Encyclopedia of Money: V

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Virginia Tobacco Act of 1713

The Virginia Tobacco Act of 1713 created the most advanced form of a commodity monetary standard found in the American colonies. Under the provisions of the act planters brought their tobacco to public warehouses, where it was weighed, graded, and stored. The planters received paper notes that were titles of ownership to the tobacco, and these notes circulated as money. Any recipient of these tobacco notes had the option of claiming the tobacco and taking possession of it.

The American colonies, struggling with a shortage of precious metal specie for transacting business, turned to several expedients, including allowing certain commodities to be acceptable in the payment of debts. Several of the northern and middle colonies had a whole list of commodities that could be used in the payment of debts at prices mandated by the government. The colony of Virginia, however, relied almost exclusively on tobacco as a medium of exchange to compensate for the shortage of specie. The government accepted tobacco in the payment of taxes and government officials and the Anglican clergy received payment in tobacco.

Tobacco as a medium of exchange, however, shared many of the defects of other commodities used for that purpose. For one thing, the quality of tobacco varied substantially and debtors always wanted to pay off debts with the lowest grade possible. Owners of tobacco also found ways to pass off lower grades of tobacco for higher grades. In 1705 the Virginia House of Burgesses enacted a law against passing off hogsheads of tobacco that had trashy tobacco packed underneath a top layer of quality tobacco. Another disadvantage of tobacco lay in its bulk and weight, which made it difficult to transport for the purposes of exchanging ownership.

The Tobacco Act of 1713 called for the construction of a number of public warehouses for the storage of tobacco. Each warehouse employed agents who weighed and graded the tobacco that a planter brought in for storage. The agents then issued to the planter notes or warehouse receipts vouching for the grade and quantity of the tobacco. These tobacco notes allowed the ownership of the tobacco to change hands without removing the tobacco. This form of tobacco money resolved many of the difficulties with the tobacco standard and decreased the inconvenience to those who received tobacco in payment of debts, effectively increasing the value of tobacco money.

The act drew strong protest from critics who were against any sort of cheap money or paper-money plan. Because of vehement opposition, the House of Burgesses was later forced to pass a law assessing penalties for burning the newly built tobacco warehouses. In 1730 the House of Burgesses enacted additional legislation that further strengthened the government’s system for inspecting and grading tobacco and providing for the rejection of tobacco that failed to meet certain quality standards. This act made Virginian tobacco more attractive in export markets.

The system of tobacco notes worked sufficiently well to delay the introduction of real paper money in Virginia until 1755, making Virginia one of the last colonies to adopt paper money. Virginia’s experience with the tobacco standard demonstrates that gold is not the only commodity that may serve as a monetary standard. Any commodity that is universally in demand and acceptable in trade can serve as a standard to support paper money.

References:

Brock, Leslie V. 1975. The Currency of the American Colonies, 1700–1764.

Galbraith, John Kenneth. 1975. Money: Whence it Came, Where It Went.

Nettels, Curtis P. 1934. The Money Supply of the American Colonies before 1720.

Virginia Colonial Paper Currency

In the last half of the eighteenth century the colonial government of Virginia was the last of the colonial governments to have recourse to paper currency. Paper money was not completely new to Virginia because tobacco notes, essentially warehouse receipts for stored tobacco, had circulated as money since early in the eighteenth century. Later, however, the Virginia colonial government issued fiat paper currency that was declared legal tender.

The circumstances that pushed Virginia to the paper currency brink were hardly rare in the history of paper money. Robert Carter Nicholas, a member of the House of Burgesses at the time but not a friend of paper money, explained the rationale as follows:

Money, the acknowledged Sinews of War was necessary, immediately necessary; Troops could not be levied and supported without it; of Gold and Silver, there Was indeed some, what Quantity I do not know, in the Hands of Individuals, but The Publick could not command it. Did there not result from hence a Necessity Of our having Recourse to a Paper Currency, as the only Resource from which we Could draw Relief?

(Brock, 1975)

The crisis that led to the issuance of paper currency was the encroachment of the French in what is now western Pennsylvania. After Major General George Washington returned from an expedition against the French and reported to the colonial governor about the military situation, the Virginia House of Burgesses in February 1754 authorized the treasurer to borrow 10,000 pounds at 6 percent interest. The treasurer reported back that there was no money to be had or borrowed. Metallic coinage, flowing out to Europe to pay for imports faster than it flowed in, was hard to come by in colonial Virginia.

