8

External Imbalances and the

Money Supply: Two Controversies
in the English “Realme” and in the
Kingdom of Naples
Lilia Costabile

1 Introduction

Many scholars have noted the similarity between the controversy

entered upon by Gerard Malynes, Edward Misselden, and Thomas Mun
in England in the early 1620s and the debate that only few years earlier
had flared up between two economists active in the Kingdom of Naples:
Marc’Antonio de Santis and Antonio Serra, to whom, as I will argue in
this paper, we should add Giovanni Donato Turbolo.1 However, still
lacking in the literature is a systematic comparative study of the argu-
ments that these writers developed on the common subject of their
disputes, namely the causes of, as well as the remedies for, the massive
specie outflows then plaguing their countries. This paper contributes to
fill this gap, in the belief that such comparison may be rewarding for the
following reasons.
First, the similarity between the two debates sheds interesting light
on how economists conceptualized in similar terms certain empirical
regularities characterizing their respective economic systems. These
regularities occurred in spite of the two countries’ different positions
and trajectories in the international hierarchy of power. At the begin-
ning of the 17th century England was emerging “as a unified and self-
conscious state ... entering the full flood of a period of aggressive and
irritable nationalism”.2 The English ruling classes considered economic
dominance over rivals as a basic precondition for national welfare, and
they were accordingly moving towards imperial expansion via both

166
 External Imbalances and the Money Supply 167

military and economic warfare. The commercial downturn in the 1620s

could not stop the country’s ascending march towards triumphant capi-
talism. By contrast, the Kingdom of Naples, then part of the Hispanic
Monarchy, had long since lost its independence and was now a subordi-
nate province within a declining empire. Yet, in spite of their opposite
economic trajectories, the Kingdom of Naples and the English “Realme”
suffered from the same problem, namely a drain on their metallic coin
and, consequently, severe liquidity constraints biting on economic
activity. This hit particularly hard because the money supply in those
times was mainly metallic. Thus, one good reason to take an interest in
these old debates lies in the picture that they reveal of converging theo-
retical efforts to understand the causes of liquidity constraints under the
national and international arrangements of the time.
Second, these economists correctly linked the money supply with
the balance of payments. To illustrate this link, they developed a useful
accounting framework and interesting theoretical and applied studies
of open monetary economies. Underlying their analytical interest
was a political concern. As much as their situations differed, both the
English and the Neapolitan writers viewed the balance of payments and
the related money flows as reflecting power in economic relations, the
former being interested in securing England’s economic power in the
international arena,3 the latter in promoting development by escaping
dependence, or at least by slackening its hold on the Kingdom’s economy.
Both groups of writers required an analytical framework for their basic
concepts, and it is here that we see a theoretical convergence between
the ascending “Realme” and the declining Kingdom, as a common set
of analytical tools and diagnoses emerged “above national context”.4
Thus, comparing these early models of the balance of payments helps
clarify the polycentric origins of economic thought in the pre-Smithian
period.
The idea of a conceptual convergence is buttressed by the transna-
tional network of virtual theoretical alliances emerging from this litera-
ture. The similarities strikingly cut across nationalities: to explain the
international money flows, de Santis and Malynes5 described in similar
terms the complex technology of international exchanges operating in
Europe and its distorting effects on exchange rates, terms of trade, cash
flows, and the money stock. By contrast, Serra, Mun, and Misselden
underlined the competitiveness, or lack thereof, of the “real” economy.
Thus, de Santis and Malynes would have been on the same side in a
hypothetical supranational controversy, with the other three sharing
the opposite position and the wise Turbolo, with his interest in both
168 Lilia Costabile

real and monetary determinants of external imbalances, occupying the

middle ground between them.
In spite of these dividing lines, all the disputants accepted a basic
accounting framework, which the present essay illustrates in Section 2.
Their heated controversies concerned the way in which the monetary
and real side of the economy should be integrated in a comprehensive
conceptual architecture and how the macroeconomic variables were
related to financial markets and the structure of production. These
controversies are illustrated in the next two sections. More specifically,
Section 3 investigates the links that connect the balance of payments
to the operation of financial markets in the works of de Santis and
Malynes, while Section 4 illustrates the links between external equi-
librium, competitiveness, and the sectoral composition of output
described by Misselden, Mun, and Serra.6 This section also includes
a summary of Turbolo’s original position. Section 5 concludes by
relating the results of our investigation to some current interpretations
of mercantilism.

2 Open monetary economies: the accounting framework

The protagonists of our story wanted to help remedy the “great scar-
city of cash” that affected their economies, a real problem that was well
documented by both contemporary documents and historical studies.7
Consequently, they became interested in the macroeconomics of open
monetary economies and, more specifically, in the links between the
balance of payments and the money supply.
The money supply is linked to the balance of payments because any
external imbalance must be settled in money – a task performed through
specie flows under the monetary arrangements of their time and through
movements in international reserves under our modern international
monetary system. In modern parlance, money flows out of the country
whenever the balance of payments (i.e. the sum of the current account
balance, plus the capital account balance, plus the non-reserve compo-
nent of the financial account balance) is less than zero.
It was precisely the experience of monetary drains that led these
economists to develop their analyses of the balance of payments and
the related accounting framework, which they correctly framed in terms
of the specie flows between the national economy and the rest of the
world. In their accounting systems, both the English and the Neapolitan
writers presented listings of the relevant items. However, while the
former put their emphasis on imports and exports of merchandise and
 External Imbalances and the Money Supply 169

services, the Neapolitans went further, including a wider range of items

in the current account, such as factor income receipts (profits and rents)
and net unilateral transfers; moreover, they investigated international
capital movements in what we now call the financial account more
thoroughly than their English counterparts.
Serra and de Santis had reason to and did in fact disagree on the
numerical value of the merchandise account, which was in substan-
tial surplus according to de Santis but was balanced, or showed at
most a small surplus, in Serra’s opinion.8 However, they both recog-
nized the other items in the current account and agreed on their
negative sign.
First, huge amounts of money left the country as “unilateral trans-
fers” in the form of taxes and “donations” to the Spanish monarchy
and, to a lesser extent, as remittances to Rome. Second, the “factor
income receipt” item was negative as a consequence of the “income
from investments and profit from businesses that foreigners receive in
the Kingdom”.9 In 1619, Turbolo estimated the amount of rents paid
to foreigners at two million ducati per year.10 The foreign rentiers were
mostly Genoese businessmen, the traditional bankers of the Hispanic
monarchy, which rewarded them for their services with unique oppor-
tunities for profits in many commercial and financial activities, both in
the private sector and in the public sector.11 In the public sector, these
Genoese operators mostly profited from the mortgaging of future public
revenues.12 This made for the “vicious circle of indebtedness”, which
burdened both the central Neapolitan government and the municipali-
ties.13 Serra denounced the crushing weight of this immense debt, which
multiplied “by the hour”.14
As for the financial account, the Neapolitan economists included
foreign investments in their accounting framework. Serra correctly
considered them as an item with a positive sign, though he deemed
them able to offset only a minimum portion of the deficit items in the
current account.15 In this connection, he went beyond mere accounting
to theoretical propositions, explaining these capital inflows as a func-
tion of the positive interest-rate differential between domestic and
foreign interest rates.16 De Santis, who also took foreign investments
into account, was pessimistic about their effects, stressing the other side
of the coin, namely the profit and rent payments owed by the country
to foreign investors, who “suck the blood of all the private citizens in
the Kingdom”. Moreover, he denounced the negative consequences of
sudden stops and reversals when direct investment opportunities were
exhausted,17 or when financial speculation took them away from the
170 Lilia Costabile

