The Evolution of Money

by David Orrell

  Personal Property

  At the time of Alexander’s death at the age of thirty-two in 323 B.C.E., the area he had conquered included the Middle East, Persia, and Egypt, as well as parts of Afghanistan, Central Asia, and India. He founded some twenty cities in his own name; one of them, Alexandria in Egypt, became the major repository of Greek knowledge, including the teachings of his tutor Aristotle. It wasn’t just coins that spread around the world, but a theory of money—which is one reason economics textbooks still include reworded versions of Aristotle. After Alexander’s death, his empire was divided between his family and his generals. His coins continued to be minted for another 250 years, but were eventually replaced by those belonging to another, even larger empire, that of the Romans.

  The Roman monetary system ran on similar principles to those of the Greeks, only on a more industrial scale. The army conquered foreign lands; slaves were put to work in mines extracting precious metals; millions of shiny Roman coins were stamped out by hand every year and distributed to the army as payment (as usual, this was the government’s largest expense); and conquered populations were subjected to taxes, payable in those same coins, which ensured their circulation.35 In Rome, coins were first minted in the temple of Juno Moneta—named for the goddess who was the protectress of funds—which is the origin of the word “money.” Mints were later also set up in the provinces. In the second century B.C.E., the Senate gave generals the right to mint coins to pay their troops, so mobile mints sometimes accompanied the army.36 Like Olympic medals, coins were available in gold, silver, and bronze (named for the metallurgists of Brindisi in southern Italy). One side would typically be adorned by the visage of the reigning emperor, while the other would feature a propagandist image, such as that of Romulus and Remus, the legendary founders of Rome.

  Coins were, of course, less useful for very large transactions, such as the purchase of property. In a letter, the politician Cicero wrote that he bought a house for 3.5 million sesterces, which equated to about 3.8 tons of silver—rather a lot to deliver by hand then as now (for comparison, that amount of silver would cost about $2.2 million today). Instead, it seems that such transactions were based on credit: as Cicero elsewhere notes, “nomina facit, negotium conficit” (provides the bonds, completes the purchase).37 The bonds (nomina) corresponded to entries in account books that could also be transferred from one person to another in a kind of proto–bond market. As he tells his financial adviser Atticus: “If I were to sell my claim on Faberius, I don’t doubt my being able to settle for the grounds of Silius even by a ready money payment.”

  Cicero’s follower Pliny the Younger asked a friend for advice on buying a piece of land: “It is three million sesterces, though at one time the price was five, but owing to the lack of capital of the tenants and the general badness of the times the rents have fallen off and the price has therefore dropped also. Perhaps you will ask whether I can raise these three millions without difficulty. Well, nearly all my capital is invested in land, but I have some money out at interest and I can borrow without any trouble.”38 Caesar apparently owed some 100 million sesterces in 61 B.C.E., though he soon earned it back through the military conquest of Gaul.39

  In his Ars Amatoria, the poet Ovid showed that the temptation to also buy smaller items on credit is not a strictly modern phenomenon. When a young man wishes to please a lover who “has her purchase in her eye”:

  If you complain you have no ready coin,

  No matter, ’tis but writing of a line;

  A little bill, not to be paid at sight:

  (Now curse the time when thou wert taught to write.)

  The center for financial dealing was the Forum. Moneylenders, who took deposits, arranged loans, and changed money, tended to congregate around a vaulted passageway known as the Exchange; the names of debtors who defaulted on their loans were inscribed on a column called the Columna Maenia. The Romans therefore had access to a range of financial services, including a primitive credit-rating system. Cicero wrote that “this whole subject of acquiring money, investing money … is more profitably discussed by certain worthy gentlemen at the Exchange than could be done by any philosophers of any school.”40 The sprawling size of the Roman Empire also meant that it was frequently necessary to transfer funds from one region to another. This was accomplished through private companies known as publicani, which were responsible for tax collection in the provinces. To send money from Rome to some outpost in Spain or North Africa, you could deposit some silver or a nomina in the Rome branch, and some of the taxes would be made available for pickup at the other end.