At first the House of Burgesses balked at the issuance of paper money, but in May 1755 the Burgesses authorized the issuance of 20,000 pounds of legal-tender treasury notes for the use of General Edward Braddock. When Braddock’s expedition met with disaster shortly thereafter, the Burgesses authorized another 40,000 pounds. Further issues were made in 1756. The legal-tender status of these notes drew protests, at first ineffective, from British merchants not wanting to accept depreciated paper money in payment of debts.

In 1757 the Burgesses seized upon the idea of slashing government expenditures by exchanging interest-bearing treasury notes for noninterest-bearing notes. It voted to issue 100,000 pounds in noninterest-bearing notes to retire the interest-bearing notes still in circulation. To attract additional support for the idea of noninterest-bearing notes, the Burgesses authorized the issuance of an additional 80,000 pounds in noninterest-bearing notes to aid in the war effort. Although not paying interest, these notes were legal tender and were to be retired in the payment of taxes.

After 1762 the exchange rate between Virginia’s paper currency and the British pound began to rise significantly, meaning that more of Virginia’s paper currency was needed to buy British currency, usually about 40 percent more. Thus, 140 pounds of Virginia paper currency was needed to buy 100 British pounds. This currency depreciation forced British creditors to accept cheap paper, which was legal tender, in payment of debts owed by Virginia’s colonists. As Virginia’s paper currency was convertible into ever fewer British pounds, British merchants became more impatient with their losses. Parliament finally passed the Currency Act of 1764, which banned paper money as legal tender in private and public debts. The act applied only to the colonies south of New England because the Currency Act of 1751 had applied similar principles to New England. Virginia continued to issue paper money until the Constitution of the United States put the authority to issue money with the federal government.

References:

Brock, Leslie V. 1975 The Currency of the American Colonies: 1700–1764.

Ernst, Joseph Albert. 1973. Money and Politics in America, 1755–1775.

Venetian Ducat

During the late Middle Ages the Venetian ducat became the preferred international currency, sometimes referred to as the dollar of its time, a reference to the dominant role the United States dollar played in post–World War II international trade. By the fifteenth century the prestige of the gold ducat of Venice made it the standard for currency reform in Muslim and Christian nations of the Mediterranean. The Mamluk ashraftil, the Ottoman altun, and the Portuguese and Castilian ducat were based upon the Venetian ducat.

Venice first minted the gold ducat in 1284 at a weight and fineness of 3.5 grams of virtually pure gold (0.997 fine), a standard of purity and fineness that would be maintained until the end of the Venetian Republic in 1797. Gold coinage had disappeared in Western Europe after the eighth century, and the Italian city-states were the first European governments to renew coinage of gold. Florence and Genoa first struck gold coins in 1252, and Venice minted its ducat at the same weight and fineness as the Florentine florin, a coin that commanded the prestige of an international currency before it lost credibility when the Florentine government minted issues of lighter weight. The florin also suffered from inferior imitations issued by other governments. The Venetian ducat clearly superseded the florin in the fifteenth century as the international currency par excellence.

Venice has been regarded as the birthplace of capitalism, a forerunner of capitalist cities such as Amsterdam and modern Hong Kong, economies whose only resources are good harbors and social and legal environments that favor commercial and financial activity. In Venice political power and social prestige had passed from the land-owning aristocracy, which still controlled most governments, to a class of hereditary mercantile families who jealously sought to preserve the position of Venice as an international trading center. Although feudal monarchies all too easily turned to currency devaluations, debasements, and seigniorage to finance government expenses, the mercantile oligarchy that ruled Venice weighed the long-term consequences and steadfastly maintained the integrity of its currency, symbolizing Venice’s commitment to fair dealings. The Venetians lodged complaints against other governments for issuing inferior imitations of Venetian ducats, and allowed only Venetian citizens to work at the mint, discouraging foreign access to stamp patterns employed to strike the Venetian coins.

Venice was on a silver standard when ducats were first struck. At first the value of gold rose as gold was in greater demand at mints for coinage. In 1326, however, the value of gold dropped significantly, putting a hardship on debtors using gold ducats to pay debts defined in silver. The debtors, including banks needing to pay depositors and the government needing to pay bondholders, persuaded the officials to switch to a gold standard, fixing the gold price of silver at a rate that prevailed before the value of gold plummeted.

During the mid-fifteenth century, the value of gold rose relative to silver, and Venice returned to a silver standard. The name of the gold ducat was changed to zecchino and the term ducat came to refer to a unit of account, such as dollars are a unit of account in the United States. The Venetian mint began producing silver ducats.

In 1797 Venice lost its independence as a sovereign state at the hands of Napoleon, ending the long history of the Venetian ducat (zecchino) as one of the most trusted coins in monetary history.

