An Empirical Discussion of Monetary Policy

Copernicus changed our perspective regarding money. He sought to answer the question, ‘Why can’t we simply create more currency?’

Published Categorized as Specials
Copernicus in the assembly in Grudziadz, presenting his treatise on Money
Copernicus reads his treatise before the Royal Prussian Assembly, 21-Mar-1522

Nicolaus Copernicus (1473-1543) – Astronomer, Economist, Canon

Paper in itself is worthless but marking it with some government authentications turns it into money. Again, in itself, it holds no intrinsic value. What then, is the origin of its demand? Why do we need money to buy everything? Who invented it? Was money always like the paper money we use nowadays?

Nicolas Copernicus played a crucial role in developing the modern concepts of money. Money itself isn’t of any use or value. It is a worthless piece of paper bloated with ink. This is exactly why the history of the creation of money is so complex and fascinating.

Before the advent of money, mankind relied on the barter system for exchange of goods and services. People would trade something they wanted to get rid of, with something they wanted to have. Barter was an effective system, but it had its limitations. Finding the buyer willing to trade goods you were looking for was an itch. Also, it was tough to measure goods against each other. For example, would you trade half a dozen eggs for a piece of meat? To find a way around this problem, mankind invented money.

Using precious metals i.e. Gold and Silver, ancient civilizations forged coins, stamping them with the initials of the rulers. Gold and silver have intrinsic value. People were, therefore, willing to exchange goods for coins! The value of gold and silver arises from their scarcity, and as a result, it is very hard to make counterfeit coins.  Moreover, precious metals can be used as a measure of worth and can act as a store of quality as well. The quality of goods can be easily determined by the amount it costs.

The Chinese are credited with the creation of paper money. Invention of money is considered a critical point in the evolution of humanity. Throughout most of recorded history, money was simply thought of as a means of exchange and trade and for centuries, this primitive ‘Market’ was the prevailing concept. That was until Nicolas Copernicus noticed something weird going on in the Prussian market.

Usually, the forces of demand and supply are enough to stabilize the prices and establish an equilibrium. As demand for a commodity increases, the price rises because people are willing to pay more. On the other hand, if demand contracts, the surplus production brings down the prices because there are not enough buyers.

What Copernicus noticed was that, despite enjoying a relatively peaceful and economically frivolous period, the cost of living in Prussia had gone up drastically in the early years of the 16th century! Some argued that the influx of gold from the colonies, namely the Americas, Ethiopia, and Sudan was responsible. With more gold available, people were able to afford more luxuries, driving up the costs of necessities. Now, a gentle and steady increase in prices is an indicator of a healthy economy and is desirable. A rapid increase, on the other hand, is cause for concern.

No one was quite sure what exactly was going on because the evidence against this hypothesis was telling. Indeed there had been an influx of gold, but it wasn’t sizeable enough to be considered the sole culprit. The cumulated amount of gold imported from America into the Kingdom of Prussia amounted to less than 1 percent of the total production in the earlier years of the century!

At this point in the history of Prussia, the debate on the matter of monetary reforms had already been raging on at the court of King Sigismund. The government’s fiscal policy was being challenged and the process of thinking and rethinking the issue was well underway. The leading argument in the halls was that the wars that raged on for 13 years between 1454 and 66 had depleted the treasury. In fact, the wars had ended with the treaty of Thorun by the middle of the 15th century, and no one seemed capable of explaining a time-lag this big. Why would the buying power of common folk fall some sixty years after a war? Why not immediately?

A more recent event was the Black Death. With fewer men to contribute to the process of production, the supply was nowhere near the demand, pushing prices up. The counter-argument raised was that the plague wasn’t exactly selective, now was it? With the number of producers and skillful workers reduced, the plague that wiped 1/3rd population of Eurasia would have reduced the number of consumers equally drastically!

With the stage set, the curtains drawn, and the audience fixated, our hero steps into the limelight. In 1517, Copernicus, though originally famous for his exertions in astronomy and dissecting the matter of the heavens, formulated a series of reflections into an organized treatise. Titled ‘The Meditata’, the treatise tried to decipher the enigma of inflationary tendencies in the Kingdom of Prussia.