country. In this connection, he investigated short term speculative

capital flows. This phenomenon, it must be added, was also considered
by Malynes. We will go back to this point in Section 3.
Having offered a fairly complete listing of the relevant items,18 the
Neapolitans correctly concluded that specie outflows had to make up
not only for the current account but also for the total external deficit. By
contrast, the English writers blamed specie outflows mostly on the trade
account imbalance. As Mun said, “we lose those monies only which
are made of the over-balance of our general trade, that is to say, that
which we spend more in value of forraign wares, than we utter of our
own commodities”.19 True, he added some minor remittances to Rome
by local priests and Jesuits, as well as gifts to ambassadors and other
foreigners to the current account balance,20 thus showing some aware-
ness of the “unilateral transfer payment” item. But, all in all, the English
economists were lucky enough to have very limited experience with
taxes and rents to be paid abroad. As for capital flows, they referred to
neither inward nor outward foreign investment. They may have disre-
garded them on account of the fact that foreign investments at the time
were “meagre”,21 and did not affect sovereign powers, while, as we have
seen, they had strong impact on the unlucky Neapolitan province of the
Spanish empire.
Thus, there is an interesting difference between the two groups of
economists, reflecting the historical circumstances of their respective
homelands: the Neapolitan Kingdom was a dependent economy, and for
this reason it was open to foreign investment, both directly and finan-
cially, both in the private sector and in the public sector; consequently,
it was burdened with taxes and rents to be paid abroad. By contrast, the
English writers lived in an independent economy connected to the rest
of the world almost exclusively through trade and war. The Neapolitan
economists paid a high cost – fraught with long-lasting consequences
for Southern Italy’s future history – for their superior understanding of
the complexities of the balance of payments.
These differences notwithstanding, the Neapolitan and the English
economists had the same accounting framework in mind, registering
with a negative sign all the items generating money outflows and
with a positive sign all inward payments. While the specific items that
they registered in their accounting systems testify to their awareness
of the factual conditions of their respective countries, the emergence
of a common accounting framework interestingly illustrates the supra-
national characteristics of political economy in the early stages of its
formation. Going on, now, from accounting frameworks to theoretical
 External Imbalances and the Money Supply 171

explanations, let us look at the transnational network of virtual inter-

pretative alliances emerging from these two controversies.

3 Malynes and de Santis: the no-silver-flow condition,

financial markets, and the “abuse of the exchange”

Gerard De Malynes (fl.1583–1641) and Marc’Antonio de Santis (fl.

1596–1605) blamed the scarcity of cash on the system of international
payments, which was based on the coexistence of two distinct finan-
cial instruments, namely metallic money and letters (or bills) of foreign
exchange. They argued that as a result of the practices of foreign exchange
dealers, the exchange rate set in the market for letters of exchange was
made independent of the metallic parity and thus diverted from its equi-
librium level, stimulating destabilizing international flows of metallic
money.22
Some introductory remarks are necessary in order to understand the
similarities and differences between their respective arguments. First,
London and Naples usually quoted the exchange rate in different ways:
in London, it was commonly defined as the variable amount of foreign
currency per pound sterling, according to the practice by which London
had “the head of the exchange” with many markets in Northern Europe,
especially the Low Countries.23 By contrast, in Naples the exchange rate
was quoted as the price of the foreign currency in terms of the domestic
currency – that is, the units of carlini that Neapolitan citizens had to
give up for a unit of the foreign currency. Consequently, when Malynes
complained about an exchange rate that was too low, and de Santis about
an exchange rate that was too high, they meant the same thing, namely
a depreciated national currency: English tradesmen, said Malynes, were
receiving too few foreign coins – for example, Dutch florins, for a pound;
the Neapolitans, said de Santis, were paying too many carlini for, e.g.,
a Florentine florin. Both statements meant that the external value of
the domestic currency was below what they regarded as its equilibrium
level.
Second, according to a common continental practice, the Neapolitans
usually quoted the exchange rate in terms of an international numéraire
or money of account:24 the gold écu or scudo d’oro in use in the “Bisanzone
fair” (actually held in Piacenza). Obviously, once each currency was
quoted in terms of a common international numéraire, bilateral exchange
rates between any two currencies were also determined. Thus, the “aerial
exchange rate”, as de Santis called it,25 was the price of the Piacenza gold
écu in units of Neapolitan carlini, or in other subdivisions and multiples
172 Lilia Costabile

of the national currency: a carlino was equal to ten grana, and to 1/10
of a ducato. By contrast, Malynes considered the exchange rate between
currencies in actual circulation, without reference to any international
numéraire.26
Finally, and most importantly, economic operators had access to two
alternative means of international payments: silver coins and letters (or
bills) of exchange. For instance, a Neapolitan (English) merchant could
either send cash abroad or pay cash for a bill of exchange that enti-
tled him/her to a given amount of the foreign currency in the foreign
market – for example, florins in Florence (in Amsterdam). The foreign
currency was readily available because the exchange dealer had a corre-
spondent in Florence (Amsterdam), whom he instructed to pay the
merchant (or their correspondent) a number of florins, corresponding
to the exchange rate stipulated in the contract, at a specified term,
usually after a standardized usance period. As a result of the latter, bills
of exchange also involved the extension of credit. Interest charges were
incorporated into the quoted exchange rates, which Malynes brought
attention to, arguing against the usury element that foreign exchange
dealers hid under the appearance of compensation for “discrepancies
and distances of time and place”.27
With these provisos in mind, let us look at the logic of our two
authors’ arguments, which came in four steps. As first step, they
defined the equilibrium level of the nominal exchange rate (dubbed
“fair” by de Santis and “right” by Malynes) as the level at which the
flow of the precious metals between countries would come to a halt.
According to Malynes,28 the equilibrium exchange rate would be given
by the Par pro Pari or value for value condition – that is, by the mint
parity between national and foreign currencies taking account of
their respective weight and fineness.29 De Santis incorporated into the
fair rate of exchange some consuetudinary and legal elements, such
as the exchange rate ruling in recent years and the quotations fixed
by the monetary authority: consequently, in his view, the equilibrium
exchange rate could deviate somewhat from strict metallic parity.30
The two essential points are for both authors that the equilibrium
exchange rate represented the “no-silver-flow condition”, as we may
call it, and that any deviation of the exchange rate from its equilibrium
level would generate specie movements: a depreciation in exchange
rates would lead to export of metallic coins, while, on the contrary,
specie would come into the country following an appreciation.31 “To
avoide the cariage of money, a certaine exchange was devised, grounded
upon the weight, fineness and valuation of the money of each country,
 External Imbalances and the Money Supply 173

according to value for value”, said Malynes.32 De Santis added specific

numbers to his definition:

