VoxEU Column Economic history Monetary Policy

Money and monetary stability in Europe, 1300-1914

There is a notable lack of long-run analyses of monetary systems and their stability. This column addresses this gap by looking at the monetary systems of major European states between 1300 and 1914. The evidence collected suggests that, despite many switches between standards and systems, fiscal capacity and political regimes ultimately shaped patterns of monetary stability. Theories of monetary stability that rely on the mechanics of monetary systems perform poorly when such a long-run perspective is taken.

In the literature on monetary systems, there are few empirical studies of the long run. Most long-run studies focus on the period after 1870 and the widespread adoption of the gold standard (e.g. Bordo and Rockoff 1996, Taylor 2002, Schularick and Taylor 2012). For the earlier period, Reinhart and Rogoff (2009) provide a comprehensive review of the historical evidence on monetary stability, and Allen (2001) and Pamuk and Özmucur (2002) provide data on price levels.

This is an important void, because only a long-run perspective can allow us to track the major transformations monetary systems went through, and to investigate the interplay between politics, technology, monetary institutions, and monetary outcomes. To help fill this void, in a recent study (Karaman et al. 2018) we evaluated the long run patterns of monetary stability (defined as the stability of the monetary units in terms of silver/gold) and price stability (defined as the stability of the value of monetary units in terms of the goods basket).

Our study reveals that there was significant cross-country variation in monetary stability. While states in northwestern Europe stabilised their monetary units by the 17th and 18th centuries, states in eastern and southern Europe continued to depreciate them until the 20th century. Our study also shows that patterns of monetary stability shaped patterns of price stability. Thus explaining price stability requires explaining monetary stability. Finally, political variables emerge as the most important determinant of monetary stability. In particular, it was fiscally strong states with constraints on executive authority that ultimately stabilised the silver/gold value of their monetary units.

Monetary standards in history

Until the 20th century, the three widely adopted monetary standards were the silver, gold, and fiat standards.

  • On the silver standard, states set their monetary units equal to a certain weight of silver, and intrinsic value silver coins dominated the circulation. Silver standard was the most common standard in Europe until the 1870s.
  • On the gold standard, states set their monetary units equal to a certain weight of gold. Gold became the most common standard after the 1870s.
  • Finally, on the fiat standard, the silver/gold value of the monetary unit was left to float. Fiat standard evolved out of earlier experiments with ledger money (deposits that were transferable as book entries) and fiduciary money (copper coins and paper notes convertible to silver or gold on demand). States switched to the fiat standard when they suspended the convertibility of the fiduciary monies they issued. These suspensions could last anywhere from a few years to decades.

States continued to switch back and forth between silver, gold, and fiat standards until WWI.

Patterns of monetary stability

To track the patterns of monetary stability over time, we compiled the data on monetary standards and silver and gold equivalents of monetary units for England, Dutch Republic, France, Portugal, Spain, Austrian Habsburgs, Venice, Sweden, the Ottoman Empire, Poland-Lithuania, and Russia from 1300s to 1914.

Figure 1 The value of monetary unit, 1300-1914 (in grams of silver/gold)

Figure 1 gives an overview of the long-run patterns. For each monetary unit, the figure initially tracks the silver value (left axis) and later the gold value (right axis). The date the figure switches from tracking the silver value to gold value is marked with a dashed vertical line. Figure 1 also distinguishes between the periods the monetary system was on silver/gold standard (blue line) and fiat standard (red line).

  • First and foremost, Figure 1 establishes that states decreased the silver/gold value of their monetary units to ever lower levels over the centuries.
  • Second, it shows that states gradually changed the way they depreciated their monetary units against silver/gold. In the earlier periods, states depreciated their monetary units on the silver/gold standard by decreasing the silver or gold content of their intrinsic value coins (i.e. debasing their coinage). In later centuries, states depreciated their monetary units by switching to fiat standards and over-issuing fiat money.
  • Third, it shows that depreciations tended to be episodic. In particular, long periods of stability alternated with episodes when states depreciated their monetary units in consecutive years.
  • Fourth, there was a divergence in monetary stability across states. Western European states stabilised their monetary units relatively early, while states in southern and eastern Europe continued to depreciate them. On the other hand, there was no clear continent-wide historical break in stability associated with the introduction of a particular monetary technology or institution.

Figure 2 Index of the value of monetary unit, 1500-1914 (in silver/gold)

Notes: The index switches from tracking the value of monetary unit in silver to gold in 1717 for England, 1854 for Portugal, and 1870 for other states. Despite the different dates for the switch, because the market price ratio of gold to silver changed only from 10 to 15 from 1700s to 1870s, it had negligible impact on the overall patterns. Sweden, the most important copper producer in the continent, occasionally switched to copper standard and issued intrinsic value copper plates. We hold the index value for Sweden constant for those years.

Figure 2 also shows that most of the variation in monetary stability was not over time, but rather across states. The figure plots the value of the monetary unit first in terms of silver and later in terms of gold, normalising the index value in 1500 to one, correcting for the introductions of new monies and units, and putting all states in one figure. At one extreme, the Dutch Republic depreciated its monetary unit by about 2.3 times; at the other, the Ottomans depreciated by about 25,000 times. These patterns suggest country specific factors, rather than global or continent-wide shocks, shaped stability patterns.

Patterns of price stability

Next, we turn to patterns of price stability. Price stability concerns the stability of the value of the monetary unit in terms of the goods basket. The monetary unit could depreciate against the goods basket for two reasons. The first reason was that, as discussed in the previous section, states depreciated their monetary units against silver or gold. In other words, monetary instability caused price instability. The second reason was that silver or gold depreciated against the goods basket. In the early modern period, it was mainly inflows of precious metals from the New World that caused the depreciation of silver and gold against the goods basket. The empirical question is whether states’ depreciation decisions or the silver/gold inflows from the New World had a greater role in driving price instability.

