The value and security of money. Metallic and fiduciary media in Ferdinando Galiani's Della moneta

Abstract

This paper proposes a new interpretative framework for Galiani's monetary theory. The main argument is that, by adopting “the methodology of successive approximations” (correctly attributed to him by Luigi Einaudi), Galiani investigated the theoretical foundations of the two archetypal moneys: metallic money and paper money. On these foundations, he developed the model of a complex monetary economy based on the coexistence of a metallic and a fiduciary circulation. The paper also illustrates how the experience of the “public banks” of Naples inspired his analysis, thus shedding new light on the theoretical and institutional richness of his monetary thought.

Keywords:

• Galiani
• monetary theory
• metallic money
• fiduciary money
• public banks of Naples

Acknowledgements

I wish to express sincere thanks to two anonymous referees of this journal for their very useful comments. I am also grateful to the participants at the 44th UK History of Economic Thought Conference held at Keele University, 3–5 September 2012 and to those attending the session on Money at the ESHET Conference held at Kingston University, 16–18 May 2013. Many of them provided useful comments and suggestions.

Notes

1 Schumpeter specified that, in principle, any commodity may function as money. Nevertheless, because of the ambiguous meaning of the alternative term “commodity money”, he added: “Availing ourselves of the fact that in modern times only gold and silver have been chosen for that role, we prefer the term Metallism, though it is not strictly correct”.

2 The first edition of Della Moneta was published anonymously in 1751, but with the indication 1750. The second edition was published in 1780. In this paper, I refer to the first edition as Galiani (1751). For the 1780 edition, I have used the Caracciolo-Merola edition, here referred to as Galiani (1963). For the quotations in English, I refer to Peter Toscano's translation On Money (Galiani 1977), occasionally amended or integrated as appropriate.

3 For information on Galiani's life (in English) see Tiran (2001). The language barrier has reduced the potential impact of Galiani's contributions to political economy on the English-speaking intellectual community (less so on the French- and German-speaking ones), at least until his recent rediscovery thanks to both Italian and international economists and intellectual historians. In addition to the economists contributing to the special issue of H.E.I. edited by Faucci and Giocoli (2001), one may mention Rothbard (2006, vol.1, p. 403) who, amusingly, proposed that Galiani should be regarded as “as largely French”, in spite of his Italian (Neapolitan) nationality. For recent works in the intellectual history tradition that devote attention to Galiani's contributions see Robertson (1997, 2005), Reinert (2011) and Stapelbroeck (2006, 2008).

4 Rosselli (2012) has further pursued this line of argument in a direction different from mine, namely by drawing an interesting distinction between the internal and the external circulation of metallic money. I instead focus on the distinction between metallic and fiduciary money.

5 See e.g. Muldrew (1998), Pincus (2011), Attack and Neal (2009), Wennerlind (2011), Ito (2011) and (2013).

6 As an example of comparative analysis, see Hernandez Esteve (2002).

7 I have dealt with these topics in Costabile (2012).

8 John Law introduced a more complex distinction among money as a measure of value, as a means of payment and medium of exchange, and as a standard of deferred payments. Consequently, he linked the stability of the value of money over time to its standard of deferred payments function, rather than to its means-of-exchange function. (Murphy 1997, pp. 53–62).

9 It has been suggested that “The search for an invariable measure of value by Pufendorf, Petty, Locke, Cantillon, Hutcheson and Smith had the practical objective of protecting people from the effects of inflation. They wanted a standard of value in order to preserve the income and wealth of individuals” (Dooley 2005, pp. 145–46). Smith also sought to measure the wealth of nations and their potential for capital accumulation. The objective was different for Ricardo, who wanted an “invariable measure” in order to track down the origin of changes in relative prices.

10 According to Locke (1824 [1696], p. 151) “the measure of commerce must be perpetually the same, invariable, and keeping the same proportion of value in all its parts”. The requisite of stability also underlay Law's proposal of a “land money” (Murphy 1997, 2009; Boyer 2003), as well as those of many other economists.

11 “Imaginary money” was the label for abstract numéraires that either had never existed or, in some cases, were moneys out of circulation. In addition to their domestic function, they were also used to convert the various moneys into a common measure at international trade fairs. On the historical origins of imaginary moneys see Bloch (1954, pp. 44–9 in particular).

12 Contrary to many of his contemporaries, Galiani did not regard seignorage as robbery: he argued that the monetary authority should establish the face value of coins by deducting minting costs from the intrinsic value of the precious metals (1977, pp. 120–1, 1751, pp. 162–3, 1963, pp. 139–41). Otherwise, jewellers would melt all the coins, and the nation would be drained of its blood. However, “minting rights” should be as small as possible, and “two per cent would be enough” (1977, p. 222, 1751, p. 300, 1963, p. 250).