The fair price of the gold scudo at the exchange, people should know,
is 130 [grana] ... Therefore, the exchanges which the Kingdom makes
with the markets in Italy, and these with it, at the said fair price of
130, determine that no hard cash comes into the Kingdom, and at
the same time that the cash that is in the Kingdom stays in it, and
does not go out. Changing at a price higher than the said fair price
entails not only that no cash comes into the Kingdom, but also that
all that is in goes out; changing at a lower price than the said fair
price brings an uncountable amount of cash into the Kingdom, and
at the same time keeps it inside.33

The second step taken by our authors was to establish the reasons why
the actual exchange rate often diverged from its equilibrium (“fair”
or “right”) level. Both blamed the divergence on the operation of the
market for letters of exchange, although they both recognized that, if
properly used, these instruments could prove useful in international
trade. “The right use of the exchange”, said Malynes, “is very needfull
and convenient”;34 consequently, he had no objections to the “permuta-
tion” of foreign commodities “for our money”,35 but only if and when
trade occurred at the “due course of the exchange rate”.36 In the same
vein, de Santis defined an exchange operation as “a permutation of
money that is given in one place to receive the fair amount of currency
in another”.37 Thus, what the two authors objected to was not the use
of these financial instruments but “the abuse of the exchange”. They
both conceived that under the circumstances of perfectly competi-
tive markets, the forces of supply and demand would bring the actual
exchange rate into equality with the equilibrium exchange rate.38 But,
they argued, under the current circumstances dealers exploited some
degree of market power in the market for letters of exchange. Ultimately
this was a microeconomic problem, which lay in the oligopolistic
structure of the financial markets, which allowed the exchange dealers
(“bankers” for Malynes and “negotianti” for de Santis) to collude and set
the price for these letters as high as possible, as is in the interest of any
oligopolistic seller.
In this connection, Malynes contented himself with blaming the
heads of the banks, who set exchange rates according to their interests
when they convened in the “ferias, or faires onely for monies ... kept
at Madril, Lyons, Civil, Bisanson, Florence”. These rates were then
174 Lilia Costabile

imposed on England, which had little autonomy since “in the maine
sea of exchanges”, the exchange of England runs only “as a river or
branch”.39
De Santis proposed a more detailed analysis. He argued that exchange
rates were set in a two-stage process. In the first stage, a selected group
of financial operators met quarterly at the Bisanzone fair40 and set
exchange rates on the basis of the supply and demand of the different
currencies. De Santis did not object to the operation of this group of
wise men, conceding that the financiers in Piacenza “took the rule”
from the markets.41 Unfortunately, though, these centrally-set exchange
rates were only the basis upon which decentralized negotiations took
place in the second stage. In Naples, for instance, a very limited number
of financial operators (or “negotianti”, as he called them) were active on
the supply side of the market. On the other side of the market, demand
for letters of exchange was high, and highly inelastic. As a consequence,
the negotianti were able to adopt collusive practices in order to make the
supply of bills of exchange artificially scarce and set their price artificially
high. “Suffice it to say that four negotianti every week have the habit
of setting the price of the exchange, and most of the time, exception
being made for some honourable and unselfish individuals, according to
their purposes make the money now increase and now become tight”.42
Apparently, the negotianti were doing more than simply exploiting
arbitrage opportunities when they happened to occur:43 they exploited
a market power that simply would not exist in competitive markets.44
With his analysis, de Santis was responding to these negotianti and their
spokespeople, who had criticized his proposal of regulating the exchange
rate by law, arguing that such regulation would amount to “ravishing”
the exchange rate.45 In fact, he was returning that charge to sender.
Our two authors then proceeded to their third analytical step by
elucidating in detail why silver would flow out of the country. This was
simply a matter of individual responses to economic incentives: domestic
traders would settle their payments abroad by sending coins (by “ship-
ping” or sending them “on the back of mules”, as de Santis explained)46
if letters of exchange were more expensive than metallic money or, put
the other way around, if their purchasing power over foreign currencies
was lower. As Malynes clarified with flawless logic, if “more will be given
for our money being caried in specie then [sic] by bill of exchange can be
had, then our money is transported; whereas otherwise no man would
adventure the money ... if by a simple bill of exchange he might have
as much payde him beyond the seas: for in truth gaine is the cause of
exportation of our monies”.47
 External Imbalances and the Money Supply 175

Elaborating on the same concept, de Santis clarified that a depreciated

currency would induce not just one but three categories of agents to send
silver coins out and paper into the Kingdom, thus leaving it “deprived
of coins and, I may say, left with virtually none”.48 These three cate-
gories were domestic importers of foreign goods, foreign importers of
Neapolitan goods, and, most importantly, financial speculators, whose
activity, “cambio per arte”, consisted in buying cheap and selling dear.
Consider the Neapolitan importers of foreign goods: by sending cash
abroad, they would pay 13 carlini per écu at the mint par. Alternatively, by
sending letters at the current exchange rate they would pay 14.5 carlini
per écu. Obviously, they would choose to send cash. By contrast, foreign
importers of Neapolitan goods preferred to send letters of exchange into
the Kingdom because by so doing they would pay only 0.069 of an écu
for a carlino rather than 0.076. Finally, but most importantly, financial
speculators would create a major drain on the Kingdom’s money stock
by sending silver coins abroad to gain from variations in the exchange
rate. They would obtain speculative gains if, as they wagered, the
carlino depreciated in the future; they would then realize their profits
by sending the money “back by way of exchange” – that is, by bills of
exchange. Such bearish speculation was the most powerful cause of the
scarcity of silver since “gaining from the exchange” was the “cause of
most exchanges” in the Kingdom.49 Malynes, too, was aware of finan-
cial speculation in England. He called this speculative trade “a merchan-
dising exchange” and severely condemned it.50
The fourth and final step taken by de Santis and Malynes was to eluci-
date the consequences of the specie outflow on the real exchange rate, or
the “terms of trade”, which we define as: R=e Pf/P (e being the domestic
price of the foreign currency, Pf the price level in the foreign country,
and P the domestic price level). De Santis focused his analysis of wors-
ening terms of trade on the depreciation of the domestic currency – that
is, on the rise in e in our formula.51
In Malynes’s more complete analysis, the terms of trade would turn
against England (foreign goods would be bought “too deare”)52 as a
consequence of the combined effects of a weakening pound (a rise in e)
and of a rise in the ratio Pf/P, this rise being determined by the flow of
specie out of the domestic and into the foreign country that would be
set in motion by the depreciation itself:

But this due course being abused, causeth ... our monies to be trans-
ported, and maket scarcitie thereof, which abated the price of our
home commodities: and on the contrary advances the prices of
176 Lilia Costabile

forreine commodities beyond the seas, where our money concurring

with the monies of other countries causeth plenty, whereby the price
of forrein commodities is advanced.53