  Hundreds of millions of coins were struck, at a pace not matched until modern times; in the mid-second century C.E. imperial spending has been estimated at 225 million denarii per year, with about 75 percent going to supply the military.41 The system was so successful that it actually outlasted the empire itself, at least in a virtual form. As discussed in chapter 3, people were still figuring debts and accounts in terms of Roman money centuries after the coins themselves were history.

  The fall of the Roman Empire has been blamed on many factors, but the economy was certainly one of them. In the third century, the lack of new foreign conquests meant the supply of precious metals decreased. Since Rome produced very little itself, money was continuously draining away to foreign lands. The process accelerated as Romans consumed increasing quantities of exotic goods from India and China. As Cicero wrote, money is “the sinews of war,” and these were stretched to breaking point as the army ballooned in size to 650,000 in the fourth century, even as the size of the empire itself was shrinking.42 Coins were therefore debased, which contributed to severe inflation as more of them were issued to pay the state’s expenses. During a spell of just one year (274–275 C.E.), prices multiplied by a factor of 100.43 Like a pyramid scheme, the empire relied on ever more conquests to sustain itself; and when it ran out of new sources of funds, it collapsed.

  The course of this inflation can be traced in the silver content of the denarius, the most common Roman coin, which was the equivalent of the Greek drachma. Its name came from the Latin for “containing ten” because it equaled ten smaller coins known as asses. The name lives on as the word for money in a number of languages, including Italian (denaro), Spanish (dinero), and Portuguese (dinheiro), and as the dinar currency in several (mostly Islamic) countries. When the small coin, with a diameter of about 2 centimeters, was first minted around 211 B.C.E., it contained about 4.5 grams of nearly pure (95–98 percent) silver and would pay a day’s wages for a soldier or an unskilled laborer.44 However, it became common for emperors to recall coins, reissue with a lower silver content, and keep the extra metal as profit. The silver content slowly reduced to about 50 percent by the middle of the third century C.E. and then plummeted to about 2 percent. In its final stages, around 280 C.E., the coin had a copper core and a silver surface that tended to rub off with use.45 Like the empire itself, appearances were being maintained, but the core had transmuted into something less stable or enduring. When Constantine introduced the solidus coin (from which “soldier,” since they liked to be paid with them) in 312 C.E., its 4.5 grams of solid gold was worth 275,000 denarii, and what counted was the weight of the metal, as opposed to the emperor’s stamp.46 The solidity of the bezant, as it was later known, is attested to by the fact that it remained in production for some seven centuries.

  Law of the Land

  While Rome’s was the first empire to fully exploit the power of money and incorporate it into its structure and organization, the Romans never quite mastered the dynamics of money. The chaotic end of the Roman Empire—with emperors struggling to raise funds through taxation, confiscation, devaluation of the currency, or even the looting of their own temples under Constantine—still serves as a cautionary tale for any government that doesn’t mind its budget (emperors didn’t even have budgets until very late in the history of the empire).47 The greatest contribution of the Romans to economic thought was not so mu
ch new theories of money—on which they tended to toe the Aristotelian line—but their legal system. Just as the straight lines of Roman roads still mark many countries in Europe, so the straight lines set by their legal codes continue to inform our understanding of things like property rights.

  The Romans had enormous respect for property, especially land and slaves (which were the two most economically important kinds), and much of their legal system was devoted to defining and protecting ownership. Economists have long emphasized the economic role of free markets, but market economies as we know them today could not exist without elaborate systems of property rights, which are legal inventions. A quirk of the Roman code—which has long caused confusion for struggling law students around the world—is that property is defined as a relationship between a person and a thing, which gives the person absolute power over the thing. This definition is strange, because while it is possible to have relationships between people, we don’t usually think of relationships with inanimate objects. I don’t think I own my car because I have a relationship of unlimited power over it (which clearly isn’t the case, otherwise it would always start).

