The Gold Problem

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MONEY as a useful tool of civilization has been known for more than a score of centuries, but only during the last four centuries of more rapid economic expansion has its utilization demanded a marked development of technical skill and a refinement of theory. This modern period was ushered in with an intensified demand in Europe for gold and silver which was the result of an evident undersupply and which was sated by the voyages of discovery and the American mines. The precious metals poured into Europe through Spain, and as the flood swelled prices mounted until, from the middle of the sixteenth century to the middle of the seventeenth, there occurred a price revolution greater in volume and in its economic, social and political effects than any other which history records. Contemporary observers, casting about for the cause of the violent and general rise of prices, first discovered and roughly stated what came to be known as the quantity theory of money. They recognized from experience that prices tend to vary directly with the quantity of money in circulation. As gold and silver became more abundant and relatively less valuable, more coins of standard weight (i.e., higher prices) had to be paid in exchange for practically all other commodities -- most of all for food products.

The sixteenth century had also suffered severely from the continuation of the long mediæval evils of clipped, debased and multitudinous coinages. This developed another contemporary generalization, known as Gresham's law, that bad money drives out good. Equipped with this new insight the stronger governments answered the call from the growing commercial community for a stricter regulation of the standards of national money...