During an 18-month period starting in 1348 the bubonic plague, or Black Death, claimed the lives of at least one-third of the people living in Europe, perhaps the worst physical calamity in historic times. People avoided congregating at markets, fairs, or wherever goods were bought and sold. With no one to purchase them, goods at first piled up and prices fell, but after the plague had run its course, production fell off sharply. The labor force had fallen by one-third, while the amount of land, capital, and metallic coinage remained unchanged.
With the same amount of circulating money chasing fewer goods, prices rose. The shortage of labor tightened labor markets and wages appear to have doubled in a few years. Land lay uncultivated and rents fell as other prices climbed. As prices rose, albeit slower than wages, coinage began to leave in search of foreign markets where goods were cheaper, and governments debased coinage to make it less attractive in foreign markets and to stop the outflow of precious metals.
In 1351 Edward III, king of England, called Parliament together for the first time after the plague, “because the peace was not well kept, because servants and labourers would not work as they should, and because treasure was carried out of the kingdom and the realm impoverished nd made destitute of money” (Feavearyear, 1963). Edward debased the English currency, and Parliament enacted laws to hold down prices and particularly wages. Workers felt hard pressed and when the bankrupt government raised taxes in 1380, revolt broke out.
France, already desolate from war with England, also turned to coinage debasement. Even priests struck for pay raises. In 1358 France saw revolt break out in towns and rural areas.
The monetary dimensions of the Black Death show that not all monetary disturbances began as shocks to the money supply. Rather than the money supply increasing sharply, output fell precipitously after the Black Death. Either a sudden money supply increase or a sudden output drop reduces the ratio of output to money, usually causing prices to increase. The pattern of internal inflation followed by currency devaluation in foreign exchange markets has been a familiar pattern in the post–World War II era. Although the mechanics of the metallic coinage systems was a bit different, the results were the same, as monetary history immediately following the Black Death illustrates. Once prices start to rise, governments often react by putting a lid on prices, a strategy that nearly always fails. The redistribution of income puts different income classes on edge, often ending in social revolt, and, on occasion, political revolution.
The monetary disorder following the Black Death prompted a French theologian and one of the greatest thinkers of the age, Nicholas Oresme (c.1320– 1382) to write the first treatise on monetary economics, entitled A Treatise on the Origin, Nature, Law, and Alternations of Money. In this treatise Oresme explained Gresham’s law two centuries before Gresham lived.