Those in power nevertheless managed to exploit the system. Roman emperors were in the habit of financing their wars by reducing the precious metal content of their coins. This resulted in higher seignorage revenues from each coin issued. For a period, these revenues  2  BIS Review 136/2008  were sufficient to finance an army, a long war or several monuments. This is the number one temptation facing money issuers. Henry VIII of England was one of the most renowned exponents of this kind of behaviour. 6 In the 1500s, he reduced the silver content in coins to 1/3 of the original to finance wars against France and his own expensive lifestyle. In addition to coins, a system gradually developed involving paper money. Banknotes were a receipt for a money issuer’s claims on silver or gold. Instead of using coins as a means of payment, the receipt was used. This was more practical, but with the introduction of banknotes the authorities also introduced a new promise. They promised the bearer that they would redeem the nominal value of the notes in silver or gold. The value of the notes was entirely dependent on confidence in the issuer’s promise. The authorities’ ability to fulfil their promise depended on government finances. Brutal tax collectors, abundant tax coffers and peace with neighbouring countries inspired confidence in the authorities’ ability to redeem the notes in a precious metal then or at some time in the future.
It was observed that countries where weight was given to low inflation recorded favourable economic developments. Theoretical works published some years later showed that expected and rules-based policy could stabilise the economy provided price and wage rigidity existed. Some examples are: Fischer (1977): “Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule”, Journal of Political Economy, 85, No. 1, pages 191-206), Taylor (1980): “Aggregate Dynamics and Staggered Contracts”, Journal of Political Economy, 88, No 1, pages 1-24 and Calvo (1983): “Staggered Prices in a Utility-Maximizing Framework”, Journal of Monetary Economics, 12, No. 3, pages 983-998. Only when these articles were published was the theoretical basis in place for keeping promises while at the same time allowing monetary policy to contribute to stabilising the economy. 25  See reference in footnote 13. 26  See Eitrheim, Øyvind (2005) in Eitrheim and Qvigstad (Eds. ): “Tilbakeblikk på norsk pengehistorie. Konferanse 7. juni 2005 på Bogstad gård (Norwegian monetary history in retrospect. Conference, 7 June 2005, Oslo)”, Occasional Papers No. 37, Norges Bank. 27  Bahr, Henrik (1962): “Høyesteretts dom i gullklausulsaken (The Supreme Court ruling in the gold clause case)”, Lov og Rett: norsk juridisk tidsskrift, booklet No. 5, pages 193-211. 28  Two government-guaranteed banks had also issued bonds. BIS Review 136/2008  7  Since the beginning of the 1980s, there has been a broad consensus that monetary policy must be geared towards price stability. This paradigm shift also reached Norway, but not until the end of the 1980s.