Because Malynes saw this effect of money flows on the ratio between
foreign and domestic price levels, some modern interpreters have cred-
ited him with an understanding of the “self-regulating mechanism”
(i.e. the Humean price-specie flow mechanism).54 However, Malynes
rejected the idea that these price movements re-equilibrate the external
balance. Far from being a remedy, these changes meant deteriorating
terms of trade:55 “the overballancing of forrain commodities with our
home commodities, which consisteth in the price of commodities, not
in the quantity or qualitie of them”.56 In other words, the deficit was
not determined by the excess of imports over exports in volumes but by
relative price effects.
Coherently with their diagnoses, both authors recommended that
the monetary authorities should revalue the domestic currency. De
Santis explained that re-evaluations have positive welfare effects
on consumers, as well as positive effects on tax revenues via import
tariffs.57 Because of these proposals, the two economists were, and still
are, criticized for their dirigiste attitude towards the exchange rate. But
the weight of this allegation is uncertain because the question of the
relative advantages of fixed vs flexible exchange rates is still a matter
of debate today.58
Summing up, de Santis and Malynes were acute observers of finan-
cial markets and provided interesting accounts of the microeconomics
of specie export points and the macroeconomics of monetary drains.
My interpretation contrasts with the viewpoint of those who see
these two enemies of oligopolistic dealers merely as “medievalists”,
as Spiegel59 considers Malynes to be. We need not necessarily take
the critics of financial capitalists’ malpractices for backwards-looking
conservatives.

4 Misselden, Mun, Serra, Turbolo: the real side of the

economy and the “product mix”

On the opposite side of the two controversies, we find Misselden and

Mun in England and Serra in Naples. Here is another example of transna-
tional theoretical convergence. These authors shared the idea that the
drain on metallic coin had little to do with financial factors, believing
 External Imbalances and the Money Supply 177

instead that the drain was determined by the trade deficit, in turn a
consequence of uncompetitive productive structures.60
Misselden (fl. 1608–1654) blamed the deficit on excessive imports of
luxury goods due to people stepping “into one anothers rankes”.61 He
argued that social mobility, in addition to threatening the stability of the
social hierarchy, also resulted in external imbalances.62 As causes of the
trade deficit, he also mentioned wars, the obstacles to commerce deter-
mined by the pirates in the Mediterranean sea,63 and “the encroaching
of strangers, in fishing upon our coasts”,64 the latter of which displaced
domestic production of consumption goods and pulled “the bread out
of the natives mouthes”.65
Thomas Mun (1571–1641) provided a much more sophisticated anal-
ysis of the competitive advantage of nations in his book English Treasure
by Foreign Trade, written during the 1620 controversy but not published
until 1664. His treatment included some of the factors in Misselden’s
list, such as wars (chapter VI), the fishing problem (chapter XIX), and
excessive consumption of foreign luxuries (chapters III, VI, and XIX).
He argued that luxury goods should be produced at home, with great
advantage for job creation and employment opportunities for English
workers. But the most interesting part of his analysis concerns export
promotion strategies. He opposed the hindering of exports by unduly
“endearing” their price abroad, including through export duties.66 Prices
should be tailored to the specific demand elasticity of each product in
foreign countries: English exporters should charge high prices for neces-
saries, because the foreign demand for these goods was inelastic. By
contrast, export prices should be kept low for goods characterized by
elastic foreign demand. As an example, Mun recalled that by reducing
the price of clothes, England had recently registered a large increase in
the volume of sales to Turkey, and in revenues thereof. Well acquainted
with cunning commercial practices, Mun went so far as to recommend
cuts in selling prices as a long-term strategy of import penetration in
foreign markets. The resulting crowding out of competitors would
increase England’s market share in world markets and, in due time,
allow English exporters to raise prices “and so in time obtain our dear
price again”.67
Our clever merchant knew very well that such aggressive commer-
cial policies required the support of a strong industrial and commer-
cial structure, which in turn called for a far-sighted industrial policy
based on strategic choice of the product mix. The crucial objective in
this strategy was to move the country up the value-added chain through
178 Lilia Costabile

the promotion of domestic industry. Mun celebrated the apotheosis of

industrial and manufacturing activities as creators of value-added:

... Iron oar in the Mines is of no great worth, when it is compared with
the employment and advantage it yields being digged, tried, trans-
ported, bought, sold, cast into Ordnance, Muskets, and many other
instruments of war for offence and defence, wrought into Anchors,
bolts, spikes, nayles, for the use in Ships, Houses, Carts, Coaches,
Ploughs, and other instruments for tillage. Compare our Fleece-wools
with our Cloth, which requires shearing, washing, carding, spinning,
weaving, fulling, dying, dressing and other trimmings, and we shall
find these arts more profitable than natural wealth.68

Following this logic, Mun argued that industrial progress requires that
raw materials be imported and then re-exported as finished products.69
This policy amounted to changing the country’s international speciali-
zation from traditional sectors, such as raw materials and agricultural
products, to advanced manufacturing.
In Mun’s view, a nation that aspires to international economic
hegemony should also devote great care to the development of commer-
cial activities, with special reference to the carrying trade. Moreover,
the country would greatly benefit from displacing other nations in the
provision of transport and insurance services. This would lead to both
sizeable cost savings and new employment opportunities in industrial
sectors like shipbuilding. He saw the industrial sector and the service
sector as an integrated whole, promoting economic progress at home
and dominance over competitors internationally. In Mun’s words, this
promotion amounted to favouring the development of artificial wealth
“which consists in our manufacturing and industrious trading with
forraign commodities” over “Natural wealth”, constituting the original
endowment of each country.70 In this context, Mun was well aware of
the positive synergies between a favourable international specialization,
on the one hand, and, on the other, the competitive advantage offered
by a large population employed in cutting-edge sectors. As he argued,
“people which live by the Arts are far more in number than they who are
master of the fruit”, and “where the people are many, and the arts good,
there the traffique must be great, and the Countrey rich”.71
In Mun’s approach, the aggressive pursuit of national interests went
hand in hand with opposition to restrictions on trade and with the
promotion of multilateralism.72 He condemned as inefficient the bilat-
eral balanced trade imposed by the statute of “Imployments”, requiring
 External Imbalances and the Money Supply 179

that foreigners use the money earned by their imports into England to
buy English goods (chapter X).
Mun was a prominent, well-respected merchant and a director of the
East India Company. As early as 1623, Misselden had extolled his virtues
and those of his first book, Discourse of Trade unto the East Indies.73 Mun
had an inside knowledge of commercial practices and went beyond the
individual merchant’s point of view by elucidating the structural and
macroeconomic conditions and consequences of successful commercial
expansion. In view of these merits, it is even more striking that in 1613
Antonio Serra (fl. 1613), a “poor devil”74 languishing in the Vicaria jail
in Naples, had developed a system of thought which, while anticipating
Mun’s approach in many essential respects, surpassed it in profundity
and comprehensiveness.
This mysterious writer, a doctor from Cosenza about whom almost
nothing is known,75 wrote a book entitled A short treatise on the causes
that can make kingdoms abound in gold and silver even in the absence of mines
(Breve trattato delle cause che possono far abbondare li regni d’oro e d’argento
dove non sono miniere).76 Serra concentrated on the economic problems of
the Neapolitan Kingdom, but his lucid analysis, transcending the local
dimension, goes to the heart of the structural determinants of economic
development and underdevelopment.
His starting point was, once again, the balance of payments. He recog-
nized that the external deficit was determined by two elements, namely
the trade deficit, on the one hand, and, on the other, the payment of
taxes plus rents and profits abroad, the latter element being the joint
result of political and economic dependence. As he saw the situation,
given the Kingdom’s subordinate position within the Spanish empire,
it was impossible to escape political and economic dependence,77 but it
was possible to work on the trade balance by strengthening the nation’s
productive structure.
Rejecting de Santis’s argument on exchange rates, Serra started his
bleak diagnosis of the Kingdom’s economic problems with a distinction
between “proper accidents” and “common accidents”.78 Proper acci-
dents were idiosyncratic factors related to natural conditions, such as
land fertility, geographical position, and so on. These “accidents”, partly
responsible for the country’s dire economic conditions, could not be
changed by policy intervention. It was more fruitful to concentrate on
“common accidents” – that is, the causes of national wealth amenable
to policy-induced change.
The first of these common accidents was the sectoral composition of
output. Successful countries relied on “a multiplicity of manufacturing
180 Lilia Costabile

