Nicholas Oresme

Gustav Klimt, Nuda Veritas (1899), Osterreichisches Theatermuseum, Vienna

Gustav Klimt, Nuda Veritas (1899), Osterreichisches Theatermuseum, Vienna

According to Murray Rothbard, the only novel though of Nicolas Oresme, for the advancement of economic science, was the first correct formulation of the world famous Gresham’s Law, some 200 years before Sir Thomas Gresham’s own description of the phenomena. The fact that good currency disappears from circulation when a less valuable one is forcefully introduced had been observed at least since Ancient Greece. There is a reference to this phenomena in Aristophanes play The Frogs, which implies that it was common knowledge and easily understood by the average theatre-goer in the late 5th Century BC. What is remarkable about Oresme is that he points the reason for this behaviour and explains the chain of events that lie underneath: it is as a reaction to government coercively imposing a fixed-price to the currency after debasing it. This drives out of the market the under-priced currency, which people will try to sell abroad at the higher market price, while keeping the debased coins for usage in local transactions. Outside Political Economy, Modern Finance applies this law to the valuation of derivative contracts when more than one underlying asset is allowed to be delivered at the settlement date. When calculating the price of the derivative, it is assumed that the underlying that will be exchanged at settlement is the cheapest-to-deliver or CTD.

All other ideas exposed in his Treatise on the Origin, Nature, Law and Alterations of Money were applications of his mentor, Jean Buridan, teachings and form an attack to the debasement of the currency that French Monarchs applied during the 14th Century. Yet Buridan’s ideas must have gained from Oresme’s treatment as his book is one of the few economic books usually referenced from before Mercantilism. Thomas E. Woods in his influential book How the Catholic Church Built Western Civilization says that Oresme’s book was used as a banking manual until the 1930’s.

It is easily understandable, after the enunciation of Gresham’s Law (or probably more appropriately Oresmes’ Law), how government declaring the forceful use of debased money at face-value drives away the money in use before. But Oresme further explained the economic consequences of continuously devaluing the value of money. These consequences are important because they apply not only to the practice of debasing the metal content of coins that Oresme knew, but also to government devaluation of any money, including modern time fiat money. Thus, the monetary function of unit of account will be hindered and both domestic and foreign trade will suffer from it. Foreign merchants will quit from coming which, not by coincidence, is what modern day monetary politicians aim at when they devalue currencies – one of the justifications is to curb imports. This goes against the interest of local consumers as it literally takes money out of their pockets, being striped out of the wealth that would have allowed them to buy those imported goods. Furthermore, Oresme points out that it will also affect domestic merchants as they will lack a firm means of communication. In this there is at least a hint to prices serving as signals for economic agents. If those signals are tampered then miscalculations occur. Devaluations also turn money lending into a less safe activity, something that is usually expressed in inflation premiums added to the natural market interest rate and makes it harder to determine the present value of projects (Oresmes’ expression being “incomes”).

In his treatise, Oresme also looks at how commodities became money and how portability and a high unit value are valued features. He was probably developing on Aristotle’s work. He correctly points that coinage was appreciated as a guarantee on the quantity of precious metal in each coin, but that sovereigns turned this activity into a monopoly for profitable motives. Nonetheless, when they start debasing coins they are committing the crime of robbery.

For those interested in reading what Oresme himself wrote, here is a copy of his treaty:


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