13 While debasement had been severely condemned by monetary theorists in Europe at large (at least since Bernardo Davanzati), Galiani regarded the sovereign's practice of manipulating the value of money (the “alzamento”, or “augmenting”, in his language) as legitimate when the public debt was too high and sufficient taxes could not be raised. Under these circumstances, he argued, debasement was a useful device with which to reduce the burden of the public debt and the real value of government outlays. In Naples, before Galiani, Gian Donato Turbolo (a seventeenth-century economist and Master of the mint) had been in favour of debasement; in the eighteenth century, Trojano Spinelli and Carlo Antonio Broggia were against it.

14 On this see Della Moneta, Book III, chapter 2.

15 “Frenesia” is rendered as “fantasy” in Toscano's translation.

16 To put this approach into context, see the debate between Cheapness and Plenty versus Dearness and Plenty, as described by Schumpeter (1954, pp. 285–8).

17 See e.g. Galiani (1977, p. 78, 1751, pp. 104–5, 1963, pp. 97–8). Galiani elaborated on this measure in one of the Notes added to the second edition (Note X, 1977, pp. 289–91, 1963, pp. 314–6)

18 On Malthus's measure of value, which also had the purpose of measuring relative prices, see Costabile (1983).

19 The idea of money as a pledge had already be propounded in the works of such authors as Vaughan (1856 [1675]) and Locke (1824 [1691], p. 22). However, there are important differences between Locke and Galiani on this point. First, while Locke (ibid.) denied that “the bill, bond, or other note of debt” had the capacity of being a pledge because of their lack of security, Galiani attributed security both to metallic and fiduciary money. Second, Galiani more precisely spelled out the condition of price stability as a requisite for the functioning of money as a pledge. A few years before writing his own treatise, Galiani had started a translation of Locke's Considerations; but he left the work unfinished. He explicitly referred to Locke's authority in “On the State of Money at the Times of the Trojan War” ( Galiani 1963, p. 372).

20 See also Galiani's definition of a “sale” as “the giving up of a thing which is useful for civil life in exchange for another which is of no use, but is only a secure pledge for the seller to have to receive the equivalent of what he gave” (“On the State of Money at the Times of the Trojan War”, Galiani 1963, p. 374; my italics).

21 The Prince would also be granted the exclusive right to issue the bullettini in order to prevent counterfeiting, and he would collect part of the products as taxes.

22 Some interpreters, having proposed a strictly cartalist interpretation of the parable of the bullettini, have been unable to escape the conclusion that there is a “contradiction” or a “conflict” between Galiani's supposed “metallism” in Book One and “cartalism” in Book Two, Chap. 1. In my opinion, the cartalist interpretation of the parable falls into the pitfall aptly described by Schumpeter (1954, p. 289): “When we find that a writer compares money to a ticket – a ticket that admits the bearer to the great social store of all goods – we feel inclined to register him as a cartalist. But the phrase need not mean much…”

23 von Mises (1971, p. 52) followed Galiani in treating value and security as the foundations of the liquidity of money.

24 In the first chapter of Book II, Galiani also studied the historical origins the “great institution” of metallic money. Here he adopted an evolutionary approach: “its use began (…) with practically no awareness that is was being used and no understanding of its utility. After it became known and was made universal, men set about to improve it. It then became possible to facilitate its improvement by coinage and by other means which were consistent with its nature” (1977, p. 48, 1751, p. 65, 1963, pp. 66–7). His approach is in sharp contrast with the then predominant idea that money arose from a “consensus”, or a contract, between men – an idea which provoked his sarcasm (1977, p. 48, 1751, pp. 65–6, 1963, pp. 76–68).

25 The King appointed the governors of these public banks, as well as their delegates ( Hernandez Esteve 2002, pp. 487, 494, 502). Moreover, as we will see below, he conceded the “privilege” that their papers should be accepted for all payments to the State. Also, a Prammatica (law) recommended that depositors should prefer not-for-profit banks, like the Monte di Pietà, over private commercial banks (De Rosa 2002b, pp. 444–5).

26 In the category of short lived moneys he also included other special types, such as monete obsidionali, i.e. those minted by the commanders of besieged cities when communications were interrupted.

27 These idiosyncratic factors were summarised as follows (1977, p. 238, 1751, pp. 322–3,1963, p. 268): “I. The colonies of Pennsylvania have only savages for neighbours and, consequently, do not fear that their paper will be counterfeited; II. They only trade with England, which they can watch carefully and attentively; III. Finally, because extraordinary actions, which seem to exceed human strength, can really be counselled by virtue”.

