Money and prices
Paying interest on a debt is one thing, reimbursing the debt is quite another. For this purpose, money of account has to be distinguished from real money, that is, from the circulating medium.
The former - the livre tournois and the pound sterling - were originally units of account in which prices, contracts and debts were denominated. The latter, realmoney - the louis d’or and the guinea - were specie coined in metal and used as means of exchange. The former were permanent, whereas the quantities of metal contained in the latter varied. In order to be legal tender, the specie had to have a legal price expressed in the money of account: for example, the louis d’or was worth 14 livres tournois. However, this price was established by the Prince, and its increase, as well as the coinage itself, provided sources of revenue known as seigniorage. Borrowing 10 louis d’or gave rise to a debt of 140 livres tournois and did not involve a promise to reimburse 10 louis d’or, but 140 livres tournois instead. A rise in the legal price of gold from 14 to 35 livres tournois would allow the debt to be reimbursed with 4 louis d’or. These were the practices that were under discussion.
This was the case with respect to the controversy between Jean Cherruyt de Malestroict, author of Paradox on the Course of the Value of Money (1566), and Jean Bodin, in his Response to the Paradoxes of Malestroit (1568), concerning rising prices during the sixteenth century. According to Malestroict, although the prices of goods had risen in the money of account, their specie prices were stable. He explained this paradox by the rise in the legal price of specie. Today, one would say that the money prices did not change, but the accounting prices did. Bodin responded that while this paradox is verified in the long run, it does not apply in the short run.
To explain the short-run variations of money prices, Bodin argued that the quantity of money was one cause, an idea already present in Nicolas Oresme (1325-1382). This would have been a precursor of the quantity theory had Bodin neglected the effects on prices of real factors - demography, monopolies, trends and bad harvests - affecting the supply and demand of goods, just as the monetary manipulations mentioned by Malestroict did.Monetary manipulations were criticised above all because they undermined political and financial confidence. Thomas Gresham (1519-1579) and Bodin (1529-1596) argued for the restoration of this confidence, in particular, in order to put an end to manipulations of the money-of-account price of legal tender coins. John Locke (1632-1704) also supported these arguments in Some considerations of the consequences of the lowering of interest, and raising the value of money (1692) and in his 1696 controversy with William Lowndes. Now, the stability between the legal price of legal tender specie and debt is essential for banking. If a lowering of the legal price of specie is anticipated, customers will hurry to the bank to deposit their gold in exchange for notes, which are labelled in the unit of account; on the contrary, if an increase in the legal price of specie is expected, they will hurry to withdraw their deposit in gold coins. This was first theorised by John Law in Money and Trade Considered (1705).