Money and monetary stability in Europe, 1300–1914

• Published in: Journal of monetary economics 2020-11, Vol.115, p.279-300
• Main Authors: Karaman, K. Kıvanç, Pamuk, Şevket, Yıldırım-Karaman, Seçil
• Format: Article
• Language: English
• Subjects: Commodity money; Fiat money; Monetary stability; Monetary standards; Seigniorage
• ISSN: 0304-3932; 1873-1295
• DOI: 10.1016/j.jmoneco.2019.07.007

•We document patterns of monetary stability in Europe from the Middle Ages to WWI.•European states varied greatly in terms of monetary stability, and it was states in northwest Europe that stabilized their monetary units first.•In explaining this variation, the empirical evidence supports political and fiscal explanations over mechanical and technological explanations.•States depreciated their monetary units mainly to generate short-term seigniorage revenue under fiscalpressures.•The historical variation in monetary stability helps explain the variation in long run economic growth rates. This paper investigates the determinants of monetary stability in Europe from the late medieval era until World War I. Through this period, the anchor for monetary policy was the silver or gold value of the monetary unit. States, however, frequently abandoned this anchor, some depreciating their monetary units against silver and gold less than 10-fold and others more than 10,000-fold between 1500 and 1914. To understand the determinants of these differences, we compile a new and comprehensive monetary history dataset for all major states in Europe and test alternative theories. We find strong evidence that political factors, and in particular, fiscal capacity, political regime and warfare explain patterns of monetary stability. This finding is robust to addressing endogeneity, controlling for the instability induced by the mechanics of the monetary system and accounting for the impacts of new monetary technologies and the advent of fiat standard.