  A plausible answer to this conundrum, according to sociologist Orlando Patterson, is that Roman property law is based on the ownership of slaves.48 A slave, after all, is a property that is also a person, so it makes sense to say that the owner has a relationship of power over it. As the historian Jerry Toner notes, “Wealthy Romans saw slaves as being necessary for a high standard of living, just as we view modern domestic appliances.”49 At the height of the empire, even “middle-class” Roman households could expect to have a person or two from a recently conquered region helping out with chores. This link between money and power is written into our legal system and coded like DNA into the fabric of our lives. Its echoes appear in the modern idea of powerless “wage slaves” who only earn enough to pay for their upkeep, or for that matter the actual slave labor that forms part of many global supply chains (11 percent of British businesses believe that their supply chains are “likely” to include slavery, according to the Guardian).50

  As with its money, the Roman system of civil law outlasted the empire and—after something of a falling off during what is often referred to as the Dark Ages—was by the sixteenth century forming the backbone of law in most European countries. Its great attraction, according to historian C. F. Kolbert, “was not so much the technical apparatus … but its clarity, simplicity and orderliness.”51 As Edward Gibbon noted in The Decline and Fall of the Roman Empire, “The hunter, the shepherd, the husbandman, may defend their possessions by two reasons which forcibly appeal to the feelings of the human mind: that whatever they enjoy is the fruit of their own industry; and that every man who envies their felicity may purchase similar acquisitions by the exercise of similar diligence.”52 Romans may not have been able to trust their coins, but their legal system was the real thing.

  Hard Money

  To summarize the story so far: credit systems such as that of ancient Mesopotamia far predated the use of coins. When coin money did emerge, it was not a natural and spontaneous process, as recited in mainstream economics, but was instead the result of government policy. The Greek and Roman Empires were both built on a military–financial complex that obtained bullion and slaves from conquered lands, paid soldiers using the minted coins, and collected taxes in said coins. Money was therefore a tool to transfer resources from the general population to the well-armed state. Once established, money created its own dynamic, as the use of money created a need for money. Its role was enforced not just through military conquest, but also by laws. The idea of value is inherently fuzzy and hard to quantify, but legal systems such as that of the Romans required clarity, straight boundaries, and exact calculations. Everything had to be convertible into money.

  The standard story from Economics 101 therefore has it the wrong way round. Coin money did not supersede barter; rather it was predated by state-backed systems of credit. And rather than emerging naturally, with government and its legal system only stepping in at the last moment to claim credit by putting its stamp on everything, the use of coin money was imposed by government in the first place. It was forced on the population, just as a coin’s stamp was forced onto metal. This changes the way we see money. Menger’s idea that state sanction is “alien” to money applies better to some of the new cybercurrencies—which get their authority from their network of users—but even these don’t emerge naturally, they are very carefully planned and designed by computer scientists and programmers. There is a parallel with the currencies used in online gaming, which are usually imposed in a top-down fashion by the game’s designers.53

  So why has the Aristotelian story endlessly been repeated? One reason is that in order for economics to present itself as an objective discipline, it must cast the modern economy as being the logical endpoint of a historical process in which alternative types of exchange or interaction are seen as just imperfect approximations of the real thing. If money has emerged naturally from commerce rather than been imposed by government, then economics can be seen as a kind of natural science, divorced from its social and political context.54

  The economics version also reflects an inbuilt assumption that there is essentially no trust between parties. Exchange therefore has to be immediate, in the form of goods or some form of money. An IOU would be right out of the question, even if it were wrapped in an envelope made of clay and stamped with a seal. Economics can therefore ignore the complex web of human relationships in which the economy is embedded. In this picture, notes Geoffrey Ingham, “the natural economy does not possess a complex social-economic structure; it is essentially simple barter with a monetary veil.”55

