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By Root 285 0

coinage (aes or libra) began to be debased; by the beginning of the empire, its weight had been reduced from one pound to half an ounce. The silver denarius and the gold aureus (introduced about 87 B.C.) suffered only minor debasement until the time of Nero (54 A.D.), when almost continuous tampering with the coinage began. The precious-metal content of the gold and silver coins were reduced, and the proportion of alloy was increased to three-fourths or more of the coin's weight. By the end of the three-century-long debasement, the denarius, once nearly pure silver, had degenerated to little more than a copper coin with a thin wash at first of silver and then of tin. As an aside, it took less than a century for U.S. dimes, quarters, and half-dollars to go through the same life cycle. We do make progress.

The debasement in Rome (as ever since) was a reflection of the state's inability or unwillingness to finance its expenditures through explicit taxes. But the debasement in turn worsened Rome's economic situation and undoubtedly contributed to the collapse of the empire.

Debasement was necessarily a slow process, involving repeated recoinages and ultimately limited by the real cost of the baser metal. The spread of paper money in the eighteenth and early nineteenth centuries enabled the process to be speeded up. The bulk of the money in use came to consist not of actual gold or silver but of fiduciary money—promises to pay specified amounts of gold or silver. These promises were initially issued by private individuals or companies in the form of bank notes or transferrable book entries that have come to be called deposits. But gradually the state assumed a greater role.

From fiduciary paper money promising to pay gold or silver, it is a short step to fiat paper money—notes that are issued on the fiat of the sovereign, are specified to be so many dollars or francs or yen, and are legal tender, but are not promises to pay something else. The first large-scale fiat issue in a Western country occurred in France in the early eighteenth century (though there are reports of paper money in China a millennium earlier). Later, the French Revolutionary government issued paper money in the form of assignats from 1789 to 1796. The American colonies and later the Continental Congress issued bills of credit that could be used in making payments. These early experiments gave fiat money a deservedly bad name. The money was overissued, and prices rose drastically until the money became worthless or was redeemed in metallic money (or promises to pay metallic money) at a small fraction of its initial value.

Subsequent issues of fiat money in the major countries during the nineteenth century were temporary departures from a metallic standard. In Britain, for example, payment in gold for outstanding bank notes was suspended during the Napoleonic Wars (1797–1816). As a result, gold coin and bullion became more expensive in terms of paper. Similarly, in the United States the convertibility of Union currency (greenbacks) into specie was suspended during the Civil War and not resumed until 1879. At the war's peak, in 1864, the price of a twenty-dollar gold coin reached more than $50 in greenbacks.

Changes in the Demand for Money

As pointed out earlier, changes in demand for money can have the same effect as changes in the quantity of money. In speaking about changes in demand, however, it is important to distinguish sharply between those that arise from changes in the usefulness of cash balances, such as the spread of monetization or the increasing range of financial instruments available, and those that arise from changes in the cost of cash balances, such as changes in nominal interest rates and in the rate of price changes. In economic jargon, we must distinguish between shifts in the demand curve and movements along a demand curve for cash balances.

This distinction is important because changes in usefulness tend to proceed slowly and gradually. Many changes in cost conditions also come slowly, but when these changes are sharp, especially