The subject of the Meditata wasn’t exactly the cost of living. Rather Copernicus touched on the subject of the debasement of currency that had become a very common practice in Poland. Debasing is the process of lowering the weight of the coins. The mints in the Prussian kingdom were owned by Teutonic Knights, and they frequently altered the weights of the coins. By lowering the weight of the individual pieces, the precious metals could alternatively be used for manufacturing more coins.

This was only one half the problem. The real problem didn’t lie in the multiplication of coins, because the aggregate amount of metals circulating in the market would remain the same. The real problem was, the face value of the coins remained the same despite the drop in weight! That is to say, supposedly, where a penny ought to weigh 5 grams, the newer one pence coin weighed only 2. This practice resulted in more currency with less intrinsic value which not only raised the cost of living but also stifled trading and exchange as its impact was felt across the geographical borders.

Copernicus wasn’t the first person to notice this. He was, however, the first person to enumerate his observations in the form of an essay and organize his thoughts into coherent ideas. In doing so, he originated the quantity concept of money. According to this concept, the more money people have, the more they will spend. This increased spending will drive up the cost of necessities and result in inflation. And that was exactly the case in Prussia! People now had more pennies to spend which eventually resulted in price hikes.


We in our sluggishness do not realize that the dearness of everything is the result of the cheapness of money. For prices increase and decrease according to the condition of the money.

– Copernicus

Copernicus argued that, since debasement results in multiplication of the original amount of money, it also tends to deteriorate the market ratios by introducing newer, more dynamic variables. One of his arguments was that it is not possible to debase all the coins at once because no government is capable of collecting all the coins in circulation.

Especially given the fact that, once the public becomes aware of the motive for collection, the older and heavier coins become more valuable as they harbor more intrinsic value. The public, therefore, will be encouraged to horde them. This introduces a whole new level of complications in an already complex phenomenon. Add to this the fact that not all coins are within the geographical borders. Some may have been used for export and trade outside the country or might be in the hands of sailors at sea!

Another problem in the Prussia was, there were more than one currency in circulation i.e., those of the Teutonic Knights of Prussia and the Kingdom of Poland. This made the entire process of debasing and varying the weights even more complicated and impractical. The two regions traded regularly with each other, and the heavier Polish coins, when traded in Prussia, would be smelt and turned into inferior Teutonic coins!

Conclusions:

Copernicus didn’t suggest a single all-encompassing solution. Rather, he suggested a series of steps to correct the imbalances that the economy of the region was going through.

First of these was that all coins be minted at a single place. This would simplify the process of creating and issuing new coins. In order not to irk the Knights, he allowed room for another mint stating that, ‘…if, however, this could not be done because of the opposition of the Duke of Prussia on the grounds that he wants to have his own mint, let two places be designated…’ To further eliminate any differences, he advised that the old coinage be completely demonetized and abolished. In its place, a newer, more modern currency be introduced which is harder to forge and smelt.

In his opinion, an excessive supply of money must be avoided. Copernicus’ observations and opinions were directly in accordance with Gresham’s Law which states that ‘Bad money drives out good money’!

All these findings and observations were not listed simultaneously. Rather, Nicholas added these one by one as his intellectual horizon widened and his observation expanded. In 1522 Copernicus presented his findings in a meeting of West Prussian Estates. This version of the treatise was specifically thoroughly revised and translated in German to enable ease of access and understanding. (The original version was drafted in Latin).

In July 1526, King Sigismund met the emissaries from the West Prussian Estates and pronounced that the older currencies be replaced by new ones and that the older currencies explicitly be declared void. In doing so, he recognized and cited Copernicus’ works, earning him widespread repute and acclaim.  Copernicus’ findings form the basis of modern concepts of money. Expanding the concepts further, it won’t be too far-fetched a statement if we say that his studies paved the path for the adoption of the Gold Standard, and also, to some extent, explain why governments don’t indulge in the practice of printing more money to correct their debts and credit balances.

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