activities”,79 while the Kingdom’s product mix was defective in this

respect, leading to unfavourable international specialization. The
Kingdom was in fact a net exporter of agricultural products, thanks to
the natural fertility of its soil,80 but it had to import all its industrial and
manufactured products, the only exception being silk. Serra’s treatment
of this point marks genuine theoretical innovation because he went
beyond the mere definition of a hierarchical order between economic
branches and enquired into the reasons for the superiority of manu-
factures. Unlike agriculture, he argued, the manufacturing sector yields
reliable profits because of both its independence from the weather and
the less perishable nature of its products. Above all, the manufacturing
industry is able to multiply its products “at proportionally lower cost”.81
This is the first known statement of the law of increasing returns “in
the form of decreasing unit costs”82 – an innovation that sets Serra apart
from contemporary writers as a theorist of structural analysis.
The second “common accident” was “an enterprising population”.83
Serra thought that the citizens of the Kingdom of Naples were defective
in this respect, being “so unenterprising that they do not trade outside
their territory ... and such local industries as do exist are run not by the
Neapolitans themselves, but by people from other places – chiefly other
parts of Italy – the Genoese, Florentines, Bergamasques, Venetians and
others”.84 As a modern interpreter has noted, this statement was not
merely “pedagogic and academic”; rather, it should be interpreted in the
light of the politics of the Spanish empire at that moment and possibly
with Serra’s own personal objectives in mind:85 in line with Viceroy
Lemos’s projects, by so severely denouncing the Neapolitan business-
men’s lack of entrepreneurial abilities, Serra was trying to pre-empt the
revival of a Neapolitan entrepreneurial “party” and make room for a
large new wave of Genoese investments in the Kingdom.86
Serra’s third common accident was “extensive trade”.87 In this respect,
Serra noted that the Kingdom was at a disadvantage owing to its “very
bad” peripheral geographic position. This prevented the country from
developing as a hub of international trade as Venice had done and from
having its own transport industry.88
The fourth common accident was “good government”, “the most
powerful of all in making the Kingdom abound in gold and silver, for it
may be described as the efficient cause and superior agent of all the other
accidents”.89 It was indicative of Serra’s courage – or recklessness – that
he asserted the superiority of republican governments over monarchies,
particularly if one considers that his book was dedicated to the Spanish
viceroy, the above-mentioned Count of Lemos. Be that as it may, he
 External Imbalances and the Money Supply 181

praised republican governments because of the institutional continuity

that they provided. Kings could in fact last for fifty years at most, and
the Kingdom’s policies and strategic objectives would then change with
the advent of the new monarch. In republics, by contrast, the coexist-
ence of old and new generations in the governing institutions, such as
the senate, ensured continuity and – simultaneously – constant rejuve-
nation of the governing body. Venice was again the example to admire
and possibly to imitate.90
We may sum up Serra’s position by saying that good institutional
design is the main foundation of a healthy economic system: good
government would create the conditions and provide the incentives to
develop a modern manufacturing sector and thereby generate a positive
external account, which in turn would make the Kingdom rich in silver
and gold, “even in the absence of mines”.
Before concluding this section, we should devote some attention to the
contribution by Giovanni Donato Turbolo (fl. 1594–1629) to the analysis
of the balance of payments in this early stage of economic theorizing.
With regard to the international adjustment process, it is to be noted
that Misselden and Mun saw the exchange rate as moving in response
to external imbalances, and they accordingly argued that the level of
the exchange rate was not the cause but a consequence of that balance.
Mun’s analysis of competitiveness focused more on relative prices than
on the equilibrating role of the exchange rate. Serra explicitly denied
this equilibrating role and bluntly argued that changes in the level of the
exchange rate “would not make any difference” to the external deficit.91
Malynes and de Santis, for their part, considered the exchange rate to be
determined in the market for letters of foreign exchange and to be rela-
tively unresponsive to the overall balance of payments.
In this respect, Giovanni Donato Turbolo was the only author who
recognized the effects of depreciations on the trade balance. In a series of
discourses delivered between 1618 and 1629,92 he argued that a weaker
domestic currency not only stimulates exports93 but also reduces the
real value of rent payments abroad, these payments now being made
in a depreciated domestic currency.94 Thus, depreciation would make
domestic products more competitive and, at the same time, promote
redistribution from foreigners to natives. For both reasons, the external
balance would improve.
Moving from theoretical analysis to the specific conditions of the
Neapolitan Kingdom, Turbolo raised the following question. The
Neapolitan currency had indeed depreciated in the market for letters of
exchange over the last couple of decades, just as de Santis had argued.
182 Lilia Costabile

Nevertheless, this depreciation had not brought about the deficit reduc-
tion that theory predicted. How could this paradox be explained? As
master of the Neapolitan mint, Turbolo was well aware of the complica-
tions of international adjustment in a metallic system. Consequently,
he proposed the following answer. The positive effects of currency
depreciation had not come into operation, because the government had
refused to debase the silver coins at the rate of the depreciation,95 thus
preventing the mint parity from converging to the level now ruling in
the market for letters of exchange, and all for the sake of “prestige”. In
that period, the weak Kingdom was in fact trying to buy credibility with
its creditors by keeping the currency strong.96 But the government’s
refusal to debase the metal coins led to dramatic losses for the Kingdom
because the price paid for the imported bullion was higher than its value
when minted into silver coins. This had caused a loss of “more than
400,000 ducati in few years”.97 Under these circumstances, the money
drain could not be remedied, the Kingdom was “exhausted of money”,98
and no re-equilibrating process came in operation.99 Our competent
mint master earnestly lamented this.