In Figure 3 we address this question. To keep the figure simple, it only covers the silver standard era (1500-1870). In the figure, the yellow area plots the price level; that is, the consumer price index in terms of the monetary unit of each state, normalised to 1 in year 1500. The figure also separates out the contributions of the two drivers of price inflation. The blue lines plot the depreciation of the monetary unit against silver (i.e. the contribution of monetary instability). The black lines plot the depreciation of silver against the goods basket.

Figure 3 Consumer Price Index and its components, 1500-1870

The figure shows that across Europe, the depreciation of the monetary unit against silver was either of the same magnitude as, or higher orders of magnitude than, the depreciation of silver against the goods basket. Hence, for most countries, the monetary policy decisions of states played a more important role in driving price inflation than the arrival of silver from the New World. This finding provides further motivation for understanding the determinants of depreciation decisions.

Determinants of monetary stability

In the literature, two classes of theories are offered to explain patterns of monetary stability. The first class emphasises political and fiscal factors. The second class explains depreciations as corrections necessitated by the mechanics of the monetary systems. We test these theories using annual data between 1500–1910 for 11 European states and making use of a number of econometric models. The results support political and fiscal theories.

For fiscal capacity, we find that it was states at intermediate levels of fiscal capacity that depreciated their monetary unit more. Weak states depreciated less because a certain level of fiscal capacity was itself a precondition for keeping mints open, producing coins, circulating domestically issued money, and profiting from depreciations. Strong states depreciated less because they could finance their expenditures by taxation, and did not have the incentive to depreciate.

For political regime, we find that states with strong constraints on executive authority depreciated their monetary unit less. Broadly speaking, nobility, soldiers, and the public at large were hurt by depreciations, and executive constraints allowed them to prevent predatory monetary policy.

Finally, we find that warfare, the main expenditure item in the budgets until the 20th century, triggered depreciations.

We also test four theories that explain depreciations by the mechanics of the monetary system. According to these theories, states depreciated to correct for wear and tear of intrinsic value coins, changes in the gold-silver market price ratio, scarcity of silver or gold, or to retaliate against depreciations by neighbouring states. We don’t find empirical support for these theories.

On the face of it, this is an unexpected result. There is strong anecdotal support for each of these monetary explanations in the literature. A finer reading of these theories, however, helps explain the discrepancy between the empirical and anecdotal evidence. First, each of the monetary theories is only relevant for some states and some years, while political theories are generic and relevant for all states and all years. Second, monetary theories generally predict one-off and small corrections, while political theories predict serial depreciations at high rates. Taken together, the evidence suggests that monetary theories mattered in specific instances, but over the long run, their impact was limited, and political factors shaped patterns of monetary stability.


Our review of centuries of European experience offers a historical perspective on a number of ongoing debates in monetary economics. One debate concerns the relationship between technological and institutional innovations and monetary stability. Through the period we study, monetary systems were transformed more than once with the introductions of ledger, fiduciary, and fiat monies. These new monies were made possible by technological innovations in minting and printing and institutional innovations in banking and legal systems. Our findings suggest that these innovations by themselves did not necessarily make monetary systems more or less stable. Instead, depending on their fiscal capacity and political regime, states could employ the innovations to stabilise or destabilise the monetary units.

A related second debate is whether states can institute mechanisms to insulate monetary policy from politics. Historically, this debate has revolved around preventing discretionary monetary policy by adopting the gold standard, and currently, by central bank independence. Leaving aside the question of whether preventing discretion is desirable in the first place, historical evidence suggests that unless political preconditions are satisfied, it is not feasible. In particular, we find that neither the gold nor the earlier silver standard was a hard commitment. On both standards, states retained the prerogative to reset the silver or gold equivalent, or switch to fiat standard altogether. Consequently, when silver or gold standards kept the monetary units stable, it was ultimately because the underlying politics favoured stability. 

A third debate concerns whether the state can be shut out of the monetary system altogether. Historically, the debate has centred on the feasibility of monies issued by private institutions, and currently, digital currencies. The long-run evidence suggests that the prospects for privately run monetary systems are dubious. Historically, it was private banks, goldsmiths, and moneychangers that innovated and developed new forms of money. States, however, sooner or later appropriated and monopolised these innovations, supported or banned them, and retained the control over the monetary system. Money was, and arguably will continue to be, too important to leave to private prerogatives.


Allen, R C (2001), “The Great Divergence in European wages and prices from the Middle Ages to the First World War”, Explorations in Economic History 38(4): 411–447.

Bordo, M D and H Rockoff (1996), “The Gold Standard as a good housekeeping seal of approval”, Journal of Economic History 56(2): 389–428.

Karaman, K, S Pamuk and S Yıldırım-Karaman (2018), “Money and monetary stability in Europe, 1300-1914”, CEPR Discussion Paper No 12583.

Özmucur, S and Ş Pamuk (2002), “Real wages and standards of living in the Ottoman Empire, 1489–1914”, Journal of Economic History 62(2): 293-321.

Reinhart, C M and K S Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press.

Schularick, M and A M Taylor (2012), “Credit booms gone bust: Monetary policy, leverage cycles, and financial crises, 1870–2008”, American Economic Review 102(2): 1029–1061.

Taylor, A M (2002), “A century of purchasing-power parity”, Review of Economics and Statistics 84(1): 139–150.

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