References:

Cipolla, Carlo M. 1956. Money, Prices, and Civilization in the Mediterranean World.

Lane, Frederic C. 1973. Venice: A Maritime Republic.

Lane, Frederic C., and Reinhold C. Mueller. 1997. Money and Banking in Medieval and Renaissance Venice. Vols. I–II.

Velocity of Money

The velocity of money is the average number of times per year that a unit of currency (e.g., U.S. dollar, Japanese yen, German mark, etc.) is spent on goods and services. From a theoretical perspective a percentage change in the velocity of money can have the same impact on prices or other economic variables as an equivalent percentage change in the money supply.

Sir William Petty (1623–1687) may have been the first writer on economics to describe the velocity of money. He advanced the plausible view that the velocity of money was determined by the frequency of people’s pay periods. The famous philosopher John Locke (1632–1704) wrote on monetary economics and referred to the ratio of a country’s money stock to its trade, a concept bearing a marked resemblance to velocity. By the mid-twentieth century, the concept of velocity was a cornerstone of monetary economics, which is the study of the relationship between the money supply and prices, interest rates, and output.

A measure of velocity can be calculated by dividing a measure of a nation’s output (i.e., Gross Domestic Product or GDP) by a measure of the money supply. Between 1945 and 1981 one measure of velocity varied between two and seven. Whether velocity is stable or fluctuates in a narrow range, conditional upon stability in other parts of the economy, remains one of the important theoretical questions in monetary economics.

Under conditions of hyperinflation money loses its value quickly and people try to spend it faster. During the classic case of the German hyperinflation after World War I workers were paid at half-day intervals, and took off work to spend their wages before they lost their value. These are the conditions that set velocity soaring, further feeding the inflationary momentum that begins with excess money supplies.

A depression economy, particularly when coupled with falling prices, may lead households and businesses to hoard money because they are afraid that stocks and bonds are unsafe investments and perhaps because they hope to capture the benefits of falling prices. These conditions produce declining velocity, having the same effect as declining money supplies, sending the economy into a steeper descent.

Many modern economists argue that if the government stabilizes the money supply growth rate at a modest rate, perhaps 3 to 5 percent annually, velocity will also stabilize, and the growth path of the economy will mirror the stability in the monetary growth rate.

Vellon

Originally, vellon was a mixture of copper and silver that became widely used for subsidiary coinage in Spain in the sixteenth, seventeenth, and eighteenth centuries. Over its history vellon took several forms. Calderilla, an early type of vellon, contained a variable but modest amount of silver, and was coined mainly in the sixteenth century. Another type of vellon, rich vellon, was coined mainly in the seventeenth century and contained a token 6.95 percent of silver. A pure copper vellon containing no silver or metal alloys also appeared in the seventeenth century.

Vellon was coined into units of maravedis, ranging from 1/2 maravedi to 12 maravedis. The maravedi was a large Moorish coin that emerged as the smallest unit of account in the Castile monetary system.

Vellon coinage circulated before the era of paper money in Spain. Just as paper money bears a face value far in excess of the value of the paper, vellon coins bore face values far in excess of the value of their metal content. Seventeenth-century Spain saw one of the last great episodes of inflation before the development of paper money vastly multiplied the inflationary potential of modern monetary systems. As Spain debased vellon coinage to pure copper, vellon coins drove out silver and gold coins according to the merciless logic ordained by Gresham’s law. The government called in vellon coins and restamped them at higher values and in time vellon was carried in bags to transact business.

In 1654 the government complained that owners of calderilla had not surrendered them as requested and ordered that within a month all calderilla should be used to pay government obligations or returned to the mint for restamping. Nobles who failed to comply within the specified time faced six years’ imprisonment, and commoners faced a comparable sentence to the galleys.

Like modern paper money, counterfeiters saw vellon coinage as an opportunity to profit from differences in intrinsic values, based upon metal content, and extrinsic values, reflected in face values. On 29 October 1660 the government enacted a statue setting forth that: (1) counterfeiting, and efforts to import vellon counterfeited abroad, were capital offenses, (2) importing, receiving, or assisting the importation of counterfeit coins would lead to confiscation of importing vessels, forfeiture of goods, and burning at the stake, and (3) a mere failure to denounce smuggling and counterfeiting merited a sentence to the galleys and confiscation of goods.

Early in the eighteenth century Spain’s government limited the legal-tender status of vellon to transactions under 300 reales, and placed the practice of selling gold and silver at a premium in a category with “theft, highway robbery, and counterfeiting,” with penalties commensurate with the crime. Meanwhile economic growth had caught up with monetary policy, stabilizing the value of vellon coinage, and monetary order was for a time restored in Spain.