5 Conclusions

The Kingdom of Naples was on its way to economic involution when

Serra, de Santis, and Turbolo wrote their essays. As we read in their
works, the silver fetters within which their Kingdom was floundering
were the result of dependence, the bitter fruit of the alliance between
the local barons, foreign merchants, and a Spanish monarchy made
rapacious by the cost of war finance. By contrast, the English authors
experienced the external constraint as a limitation to their nation’s pros-
perity and progress towards worldwide commercial empire and indus-
trial pre-eminence.
These differences notwithstanding, the Neapolitan and the English
authors adopted similar accounting frameworks for their analysis of open
economies. At the theoretical level, they offered two alternative inter-
pretations of how real and financial forces affect the external balance
of nations. On one hand, Serra, Mun, and Misselden gave priority to
forces operating on the real side of the economy, such as the structure
of production and the product mix; on the other hand, Malynes and
de Santis focused on the international payments system and the role of
financial speculation within it. These alternative explanations offer a
fascinating example of how theoretical fault lines cut across nationali-
ties. Finally, Turbolo, thanks to his insider’s knowledge of the operation
 External Imbalances and the Money Supply 183

of the monetary system, provided an original contribution with his real

and monetary analysis. Through comparative investigation into the two
controversies that these economists were involved in, the present paper
has tried to clarify the polycentric origins of economic analysis.
By illustrating how these economists conceptualized the link between
money supply and the balance of payments, this paper also corroborates
the rejection by modern interpreters100 of the old idea that mercantilists
identified money and wealth. This misleading criticism was the fruit
of prejudices developed when economists still believed in a dichotomy
between real and monetary variables. In those times, the role of money
as the liquid asset par excellence was underestimated and money was
considered as a representation of real commodities or capital.101 But
money as a means of payment does not represent other entities, because
what buyers need in advance of their desired transactions is money,
rather than other commodities or assets.102 It is indeed significant that
Keynes,103 whose theoretical work may be interpreted as a far-reaching
attempt to differentiate monetary economies from barter economies,
proposed a rehabilitation of mercantilism in The General Theory. Our
analysis shows that the mercantilist writers we have dealt with here were
well aware of the distinction between money and wealth, but they were
also aware that a permanently negative external balance is not sustain-
able. Consequently, they offered shrewd analyses of the causes of these
external imbalances and proposed thoroughly pondered remedies.
A further criticism that is sometimes raised against these writers points
to their ignorance of the automatic adjustment mechanisms operating
via the “price-specie flow mechanism”104 or via the equilibrating role of
the exchange rate.105 This line of criticism is theoretically valid (though
it does not apply to Turbolo), but it ignores the justification that inter-
national adjustment does not necessarily come into operation and that
international imbalances may last for long periods of time. This point
has been made with reference to both the time when our economists
were active106 and to more recent periods. For instance, even under the
gold standard, considered to be the “self-regulating” monetary system
par excellence, the United Kingdom ran persistent and growing surpluses
for very long periods of time.107 Again, long-lasting and growing deficits
on the current account have been registered in the dollar-based interna-
tional payment system.108 Moreover, and most importantly, the resolu-
tion of international imbalances may require more than the automatic
operation of market forces.
Finally, these authors have been criticized on the grounds that their
elasticity approach to the balance of payments is incomplete and does
184 Lilia Costabile

not meet the test of the Marshall/Lerner conditions expressed in mathe-

matical equations,109 which is after all hardly surprising given the stage of
development of economic theory at their time.110 But they were reason-
ably aware that there were elasticity conditions for the validity of their
reasoning: for instance, Malynes and de Santis explicitly considered the
foreign demand for their countries’ exports to be inelastic111 – a circum-
stance that, in their view, prevented England and Naples from losing
sales abroad when their currencies appreciated. Moreover, de Santis also
considered the Kingdom’s imports to be elastic (and hence to fall with
exchange-rate appreciations). Summing up, de Santis and Malynes may
be charged with excessive “elasticity optimism” but certainly not with
complete neglect of the elasticity conditions in their balance of payment
analysis. And, as we have seen, Mun carefully calibrated price strategies
to the specific demand elasticities of individual products.
Bottom line, I submit that, in looking back to the founding fathers
of economics, a positive attitude may be more rewarding than simply
faulting them for not having gained full command of the sophisticated
tools and models of modern economic analysis. Rather, these tools are
useful for our understanding of what they saw in the world that they
lived in and of the ways in which, in attempting to understand that
world, they built the conceptual basis of economics.

Notes
I wish to thank Cosimo Perrotta, who read and commented on the present
version of this work, and the participants at the session of the ESHET confer-
ence where this paper was presented (Rome, 14–16 May 2015). For comments
on a previous partial version, I am grateful to the participants at the Cambridge
Research Seminar in Political Economy held at Emmanuel College on the 21 of
May 2013, and in particular to Ivano Cardinale, D’Maris Coffman, Craig Muldrew,
and Roberto Scazzieri.
1. See Schumpeter, J.A., History of Economic Analysis, London: George Allen
& Unwin, 1954, p. 355; Rosselli, A., “Early Views on Monetary Policy: The
Neapolitan Debate on the Theory of Exchange”, History of Political Economy,
32(1), 2000, pp. 61–62; Reinert, E.S. and S.A. Reinert, “An Early National
Innovation System: The Case of Antonio Serra’s 1613 Breve Trattato”,
Institutions and Economic Development/Istituzioni e Sviluppo Economico, 1, 3,
2003, pp. 87–119; Roncaglia, A., The Wealth of Ideas: A History of Economic
Thought, Cambridge: Cambridge University Press, 2005. This literature ignores
Turbolo (Turbolo, G.D., Discorso della differenza e inegualità delle monete del
Regno di Napoli, con l’altre monete di potentati convicini, e della causa della
penuria di esse, Naples: Tarquinio Longo, 1616, as reprinted in R. Colapietra
(ed.), Problemi monetari negli scrittori napoletani del Seicento, Rome: Accademia
Nazionale dei Lincei, 1973, pp. 289–297 and Turbolo, G.D., Discorso sopra le
 External Imbalances and the Money Supply 185