  Above all, though, the idea that money replaced barter by making transactions more efficient allows one to see the economy as something in which money is nothing more than a passive intermediary—a “lubricant in exchange.” Money objects such as coins are not fundamentally different from commodities such as weights of gold: the stamp is merely something to “save the trouble of weighing” (Aristotle) and “a great convenience” (Ragan and Lipsey) but has no unique importance of its own. The Canadian economist Todd Hirsch quipped that “you could use chickens as money” as long as people are ready to accept them as a means of exchange.56 However, the fact that many things can serve as money does not tell us much about money, any more than the number of actors who have played Hamlet tells us about Shakespeare’s play. What counts is the properties of objects at the time when they are used as money, not when they are offstage.

  An example of this view of money as passive intermediary is the famous (in monetary circles) paper “Money Is Memory,” by Narayana R. Kocherlakota of the Federal Reserve Bank of Minneapolis.57 The paper begins by noting that “fiat money consists of intrinsically useless objects that do not enter utility or production functions” in economic models, and goes on to provide a quasi-mathematical demonstration that the role of these “barren tokens” is to act as a kind of memory substitute and keep track of who owes what to whom in what amounts to a barter economy. The conclusion is that “money is technologically equivalent to a primitive version of memory.” The argument relies on standard ideas from economics such as “perfect public equilibria” and the existence of well-defined utility functions (i.e., mathematical measures of value) to give “a rigorous notion of what outcomes are possible” (such assumptions are explored further in chapter 7). Obviously money could therefore never lead to irrational responses or have a destabilizing effect on the economy, because it is nothing more than a memory crutch, a convenient reminder system.

  This idea of money as something that is inert, sterile, and boring is consistent with the mainstream economics view of the economy as a stable, self-regulating, logical machine in which money plays no special role, other than as a metric for economic activity. As economist Stephanie Kelton notes, “Money, debt and finance don’t even fit into many economic models.”58 Former Bank of England go
vernor Mervyn King observes that “most economists hold conversations in which the word ‘money’ hardly appears at all” (which is particularly strange given the way the financial community hangs on every word of central bank governors).59 As shown in chapter 7, this leads to the curious situation in which the powerful dynamics of money have traditionally been all but excluded from mainstream economic models—as if the subject is too grubby to touch—and alternatives are not taken seriously.

  The central, founding myth about the origins of money is one of the reasons why economists still, despite the countless number of books written on the subject, seem to be in denial about its true nature. And it shows that, far from representing the perfection of a logical process, our current version of money is only one of the possibilities. In chapter 3, we will discuss the emergence of private virtual currencies that used strings of information instead of precious metal to convey value—in the Middle Ages. Before that, we first take a brief philosophical diversion, as we ask what magical property it is that makes money, money.

  2

  The Money Magnet

  Money is a singular thing. It ranks with love as man’s greatest source of joy. And with death as his greatest source of anxiety.

  JOHN KENNETH GALBRAITH, THE AGE OF UNCERTAINTY

  As all things change to fire, and fire exhausted falls back into things, the crops are sold for money spent on food.

  HERACLITUS, FRAGMENT 22

  The question “What is money?” never has a fixed answer because money is not stable; it would be answered differently by an accountant in ancient Sumeria, a nineteenth-century banker, a teenager at a mall, or someone in the future. Some people will argue that the only real money is gold; others, that all money is a collective illusion with no reality of its own. Some believe that the production of money is the prerogative of government; others, that we need government to get out of the way of private currencies. Money is the root of all evil, or (George Bernard Shaw) lack of money is the root of all evil. But everyone will agree that money holds a magnetic appeal. In this chapter, we adopt an approach inspired by modern, non-Newtonian physics to investigate the basic properties of money and show how such an apparently simple thing can evoke such strong and varied responses, while remaining in many respects our central point of reference: our true north.