The Kipper und Wipperzeit (1619–23)
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. One involved reducing the
value of silver coins by clipping
shavings from them; the
other involved melting the coins, mixing them with inferior
metals,
re-minting them, and returning them to circulation. As the crisis
evolved, an
early example of Gresham’s Law took hold as bad money drove out
good. As Vilar notes in
A History of Gold
and Money, once
“agriculture laid down the plow” at the peak of the crisis
and farmers
turned to coin clipping as a livelihood, devaluation,
hyperinflation, early
forms of currency wars, and crude capital controls were
either firmly
in place or not far behind.
From Self-Sufficiency to Money and Markets
The period preceding and including the early 1600s was marked by
a
fundamental shift from feudalism to capitalism, from medieval to
modern times,
and from an economy driven by self-sufficiency to one driven
by markets and
money. It is within this social and economic context
that various states in the
Holy Roman Empire attempted to finance the
Thirty Years’ War by creating new
mints and debasing subsidiary coins,
leaving large-denomination gold and silver
coins substantially unaffected.
In a simple example, subsidiary coin
might initially be minted using
only silver, then gradually undergo a shift in
metallic content as a growing
percentage of copper was added during
re-mintings, until the
monetary system was effectively on a copper rather than
a gold
or silver standard. This shift in metallic content created a divergence
between a coin’s nominal value and its intrinsic metal value, which
led to the
rapid debasement of coin. As Kindleberger notes, “Bad money was
taken by
debasing states to their neighbors and exchanged for
good [money]. The neighbor
typically defended itself by debasing
its own coin.”
Owing to trade and the easy
circumvention of laws that forbade the
removal of coin from a city, states
found that early forms of
capital controls were ineffective and that a large
portion of circulating
coin originated elsewhere. Given this porosity,
individual states
determined that reforming their own minted coinage by
returning
to a silver standard did not necessarily allow them to reform the
currency circulating within the state. So states sought greater revenue
through
seigniorage—the difference between the cost of production (including
the price of the metal contained in
the coin) and the nominal value of
the coin—by minting more money
and by taking debased coin
abroad, exchanging it, and bringing home good coin and
re-minting it.
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.
History Repeating Itself
Like markets and money, crises evolve easily but lessons learned
often last
only a lifetime and are easily forgotten. Over the coming year,
we’ll share
with you how elements of this crisis were repeated during the
Great Re-Coinage
of 1696, the Mississippi Bubble of 1720,
the Dutch Commodities Crash of 1763,
and the Continental Currency
Crisis of 1779, with each crisis adding a unique
twist.
In the meantime, as we reflect upon
the states’ struggles to manage their domestic
economies of the 1620s at a time
of evolving money, markets, and trade,
and amid pressure to finance the Thirty
Years’ War, we pose the
following question: Is it possible to draw any parallels
between the events of the 1620s and the current
objectives of the Group
of Seven to meet “respective domestic objectives using
domestic
instruments”? Tell us what you think.
Disclaimer
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.
James Narron is a senior vice president in the Federal Reserve
Bank of New York's Executive Office.
David Skeie is a senior economist in the Bank's Research
and Statistics Group.
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