monete del Regno di Napoli, Per la renouazione della lega di esse monete, ordinata
e eseguita nell’anno 1622. E degli effetti da quella proceduti. E se il cambio alto
per extra Regno sia utile, o danno a’ Regnicoli, con diverse relationi e copie d’altri
discorsi dati fuora nell’anni 1618, 1619 & 1620 pertinenti alla medesima materia,
Naples: n.p., 1629, as reprinted in R. Colapietra (ed.), 1973, pp. 297–377),
who actually did not directly take part in the controversy engaged in by Serra
against de Santis but, a few years later, had interesting things to say on the
same issues. See Costabile, L., “Monetary Analysis, Financial Innovation,
and Institutions before the Industrial Revolution: a Paradigm Case”, in M.
Baranzini, C. Rotondi, R. Scazzieri (eds), Resources, Production and Structural
Dynamics, Cambridge: Cambridge University Press, 2015, pp. 213–231 for an
analysis of the Neapolitan debate, including de Santis, Serra, and Turbolo.
2. Angell, J.W., The Theory of International Prices. History, Criticism and Restatement,
Cambridge, MA: Harvard University Press, 1926, pp. 10–11.
3. Reinert, S.A., Translating Empire: Emulation and the Origins of Political Economy,
Cambridge: Cambridge University Press, 2011.
4. I borrow part of the title of J. Robertson’s 1997 article. The present paper illus-
trates a case of theoretical convergence before the age of illuminism dealt with
by Robertson. (Robertson, J., “The Enlightenment above National Context:
Political Economy in Eighteenth Century Scotland and Naples”, The Historical
Journal, 40, 3, 1997, pp. 667–697.
5. de Santis, M.A., (1605a), Discorso di Marc’Antonio De Santis intorno alli effetti
che fa il cambio in Regno, Naples: appresso Costantino Vitale, 1605; (1605b),
Secondo Discorso di Marc’Antonio De Santis intorno alli effetti che fa il cambio
in Regno. Sopra una risposta, che è stata fatta avverso al primo, Naples: nella
stamperia di Felice Stigliola, 1605 (both as reprinted in Colapietra, R. (ed.),
1973, pp. 111–162); Malynes, G., The Canker of England’s Common Wealth,
London: by Richard Field for William Iohnes, 1601; reprinted in Amsterdam,
Norwood, N.J.: W.J. Johnson, Theatrum orbis terrarum, 1977; Malynes, G., The
Maintenance of Free Trade, London: by I.L. for William Sheffard, 1622; reprint
New York, NY: Kelley, 1971; Malynes, G., The Center of the Circle of Commerce,
London: William Iones, 1623; reprint Clifton, N.J: 1973.
6. Misselden, E., Free Trade, or the Means to make Trade flourish, London: printed
by Iohn Legatt for Simon Waterson, 1622; reprint New York, NY: Kelley, 1971;
Misselden, E., The Circle of Commerce or the Balance of Trade, in Defence of Free
Trade, London: printed by Iohn Dawson for Nicholas Bourne, 1623; reprint
New York, NY: Kelley, 1971; Mun, T., A Discourse of Trade: From England unto
the East-Indies, Answering to Diverse Objections which are Usually Made against
the Same, London: printed by Nicholas Okes for Iohn Pyper, 1621; reprint
New York, NY: Kelley, 1971; Serra, A., Breve trattato delle cause che possono
far abbondare li regni d’oro e d’argento dove non sono miniere, Naples: Appresso
Lazzaro Scoriggio, 1613, as reprinted and as translated by J. Hunt, in A. Serra,
A Short Treatise on the Wealth and Poverty of Nations, bilingual edition, ed. by
S.A. Reinert, London-New York, NY-Delhi: Anthem Press, 2011.
7. The reader is referred to the relevant literature for the historical and institu-
tional context, e.g. De Rosa, 1987, pp. 95–98; Muldrew, C., The Economy of
Obligation: The Culture of Credit and Social Relations in Early Modern England,
Basingstoke: Macmillan, 1998, p. 100. For the English context, see among
others Johnson, E.A.J., “Gerard De Malynes and the Theory of the Foreign
186 Lilia Costabile

Exchanges”, American Economic Review, 23, 3, 1933, pp. 441–455; Gould,

J.D., “The Trade Crisis of the Early 1620’s and English Economic Thought”,
Journal of Economic History, 15, 2, 1955, pp. 121–133; Muchmore, L., “Gerrard
de Malynes and Mercantile Economics”, History of Political Economy, 1, 2,
1969, pp. 336–358 and Muchmore, L. “A Note on Thomas Mun’s ‘England’s
Treasure by forraign Trade’”, The Economic History Review, New Series, 23,
3, 1970, pp. 498–503; Gomes, L., Foreign Trade and the National Economy.
Mercantilist and Classical Perspectives, Basingstoke and London: Macmillan,
1987; Wennerlind, C., Casualties of Credit: the English Financial Revolution
1620–1720, Cambridge, MA: Harvard University Press, 2011. For the
Neapolitan side, see Fornari, T., Studi sopra Antonio Serra e Marc’Antonio De
Santis, Pavia, Fratelli Fusi, 1879; Colapietra (1973); De Rosa, L., I cambi esteri
del Regno di Napoli dal 1591 al 1707, Naples: Biblioteca dell’Archivio Storico
del Banco di Napoli, 1955; De Rosa, L., Il Mezzogiorno spagnolo tra crescita e
decadenza, Milan: Il Saggiatore, 1987; Calabria, A., The Cost of Empire. The
Finances of the Kingdom of Naples in the Time of the Spanish Rule, Cambridge:
Cambridge University Press, 1991; Galasso, G., Alla periferia dell’impero. Il
Regno di Napoli nel periodo spagnolo (secoli XVI–XVII), Turin: Einaudi, 1994;
Villari, R. (2014), Un sogno di libertà. Napoli nel declino di un impero. 1585–
1648, Milan: Mondadori, 2014. For the international financial context, see
the two classics: de Roover, R., Business, Banking and Economic Thought in Late
Medieval and Early Modern Europe, Selected Studies, Chicago, IL and London;
University of Chicago Press, 1974; and Neal, L., The rise of financial capitalism,
Cambridge: Cambridge University Press, 1990.
8. Serra, 1613, pp. 150–151.
9. Serra, 1613, pp. 230–231, 204–205; see also de Santis, 1605a, p.136; Turbolo,
1629, pp. 304, 317.
10. Turbolo, 1629, p. 354.
11. Serra, 1613, pp. 150–151.
12. Thanks to this financial expedient, the administration was able to secure a
lump sum equal to the current discounted value of a series of future incomes
(e.g. the revenues from a tax). The mortgaging of future public revenues led
to the creation of a government bond market in the second half of the 16th
century (Calabria, 1991, pp. 52, 104–129).
13. Calabria, 1991, p. 51.
14. Serra, 1613, pp. 104–105, 150–151.
15. Serra, 1613, pp. 152–153.
16. Serra, 1613, pp. 136–137.
17. de Santis, 1605a, p. 136; 1605b, p. 147.
18. Benini, R., “Sulle dottrine economiche di Antonio Serra”, Giornale degli
Economisti, 3, 5, 1892, pp. 222–248, p. 232.
19. Mun, T., England’s Treasure by Forraign Trade, London: printed by F.G. for
Thomas Clark, 1664; reprint: Oxford: Basil Blackwell, 1928, pp. 9–10, 12, 42,
83–84.
20. Mun, 1664, p. 85.
21. Blitz, R.C., “Mercantilist Policies and the Pattern of World Trade, 1500–1750”,
Journal of Economic History, vol. 27, no. 1 (Mar.), 1967, pp. 39–55, p. 50.
22. Reference was mainly to silver coins when they mentioned metallic money.
Gold was costly and hence almost absent from both the domestic and the
 External Imbalances and the Money Supply 187

