Originally posted on Thursday, October 31st, 2013

Two erudite scholars, James Narron and David Skeie, publishing at the Federal Reserve Bank of New York’s Liberty Street Economics are treating their history-minded readers to “new series chronicles mostly forgotten financial crises over the 300 years—from 1620 to 1920—just prior to the Great Depression.”

Flugschrift aus der Kipper- und Wipperzeit gegen die Geldverschlechterung durch diePrägung minderwertiger Münzen:

An die Gotts- und Gwissenlose Geltwucherer, 1622, Holzschnitt (ÖNB)

As they observe, “As momentous as financial crises have been in the past century, we sometimes forget that major financial crises have occurred for centuries—and often.”  Their June 24, 2103 publication takes us back to the early 17th century:

The Kipper und Wipperzeit is the common name for the economic crisis caused by the rapid debasement of subsidiary, or small-denomination, coin by Holy Roman Empire states in their efforts to finance the Thirty Years’ War (1618–48). In a 1991 article, Charles Kindleberger—author of the earlier work Manias, Panics and Crashes and originally a Fed economist—offered a fascinating account of the causes and consequences of the 1619–23 crisis. Kipper refers to coin clipping and Wipperzeit refers to a see-saw (an allusion to the counterbalance scales used to weigh species coin). Despite the clever name, two forms of debasement actually fueled the crisis.

The rapid debasement up to 1622 created a European boom, which turned to mania by early 1622 when average citizens turned to coin clipping as a livelihood, then hyperinflation in 1622 and 1623. Many became rich by exploiting the unknowing—typically peasants. This ultimately led to a widespread breakdown in trade as peasants, fearing that they would be paid in debased coin, refused to bring products to market, creating the spillover to the broader economy.

Cry Up, Cry Down, or Call In

One response to the crisis was for states to “cry up” good coins by raising the denomination or “cry down” bad coins by lowering their denomination. Another response was to “call in” coin and re-mint it. A third response was to enforce minting standards. But central authority was so weak that no one state could solve the crisis without the help and support of neighboring states. States were finally able to solve the crisis through mint treaties and by setting exchange rates, with hyperinflation subdued by a return to the Imperial Augsburg Ordinance of 1559. Because the public became so wary of clipped and debased coin, it took months to convince the masses that coin was good once it was restored.

“The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.”

It is from the laboratory of history, as Lehrman Institute founder and chairman Lewis E. Lehrman observes, from which we can derive the lessons to guide our steps today.  And one invariable lesson of history is that the debasement of money inevitably fuels crisis.

Whether resolved by crying up or crying down,degrading the unit of account inevitably ends in tears.