The Evolution of Small Change: Beliefs, Experiments, and ...

10 Introduction
lawyers (ecclesiastical and secular) came to grips with these observations as
they confronted related legal issues and continuously refined their views of
money as a commodity and thereby approached a concept of fiat money. By
the late 15th century, isolated experiments with convertible token coinage
were carried out, but they encountered the technological constraints of
their time.
The 16th century brought mechanization of minting. Coins of higher
quality, more immune to counterfeiting, could be produced, but at a high
fixed cost. This innovation tempted Castile into an experiment to reap
the efficiency gains from a well managed fiat currency system based on
token copper coins. But deficit finance ultimately created unprecedented
inflation. Other countries across 17th century Europe wrestled with the
same temptation, with a range of outcomes. Monetary doctrine responded
to these experiments with an understanding of the conditions under which
fiat money was desirable, and of the restrictions to place on its management,
including limited legal tender provisions for small coins, based on a quantity
theory of money. This period also saw the first enunciations of key elements
of the ‘standard formula’ in Restoration England.
It took another century and a half before these recommendations were
implemented. We close by endorsing Angela Redish’s account of how
technological changes in metal working (namely, the application of the
steam engine) opened the way for the first implementation of the standard
formula in Britain in 1816. It took more decades before the formula was
to be adopted in the United States, France and Germany, providing the
basis for the Classical Gold Standard.
At the conclusion of this centuries-long learning process, societies
emerged not only with a functioning commodity money system, but also
with the theoretical tools and the collective experience to prepare a fiat
money system. Some episodes of the 20th century resemble ones described
in this book. So learning continues.