Those Who Pay in Specie, Those Who Pay in Paper

A Market with Two Prices

In the markets of 19th-century Lisbon, there were two types of payment: people who paid with gold or silver coins, and people who paid with paper.

What is interesting is that for the same item, the price differed depending on how one paid. There was a surcharge for paying with paper and a discount for paying with specie. This difference fluctuated daily and was posted in front of money changers' shops. People would compare the types of money they had on hand with that day's posted rates.

These coins made of gold or silver are called "specie".

The Term "Specie"

Specie refers to currency, such as gold or silver coins, in which the value of the constituent metal itself backs the face value. It is a term used in contrast to banknotes. The gold and silver held in the vaults of a bank that issues banknotes, to be exchanged for that paper at any time, is called the "specie reserve".

It is important to note that specie does not mean "real currency". The currencies used in the world today are fiat currencies, disconnected from the value of their material, but they are nonetheless valid currency. Specie is not a term that distinguishes between genuine and counterfeit currency, but is merely a classification for money in which the value of the material is the standard for the system.

However, there have been times in history when this distinction has had a major impact on people's lives.

Can Be Printed, But Not Made

In 1720 France, the banknotes of a certain bank and the shares of a company became the object of a frenzy. It was in 1716 that the Scotsman John Law, proclaiming that "money need not be metal; paper will do," opened his bank. His system expanded with branches in Paris, Lyon, Tours, and Amiens.

However, after the stock price rose to astronomical heights, the bubble burst. When people rushed to the bank demanding to exchange their banknotes for specie, the bank could not meet their demands. It could print banknotes, but it could not make gold coins. Replacing specie with paper long remained in disrepute afterward, and Law's reputation was restored only in the 1930s.

A Mark Alone Does Not Bring It Back

There was also an emperor who tried to restore a debased currency with a mark alone.

In 274 AD, the emperor Aurelian brought the Gallic Empire back into the fold. Reclaiming the monopoly on striking coins, he reformed the currency around that year. He had the antoninianus, a coin whose silver content had fallen, recoined, and struck a mark on its reverse indicating "twenty to one". This is read as a ratio of twenty parts copper to one part silver.

However, the mark did not bring back the lost silver itself. By the end of this century, specie had disappeared from daily commerce, and taxes were collected in kind. The denarius silver coin, used for three hundred years, lost almost all its value.

When multiple currencies exist, people will always spend the worse one first. Good money is hoarded at home, and bad money remains in the market. In Lisbon until 1887, multiple banks issued their own paper, and the size of the surcharge varied depending on which bank's paper it was.