Ghost Money

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During the late medieval period, money units of account arose that did not correspond to real or tangible pieces of money or coin. Some historians have labeled as “ghost” money units of account without real counterparts. Some of the ghost money owed its origin to coins that were minted in the past, but were no longer minted or found in circulation. Two important units of account, however, the pound and the shilling, began as ghost money.

King Pepin the Short of France, father to Charlemagne, decreed that a pound weight of silver be struck into 240 pennies. He also introduced the shilling as a unit of account equal to 12 pennies, comparable in value to the popular Byzantine solidus. In the Carolingian system, one pound equaled 20 shillings or 240 pennies. The only coin that was actually minted for several centuries, however, was the penny, and the pound and shilling remained only money units of account or ghost money. Rather than recording 2,400 pennies in a ledger, or pricing a good at 2,400 pennies, merchants found it much easier to write 2 pounds. The silver weight of pennies dropped in time but a pound remained the equivalent of 240 pennies, losing all connection with a pound in weight of silver. The shilling was also a money unit of account for several centuries. England minted its first shilling during the 1500s.

In 1252 Milan began minting gold florins equivalent to 120 pennies. Perhaps because of the debasement of pennies, the value of the florin rose to 384 pennies and remained at that value for 60 years. A ghost florin emerged that was equal to 384 pennies, meaning that a florin came to signify 384 pennies. Later the value of the real florin rose to 768 pennies, leaving a real florin at twice the value of the ghost florin. Venice and Genoa developed ghost money in a similar fashion.

In Florence the florin also established itself, after a period of stability, at a rate of 384 pennies, another ghostly multiple unit of account. The Florentines, however, kept the real florin as a unit of account, and made the penny a ghost penny equal to 1/384 florin, and the shilling, also a ghost, 1/29 florin.

The subject of ghost money touches on an issue always important to debtors and creditors—the stability of the purchasing power of a unit of money. Debtors invariably prefer contracts expressed in depreciating units of account, while creditors prefer contracts expressed in a stable coin. Put differently, debtors in Milan preferred to pay off debts in ghost florins rather than real florins. Creditors wanted to receive payment in real florins. Depreciating units of money and ghost monies created the same divergence of interest of debtors and creditors as found in modern societies suffering inflation.