The Big Problem of Small Change
By Thomas Sargent, the William R. Berkley Professor of Economics and Business, and François Velde
… For centuries, authorities sensed that economic health depended on the steady, predictable availability of currency. But they did not understand how to realize this goal. Messrs. Sargent and Velde deserve credit for revealing how the correct model came into being. . . . More than a penny for their thoughts. -- Paul Podolsky, The Wall Street Journal
One big problem had long plagued commodity money (that is, money literally worth its weight in gold): governments were hard-pressed to provide a steady supply of small change because of its high costs of production. The ensuing shortages hampered trade and, paradoxically, resulted in inflation and depreciation of small change. After centuries of technological progress that limited counterfeiting, in the nineteenth century governments replaced the small change in use until then with fiat money (money not literally equal to the value claimed for it) – ensuring a secure flow of small change. But this was not all. According to Professor Sargent and Velde, by solving this problem, modern European states laid the intellectual and practical basis for the diverse forms of money that make the world go round today.