INDEXED UNITS OF ACCOUNT: THEORY AND ASSESSMENT OF HISTORICAL EXPERIENCE
Robert J. Shiller
COWLES FOUNDATION FOR RESEARCH IN ECONOMICS AT YALE UNIVERSITY
Box 2125, Yale Station
New Haven, Connecticut 06520
COWLES FOUNDATION DISCUSSION PAPER NO. 1171
"Historical Antecedents of Indexed Units of Account
While the UF is apparently the first successful unit of account indexed to a true price index, the use of units of account separate from money has been known for millennia. Of course, historically, units of account precede money altogether, at least precedes money as we know it. Trade in terms of precious metals themselves, rather than any money, actually preceded the invention of coinage in the seventh century B.C. Units of weight, such as the talent or the shekel, evolved into units of money when coins were minted that had specified relations to the weight. But, since governments could not be trusted to maintain the weight of the coinage, a tradition developed to write contracts in units that did not correspond to any current coins:
Einaudi (1953, pp. 234–235) wrote:
Today each country has only one monetary unit: the lira, the franc, mark, pound
sterling, or dollar. This is the system established by the French assemblies at the
end of the eighteenth century. . . . Prior to the French Revolution, the monetary
system of most European countries was based on altogether different principles.
Contemporary authors could take these principles for granted and did not have to
explain them to others. Their strange terminology causes us, who live in another
world, to wander for a while in a dark forest. By and by, we finally understand the
tacit assumptions of their discourses. The key, needed to interpret the apparent
confusion of the monetary treatises written prior to the eighteenth century, is the
disjunction between a monetary unit and a standard of value and of deferred payment
and another monetary unit used as a medium of exchange.
In medieval and renaissance times, even contracts that were explicitly written in terms of units of currency that were currently circulating as coins sometimes were understood to be executed in terms of some other measure. For example, in Milan in 1445, a debt of one florin would not be paid with one of the gold florin coins, but rather in an amount computed under the assumption that the florin was still worth 384 silver deniers (and not the 768 deniers that the florin coin was then worth), see Cipolla (1956).
Since there were often no coins currently circulating corresponding to these units, the actual units of account were often called “imaginary money.” They were also called “moneta numeraria,” “money of account,” “ideal money,” “political money,” or “ghost money.” From the time of Charlemagne, trade and contracts in Europe were substantially based on the moneta numeraria called the pound, (or equivalently, “livre” or “lira), which was always worth 20 sous (shillings) and each sou worth 12 deniers (pence), see Einaudi (1953). Ultimately, the standard of value represented by this system was the silver denarius issued by Charlemagne in the late eighth century and early ninth centuries, coins that were no longer circulating, or even seen, later in the middle ages and renaissance. Charlemagne’s denarius weighed one 240th of a troy pound, while the earlier Roman denarius had gone through repeated debasements, and was not a unit of account in medieval or renaissance times. Because they are even fractions, the sou (at twelve deniers) and pound were natural units of account, but Charlemagne never issued coins representing these values. Actual exchange was executed in terms of current coinage, which had many names from the realms that issued them, names such as angels, blanks, crowns, crazies, doblons, dollars, douzains, ducats, ducatoons, écus, farthings, florins, guilders, louis, moutons, nobles, obols, phillipi, reals, sovereigns, stivers, and testoons. Many of each of these would circulate simultaneously in each country, a situation that would create tremendous confusion if there were not a standard unit of account..."
H/T Anwer Khan