References:

Grice-Hutchinson, Margorie. 1993. Economic Thought in Spain: Selected Essays of Margorie Grice-Hutchinson.

Hamilton, Earl J. 1969. War and Prices in Spain: 1651–1800.

Vives, Jaime Vicens. 1969. An Economic History of Spain.

Variable Commodity Standard

Under a variable commodity standard a currency is officially redeemable in a certain amount of a commodity, such as gold, but the authorities may vary the redemption rate, depending upon other economic conditions. If the commodity is gold, the monetary authorities would vary the amount of gold the central bank stood ready to buy and sell for a unit of currency (e.g., a dollar) to maintain the value of the currency.

One of the legacies of the inflation-ridden 1970s and early 1980s was a renewed search for an inflation-proof currency. Issues surrounding the formation of the European Monetary Union and the planned development of a single European currency, focused additional attention on schemes of monetary reform. In the late 1980s numerous proposals for monetary reform surfaced that incorporated the concept of a variable commodity standard. The common theme in these proposals was the idea of a currency whose value is tied to a weighted basket of goods. The emphasis was on a currency not convertible into a fixed weight of gold, or other commodity, but convertible, at least indirectly, into a weighted basket of goods.

Irving Fisher made one of the first proposals for a variable commodity standard in 1926. He called it the compensated dollar and it required periodic adjustments to the rate at which dollars were redeemable into gold. The magnitude of the adjustments was based upon the deviations of the current dollar value of a basket of goods from the value of the same basket of goods at a point in time. The purpose of Fisher’s proposal was to stabilize the value of the dollar in terms of a basket of goods, rather than a single commodity.

More recent proposals abandoned the idea of periodic adjustments in favor of a currency indirectly convertible into a weighted basket of goods at all times. Under these plans, the monetary authorities would constantly evaluate the value of a weighted basket of goods in terms of a weight of gold or other commodity, and would stand ready to redeem a unit of currency in the amount of gold needed to purchase the weighted basket of goods.

The weighted basket of goods in these schemes would be identical with the weighted basket of goods in a price index, such as the Wholesale Price Index (WPI). The weighted basket of goods might be viewed as a unit of a composite good composed of all the goods in the WPI, and combined in the same proportions as in the WPI. The variable commodity standard then is seen for what it is: A commodity standard that replaces gold or a single commodity with a composite of goods. If the value of a unit of currency (e.g., dollar) remained constant relative to its ability to purchase a unit of a such a composite good, then by definition the inflation rate would be zero.

The mechanics of these schemes have not been worked out satisfactorily, at least for operation over an extended period of time. Recent discussions of variable commodity standards, however, may indicate that the inconvertible paper standard may not represent the pinnacle stage of evolution in monetary standards and that in the eyes of some theoretical researchers there is room for improvement.

References:

Coats, Warren L. 1989. In Search of a Monetary Anchor: A New Monetary Standard. International Monetary Fund Working Paper. No. 82.

Fisher, Irving. 1926. Stabilizing the Dollar.

Schnadt, Norman, and John Whittaker. 1993. Inflation-proof Currency? The Feasibility of Variable Commodity Standards. Journal of Money, Credit, and Banking, 25, no. 2: 214–221.

Value of Money

The value of money has to do with the purchasing power of a unit of money. One approach to the measurement of money value is to look at its precious metal equivalent. Under a gold standard, a dollar should be worth approximately a dollar’s worth of gold. Under a gold coin standard, the value of a dollar could drop below a dollar if the government reduces the gold content of its coinage relative to its face value. Under such circumstances it might be appropriate to say that a dollar is worth only 75 cents or 50 cents, based upon the value of its precious metal content.

Despite the widely hailed virtues of precious metal backing for money, the amount of precious metal a unit of money can buy is not the essential factor to individual consumers, who have to think of the cost of things they must buy to maintain themselves and their families. Furthermore, under an inconvertible paper standard such as that of the United States, where even the metallic coinage is token money, the value of money is divorced from any precious metal connection. The true measure of money value must be measured in terms of its purchasing power.

The value of money can only be measured relative to its value at a point in time. Assume that $1 is equal to $1 in 1987. If prices double from inflation in the following decade, and in 1997 it takes $2 to buy what $1 would have bought in 1987, then it would be appropriate to say that today’s dollar is worth only 50 cents.