intra-European circulations. Thus, a shortage of silver impacted strongly on

the domestic circulation (Muchmore, 1970, p. 498).
23. Malynes (1601, pp. 28–29) gave a clear definition of the concept: “the head
of the exchange is taken to bee [sic] at such a place or places where the price
doth not alter, as for example: We have the head of the exchanges with
Hamborow, Middleborough, Emden, Amsterdam ... And on the contrarie, for
as much that the price for Roan, Paris and other places in France, and for
Venice, and other places in Italie or elsewhere, doth for time to time alter
with us according to their Crowne or Ducat, therefore does the head of those
exchanges rest with them”.
24. It was common practice on the continent to use as numéraires “imaginary
moneys”, i.e. money that either had never existed, or had been out of circu-
lation for centuries. On imaginary moneys, see Bloch, M., Esquisse d’une
Histoire Monètaire de l’Europe, Cahiers des Annales, n. 9, Paris: Librarie
Armand Colin, 1954, pp. 7–96.
25. de Santis, 1605a, p. 114.
26. The system of quoting the sterling pound in imaginary écus had been in use
in London in the Middle Ages, too (De Roover, 1974, p. 186).
27. Malynes, 1601, p. 32.
28. Malynes, 1601, pp. 14–15.
29. As a purely abstract example, let us suppose that the Neapolitan mint would
issue one hundred carlini in return for one ounce of silver, compared to fifty
florins for one ounce in Florence; thus, the two currencies would exchange
for 100/50=2. More generally, if X is the price paid for one ounce of silver
by the national mint, and Y is the price, measured in units of the foreign
currency, paid for one ounce of silver by the foreign country’s mint, then
the mint parity between the two currencies is E = X/Y (adapting McKinnon,
R.I., “The Rules of the Game: International Money in Historical Perspective”,
Journal of Economic Literature, 31, 1, 1993, pp. 1–44). This mint par could
not be permanently violated because of arbitrage. The necessary assumptions
are free capital mobility, free conversion of coins into silver at the mints,
and zero transaction costs (insurance, shipping, and foregone interest). The
formula presented above is easily modified into E = X/(Y − TN), where TN
stands for the transaction costs of transferring silver, e.g. from Naples to
Florence.
30. Seignorage and debasement were possible causes of divergence from the mint
parity (Rosselli, 2000, esp. pp. 68–71).
31. Malynes, 1601, pp. 34–35; 1622, pp. 14–15; de Santis, 1605a, pp. 138–140.
32. Malynes, 1601, p. 14.
33. de Santis, 1605a, p. 132.
34. Malynes, 1601, p. 55.
35. Malynes, 1601, p. 89.
36. Malynes, 1601, p. 35.
37. de Santis, 1605, p. 130.
38. Malynes, 1622, pp. 14–15, 28; de Santis, 1605, pp. 138–139.
39. Malynes, 1601, p. 33.
40. de Santis, 1605a, p. 116.
41. de Santis, 1605a, p. 123.
42. de Santis, 1605a, pp. 138–139.
188 Lilia Costabile

43. On arbitrage in 17th-century capital markets, see Neal, L. and S. Quinn,

“Networks of information, markets, and institutions in the rise of London
as a financial centre, 1660–1720”, Financial History Review, 8, 2001, pp. 7–26.
doi: 10.1017/S0968565001000130.
44. Malynes and de Santis are generally looked down upon by commentators,
both contemporary with them and of our own day, for their “conspiracy”
approach to exchange-rate determination. But they were in fact discussing
price setting in oligopolistic markets.
45. de Santis, 1605a, pp. 119, 139.
46. de Santis, 1605a, p. 114.
47. Malynes, 1601, pp. 16, 34, 35.
48. de Santis, 1605a, p. 28.
49. de Santis, 1605a, p. 114–115, 151.
50. Malynes, 1601, p. 55.
51. Rothbard, M., Economic Thought Before Adam Smith. An Austrian Perspective, vol.
1, Auburn, AL: 2006, p. 287 [electronic edition; original edition Cheltenham:
Edward Elgar, 1995] overlooked de Santis when he assigned to Malynes “the
dubious credit for the emergence of the spurious and pernicious “terms of
trade’ fallacy” (de Santis, 1605a, p. 116). Not every economist would agree
that it is a fallacy.
52. Malynes, 1601, p. 3.
53. Malynes, 1601, p. 35.
54. Viner J., Studies in the Theory of International Trade, New York, NY: Kelley,
1965, p. 76.
55. If we consider real, rather than nominal, exchange rates, it is untrue that
“exchange rates, according to Malynes, were independent of commodity
prices and specie flows” (de Roover, 1974, p. 364), because he maintained
that these flows affected price levels and consequently the real exchange
rate.
56. Malynes, 1601, p. 17.
57. de Santis, 1605a, p. 116.
58. It must be admitted, however, that both Malynes’s and de Santis’s proposals
were repealed soon after having been adopted because they were recognized
to have failed.
59. Spiegel, H.W., The Growth of Economic Thought, Durham, NC: Duke University
Press, 1983, p. 101.
60. Serra, 1613, p. 164; Mun, 1664, p. 42; Misselden, 1623, p. 21.
61. Misselden, 1622, pp. 12–13.
62. Wennerlind (2011, p. 33 ff.) illustrates the static, hierarchical view of
society underlying what he describes as Malynes’s, Misselden’s, and Mun’s
“Neo-Aristotelian” approach to political economy.
63. Misselden, 1622, pp. 17–18.
64. Misselden, 1622, p. 35.
65. Misselden, 1623, p. 48.
66. Mun, 1664, p. 12.
67. Mun, 1664, p. 8.
68. Mun, 1664, p. 13.
69. Mun, 1664, p. 11.
70. Mun, 1664, p. 7.
 External Imbalances and the Money Supply 189

71. Mun, 1664, p. 12.

72. Kindleberger, C.P., Historical economics: Art or science? Berkeley, CA: University
of California Press, 1991.
73. Misselden, 1623, pp. 36–38.
74. Schumpeter, 1954, p. 354.
75. Did he take part in Tommaso Campanella’s conspiracy to establish a republic
in Calabria, then part of the Spanish-dominated Kingdom of Naples? Or was
he, less heroically, merely guilty of counterfeiting? The doubt has not been
resolved, and it probably never will be: many regard his involvement in the
revolt led by Campanella as a myth.
76. Serra, 1613.
77. Serra, 1613, pp. 238–239.
78. Serra, 1613, pp. 118–119.
79. Serra, 1613, p. 119.
80. Serra, 1613, pp. 154–155.
81. Serra, 1613, pp. 120–121.
82. Schumpeter, 1954, p. 258.
83. Serra, 1613, pp. 122–123.
84. Serra, 1613, pp. 122–123.
85. He was trying to obtain the viceroy’s favour and get out of jail.
86. Colapietra, 1973, p. 30.
87. Serra, 1613, pp. 124–125.
88. Serra, 1613, pp. 126–127.
89. Serra, 1613, p. 176.
90. Serra, 1613, pp. 176–177.
91. Serra, 1613, pp. 152–153, 230–231.
92. Turbolo, 1629.
93. Turbolo, 1629, pp. 302, 313.
94. Turbolo, 1629, pp. 304–305.
95. Turbolo, 1629, pp, 311–312, 317.
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97. Bulgarelli, 1993, p. 311.
98. Bulgarelli, 1993, pp. 299–300.
99. Note that the scarcity of money problem was opening the way to finan-
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(Muldrew, 1998 ), and in the Kingdom, where the circulation of paper money
was introduced by the “Public Banks” of Naples (De Rosa, L., Gli inizi della
circolazione della cartamoneta e i banchi pubblici napoletani, in id. (ed.), Gli
inizi della circolazione della cartamoneta e i banchi pubblici napoletani, Naples:
Istituto Banco di Napoli-Fondazione, 2002, pp. 437–459; Costabile, L., “The
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Galiani’s Della moneta”, European Journal of the History of Economic Thought,
doi: 10.1080/09672567.2014.916730; Costabile, L., “Monetary Analysis,
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