troy grains of pure silver.  The pound and shilling were accounting units used to keep track of large amounts of pennies.  Since coins were only needed for small local transactions at that period in history, only pennies were actually minted.  Here is the history of the debasement of the English silver coinage [2, 3]:

757: penny = 22.5 troy grains pure silver

1158: Henry II introduced “sterling” silver at 0.925 pure, which improved the durability of the coin.  There were still 240 pennies to the tower pound (5400 grains); at 0.925 pure, the penny contained 20.812 troy grains pure silver.

1257: 242 pennies per tower pound at 0.925 pure; penny = 20.664 troy grains pure

1300: 243 pennies per tower pound at 0.925 pure; penny = 20.555 troy grains pure

1411: 360 pennies per tower pound at 0.925 pure; penny = 13.875 troy grains pure

1464: 450 pennies per tower pound at 0.925 pure; penny = 11.100 troy grains pure

1526: The tower pound at 349.9144 grams (equal to 5400 troy grains) was replaced by the troy pound at 373.2417 grams, consisting of 5760 troy grains.  The penny was redefined as 540 pennies per troy pound at 0.925 pure (equivalent to 506.3 pennies per tower pound at 0.925 pure); the penny was then 9.866 troy grains pure

1543: 540 pennies per troy pound at 0.833 pure; penny = 8.885 troy grains pure

1544: 540 pennies per tower pound at 0.500 pure; penny = 5.333 troy grains pure

1551: 540 pennies per tower pound at 0.250 pure; penny = 2.666 troy grains pure

In 1552, the coinage was reformed in response to the debasement of the past decade.  The shilling became the normal coinage since the penny was now a small unit, and was defined as 1/60th of a physical pound of pure silver.  The shilling thus consisted of 96 troy grains of pure silver and a penny was therefore 8 troy grains of pure silver.  The physical coin was heavier, since copper and other metals were added for durability.  Here we see the monetary pound debased, now having only 1920 grains of pure silver (since there are still 20 shillings per monetary pound).  In 1601, the penny was defined as 7 and 23/31 (7.7419) troy grains of pure silver; in 1816 it was reduced to 7 and 3/11 (7.2727) troy grains of pure silver.  In 1870, the shilling was defined as 87.27272 troy grains at 0.925 pure, which is 80.7272 troy grains pure; thus a penny was defined as 6.7272 troy grains pure.

There were three main periods of debasement of the English silver coin: a) 757 to 1526 = 769 years, debased by a factor of 2.329; b) 1526 to 1551 = 25 years, debased further by a factor of 3.700; followed by a reform upward in 1552; and then c) from 1552 to 1870 = 318 years, debased further by a factor of 1.189.  All total, it was debased a factor of 3.344 from its original definition (excluding the reduction and reform 1526 – 1552).

The coinage of France has some parallel to that of England, but the debasement thereof was much more rapid [2 - 5].  King Charles I (Charlemagne) (about 800 AD) defined a carolingian pound (livre tournois) to be 489.506 grams, which is by conversion equal to 7554.3 troy grains.  The livre was divided into 20 sou or solidi, and each sou was divided into 12 denier.  Thus a denier is the analog of an English penny in the sense that it is 1/240th of a pound, although it has a different weight (being 31.476 troy grains).  Similar to the case in England, and for the same reason, the French only coined deniers, and relegated sou and livre tournois to mere accounting units until the late medieval era.  It is believed that the French coinage was reasonably stable until the reign of Philip I (1060 – 1108).  The record of the debasement of the French denier from the reign of Philip II Augustus (1180 – 1223) is as follows, given by year and troy grains of pure silver:

800: 31.476; 1200: 6.301; 1226: 5.787; 1291: 4.629; 1301: 3.858; 1321: 3.536; 1351: 2.121; 1361: 2.572; 1390: 2.186; 1411: 1.993; 1426: 1.864; 1446: 1.671; 1456: 1.543; 1488: 1.350; 1512: 1.157; 1541: 0.964; 1561: 0.900; 1573: 0.835; 1580: 0.739; 1602: 0.681; 1615: 0.601; 1636: 0.532; 1643: 0.526; 1651: 0.484; 1676: 0.429; 1701: 0.353; 1726: 0.274; 1759: 0.260; and 1795: 0.289 troy grains pure silver.  During the French Revolution, the livre (i.e., 240 denier) was converted to francs; 80 francs to 81 livre.  The livre was at that time 240 deniers at 0.260 troy grains which comes to 62.4 troy grains; hence a franc was 63.18 troy grains of pure silver.

In the first 400 years of its existence, the French denier was debased a factor of 4.995; for the next 559 years to 1759, was further debased by a factor of 24.23; all total, debased by a factor of 121.051 from its original definition.

The Scottish penny started off about the same as the French denier, but it was debased at a very rapid rate.  By 1600, the Scottish penny was about 0.645 troy grains, that is, about 1/12th the weight of the English penny.

The silver coinage was debased by nearly every nation in Europe, except for the Arabs in Spain, who were very careful to maintain the value of their coins.  Also, the gold coins minted throughout the medieval era generally retained their full weight.  The reason is simple: the gold coins, being of much greater value than silver, were used generally in transactions between great lords or important merchants in international dealings.  Meanwhile, the silver coins were used for local trade.  It was easy for the minters to debase the local coinage used by the dumb local people, since it did not have to be readily converted to any other standard, and the king could simply issue an edict requiring that it be accepted at full face value.  But the gold coin had to maintain its value because the issuing king could not force another nation’s merchants to accept it; it would be accepted only at full weight. Thus the large traders and their associates avoided any losses that would have occurred due to a reduction in the value of the coin.


1.  Murray N. Rothbard, What Has Government Done to Our Money?,Auburn,AL: Ludwig von Mises Institute, 1991

2.  Encyclopedia  Britannica, Vol. 16, pp. 483, 726, 727 (1904)



5.  Henri Pirenne, Economic and Social History of Medieval Europe,London: Routledge & Kegan Paul Ltd., 1936, pp. 108 – 114

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