In practice government statisticians and economists calculate price indices, such as the wholesale price index, the consumer price index, or the GDP deflator, which show the ratio of a weighted average of prices in a given year over a weighted average of prices in some arbitrarily selected base year. If the base year is 1987, then the price index is set to 100 for that year. If prices go up 10 percent over the following year, then the price index for 1988 will be 110, indicating that it takes $1.10 to purchase what $1 would buy the year before.

In 1998 the United States GDP deflator (base year = 1987) stood at 137.33. The value of a dollar can be calculated by dividing 137.33 into 100 (100/137.33), which equals 0.73, indicating that a dollar was worth only 73 cents in 1998. Keeping the base year at 1987, the GDP deflator for 1970 equals 34.5. The value of the 1970 dollar equals 100/34.5, or $2.90, meaning a dollar in 1970 was worth $2.90 cents relative to a 1987 dollar. In this context it would be appropriate to say that a dollar in 1970 was worth $2.90.

For a currency to be useful as a store of value and standard of deferred payment, it must maintain its purchasing power. A general rise in prices, commonly known as inflation, can be interpreted as a decrease in the value of a unit of money.

See also:

Inflation and Deflation,Monetary Theory

References:

Klein, John J. 1986. Money and the Economy. 6th ed.

McCallum, Bennet T. 1989. Monetary Economics.

Vales (Spain)

Vales were Spanish paper money notes issued in the late eighteenth century and the Napoleonic era, the first paper money issued in Spain. During the last half of the eighteenth century, the gold and silver mines of Spanish America supplied the lion’s share of the world’s precious metals, and mints in Spain and the Indies struck most of the coins. Vast gold and silver resources were of little avail when war interrupted the flow of trade with the New World, compelling Spain to turn to the issuance of paper money.

War between England and Spain, the major colonial powers in the New World, broke out in 1779. Charles III, king of Spain, refused, perhaps out of fear, to raise taxes to fight the war. Also a history of defaults and bankruptcies damaged the ability of the Spanish government to float bond issues. A royal decree of 20 September 1780 authorized the issuance of 16,500 vales, each with a face value of 600 vellon pesos and bearing 4 percent interest. A syndicate of Dutch, French, and Spanish merchants had offered to extend funds to the Spanish government in return for interest-bearing notes that passed as legal-tender money.

Once a year the vales were returned to the treasury for payment of interest, inspection for counterfeited issues, and renewal for another year. A holder of a vale endorsed it before passing it on in exchange, and the holder of a counterfeited vale was entitled to reimbursement from the last endorser.

The vales were legal tender for payment of taxes and other obligations to the crown, promissory notes and other private debts, and bills of exchange. Creditors had to accept vales even when specie had been stipulated in the contract’s terms. Anyone refusing to accept vales as the equivalent of specie faced exile from Spain and exclusion from business dealings with Spain abroad. Vales had legal-tender status only for transactions equal to or exceeding 600 pesos, and recipients of salaries, wages, and pensions could refuse to accept them.

Other issues of vales followed on similar terms. The first issue drew a 10 percent commission to the syndicate supplying the funds, and subsequent issues drew a 6 percent commission.

The strains of the four-year war with England led to a modest overindulgence in paper money, and at times vales circulated at 15 to 20 percent discounts relative to specie. At the war’s end, bullion and specie again flowed into Spain from the New World, and vales circulated at par again. The retirement of a portion of the vale issues further boosted their value. In 1781 the Bank of Spain was chartered partly as a means for the orderly retirement of paper-money issues, an unusual mission for the type of bank usually known for issuing paper money.

In 1793 war erupted with revolutionary France, and the Spanish government again balked at raising taxes. At the opening of the war vales were circulating at par and suffered little depreciation despite the 300 percent increase in the supply of vales over the course of the 28-month war.

When Spain went to war with England again in 1796 the strains of wartime finance reached the breaking point. After resisting the issuance of additional vales for the first three years of war, the Spanish increased the supply of circulating vales by 50 percent in 1799. The inflation cooker now boiled over, and vales began to depreciate relative to specie. When a government office began to redeem small amounts of vales in hardship cases, a riot ensued after people formed a long line, and some bought places in line. By 1801 vales had depreciated by 75 percent.

Monetary chaos continued in Spain as the Napoleonic struggle spread to Spain, first with occupation by Napoleon and then by the Duke of Wellington. By the war’s end the value of the vales had fallen to 4 percent of their par value. After the war the government stopped printing vales and the inflation ceased.

References:

Hamilton, Earl J. 1969. War and Prices in Spain: 1651–1800.

Kindleberger, Charles P. 1984. A Financial History of Western Europe.