Why did early governments/city-states allow coinage?

Perhaps one of the oldest and fascinating topics on monetary economics. How and why did coinage emerge in places historically?

Prof. Jacques Melitz has a superb piece on the topic. He first discusses places which started coinage and then on the issues with the coinage. There were two of them:

As a further consideration, the area where early coinage took place was one of high metallurgical skills. Had the activity been highly profitable, we would have expected competition to have eroded the profits. Indeed there were over 300 different early issues of electrum coins in Ionia and Lydia, many of them private. Should not these competing issues have precluded extraordinarily high royal profits? And why did Croesus ultimately abandon electrum in favour of bimetallism? Had electrum coins become unprofitable?2 World monetary history also tells us that very profitable coinage attracts counterfeiting. Counterfeiting was an enormous problem prior to the introduction of highly sophisticated and mechanised methods of producing coins both in China since the Han dynasty in the 2nd century BC and Europe since medieval times. Yet we know of no corresponding problem in the Lydian and Greek poleis. To be sure, counterfeits crop up, but the problem is contained. Velde (2014) estimates “the counterfeits found in the numismatic trade” of Lydian electrum coins as “1 to 2% of the total number of coins”. Of the early Greek coins, Wallace (2001, p. 131) says: “It is a fact that the alloys of Greek coins were very carefully calibrated and scarcely ever adulterated”.

One last consideration is particularly damaging to the thesis of highly profitable early coinage. The states that produced the earliest coins displayed peculiar behaviour in the historical instances. They provided a range of denominations of coins that took centuries to emerge elsewhere (especially if we ignore the Roman republic and empire), and they did so despite the higher costs of producing the lower than the higher denominations….

The first  issue would be familiar to free banking scholars. In free banking too, we argue that let banks issue their own currency notes and the competition will take care of all kinds of problems. Same was seen in coinage world as well.

On the issue of why they issued coins of different denominations, author says answer was political. Empires gained from widespread usage of their notes:

The issue is obvious. To produce a low-value coin costs more as a percentage of market value than to produce a high-value coin of the same material with the same methods and differing only in size. Sargeant and Velde (2002: 51) provide a table showing brassage costs (costs of production) as a percentage of value for silver and partly gold, drawn from various sources and covering nine examples for different parts of late medieval Europe. If we focus on denominations differing by around 20 to 30 to one, the costs of brassage are about five to nine times higher on the lower denomination than the higher one in the relevant readings (six of them). Thus, a brassage cost of 1% on a ‘stater’ (any unit) means 5% to 9% on a coin of one twentieth to one thirtieth of a stater. Furthermore, the technology “was little changed from Greek and Roman times” (Sargeant and Velde: 50).

It would seem quite apparent from all this evidence that the willingness of the Lydian government and the Greek city-states to absorb the cost of producing an extremely wide array of denominations of coins in a single precious metal must have reflected a political strategy of promoting coinage. Such a policy would also be easy to explain. As repeatedly stressed in the literature, the government itself had much to gain from the spread of coinage in managing its budgetary affairs because of its numerous payments and receipts of bullion in small individual lots (think of public salaries, the pay of mercenaries and soldiers and individual tax receipts).4

This is the case with single currency issued by govt as well. It is govts who gain the most from the single currency..

Superb stuff, Check the references. These are the things monetary economics should teach and not just the jazzy stuff of monetary transmission and so on..

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