28 This may explain why some of them, like Cesarano, depict Galiani as resembling a reluctant, or incoherent, cartalist.

29 For instance, the money scarcity problem was discussed in seventeenth-century England by Gerard de Malynes, Edward Misselden and Thomas Mun in their “mercantilist” writings, and later by the Hartlib Circle, to which Sir William Petty was connected (Wennerlind 2011). For recent studies on how the scarcity of money stimulated the rise of informal and formal credit networks in England see the authors mentioned in fn. 5 above. The problem of money scarcity is one aspect of the classic issue of the “adequate” level of money in circulation, and many well-known authors dealt with this problem. Among them, see e.g. Davanzati (1696 [1588], p. 18), Petty (1899[1691], p. 113), Locke (1824 [1691]), pp. 21–2), Law 1750 (1705) and, finally, David Hume, who dismissed the problem as altogether irrelevant by arguing that “greater or less plenty of money is of no consequence, since the prices of commodities are always proportioned to the plenty of money” (Hume 1752, Discourse III, Of Money, p. 41). This proposition, emphasising full price flexibility, is still central to the neutrality propositions of modern orthodox monetary theory. On Hume's monetary thought see Arnon (2011).

30 For all his merits in other parts of his work, and his acquaintance with the international literature, Antonio Genovesi was unoriginal as a monetary analyst, as evidenced both by the lectures that he delivered to his students (Genovesi 2005 [1757–1758]), and by his main economic book Lezioni di Commercio o sia d'economia civile (an enlarged version of the former), first published in 1765–1767 and later in other editions (Genovesi 2005). His treatment elaborates for didactic purposes on many points already made in the literature, particularly in Galiani's Della Moneta, which he read and mentioned (2005, p. 658). Among Galiani's points borrowed by Genovesi are the critique of Aristotle on the origins of the value of money; the effects of “augmentation”, and the mechanics of inflation. Moreover, Genovesi did not grasp the link between private and public trust which was the essence of the Neapolitan banking system (Genovesi 2005, 703ff.). Genovesi had started his career as a philosopher, and had become an economist in around 1754, when he was appointed to the chair of Meccanica e Commercio, founded in that year by Bartolomeo Intieri (he talked of his “conversion from a philosopher to a merchant”). Both Galiani and Genovesi gravitated in the intellectual circle of Bartolomeo Intieri and Celestino Galiani (Ferdinando's uncle), who was the equivalent of a modern “rector” of the University.

31 As the modern “cash in advance” approach has clarified, “transactions necessarily need intermediate money transactions” because “money buys goods and goods buy money, but goods do not buy goods” (Clower 1967, pp. 4–5). Consequently, what buyers need in advance, in order to carry out their desired transactions, is money, rather than other commodities or assets. In this light, we can understand many important episodes in the history of economic thought, including, for instance, Keynes's defence of mercantilism against the allegation that it confused money with wealth. Galiani was certainly not guilty of this identification, as in several passages he clarified that money cannot itself create wealth (1977, pp. 203–4, 1751, pp. 272–3, 1963, pp. 229–30). According to him, wealth is produced by agriculture, industry, and, ultimately, by an active population.

32 These “attributes” are those described in the quotation reported above: namely the difficulty of their imitation, trust, and the good name of the debtor (1977, pp. 235, 1751, pp. 319, 1963, p. 265).

33 Galiani might have been over-optimistic about, or unduly apologetic for, the readiness of Neapolitan bankers to convert their paper notes into coins because, more than a century before, an anonymous Genoese critic of the public banks of Naples had pointed out: ‘…although the Banks are prescribed to pay hard cash, they regard it as the utmost offence when someone seeks to collect two hundred écus in cash’ (quoted in De Santis 1973 [1605b], p. 147). The anonymous Genoese writer also complained about the fact that the public banks were ‘paying in writings’. His words were conscientiously reported by Marc’Antonio De Santis, a great admirer of the new-born Neapolitan banking system.

34 On the economic role of Monti di Pietà in Italy, see Muzzarelli (2001, 2012) and the literature cited therein. In English, see Menning (1993) on the Monte di Pietà of Florence.

35 When a bank issued a deposit certificate (fede di credito) in favour of a depositor, the latter could use it in order to pay for his/her purchases. He/she simply had to transfer the certificate to the payee, after writing the latter's name on it, together with the reason (i.e. which goods or services were being paid for). In turn, the payee could transfer the certificate to pay for his/her own purchases, again with the same procedure. Thus, these papers circulated by “girate”. These deposit certificates were redeemable, so that the depositor or the certificate's holder would eventually get cash at the bank. There was also the possibility for the depositor to use only part of his deposit certificate to make smaller payments. His/her credit on the bank's books would be reduced accordingly.

Additional information

Funding

This work was supported by Fondazione Assicurazioni Generali [grant number 12/3/2013].