The Evolution of Money

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The Evolution of Money Page 5

by David Orrell


  In Nicomachean Ethics, Aristotle wrote that money “makes all things commensurate, since all things are measured by money.”1 Money therefore acts as a kind of map from the real world to the abstract world of numbers. It projects the messy plurality of objects and services onto a uniform metric that is easily compared and referenced.

  This role as an economic weigh scale is reflected by the association between units of money and units of weight. The word “shekel” is based on the Sumerian root word for “weighing.” Similarly the British pound sterling originally referred to 1 pound of silver. The Latin word for “pound” is libra, which is why the English pound symbol is £. Libra also appears in Italian as the lira. A difference between units of weight and currency, of course, is that even if the names of coins are stable and enduring, their value is shifting and fluid—a dollar isn’t what it used to be (or actually it is, but it doesn’t buy as much). Also, value doesn’t actually weigh anything.

  While many things have been used as means of payment throughout history, an implication of the idea that “all things are measured by money” is that, in principle at least, all things are measurable by one kind of money. In the same way that we can translate between imperial pounds and metric kilograms without any loss of accuracy, we can translate between units of currency by using an accepted exchange rate—so why have more than one? As we will see, keeping two currencies on the go at the same time—such as silver and gold under a bimetallist regime—adds flexibility to the money supply but can be confusing and unstable, because market prices tend to shift for one metal relative to the other, raising the question of which is the proper unit of account. Furthermore, the power of a currency depends on its range of acceptance. The greater the number of people who recognize a single currency, the more useful it becomes for trade. Finally, governments prefer to have monopoly power over currencies.

  In 175 B.C.E., the Chinese emperor Wen decided to address a monetary crisis by an unconventional strategy: he allowed anyone to mint money at will. While this did accomplish the aim of providing more money for circulation, it also led to some unwelcome competition. As the ancient Records of the Grand Historian observed, “The King of Wu, though only a feudal lord, was able, by extracting ore from his mountains and minting coins, to rival the wealth of the Son of Heaven.”2 In 113 B.C.E., the monopoly on minting coins was reclaimed by the emperor, with his economic adviser noting, “If the currency system is unified under the emperor’s control, the people will not serve two masters.”

  Money therefore has within it a tendency toward unification, homogenization, and the development of a single common standard (such as gold). A modern example of this trend was the establishment of the euro, which is the monetary equivalent of the metric system. A principal aim of the euro was to unite the continent of Europe and help prevent the kind of military conflicts that dominated much of its twentieth century. At the same time, though, the adoption of a single currency exacerbated the differences between its member states. Critics described it as a top-down project imposed by bureaucrats who were detached from economic and social realities. In 2012 and then again in 2015 (most likely not for the last time is the consensus at the time of writing), this tension came to a head when Greece, unable to pay its debt without massive aid from its neighbors, came perilously close to exiting the common currency.

  The story of the euro is just one example of how money is driven by two conflicting impulses. On the one hand, it wants to unify messy reality; but on the other, it seems that it can achieve this only by separating itself from the real world. To understand the sources and nature of this conflict, we need to go back once again to the ancient Greeks, particularly the schools of philosophy that took root at the same time that coins were invented.

  Unity

  The first Greek city to produce its own coins in the sixth century B.C.E. is believed to have been Miletus, a commercial hub located in what is now Turkey, adjacent to the kingdom of Lydia. However, Miletus is most renowned in history for its minting of not coins but great minds. It would be no exaggeration to view the city as the birthplace of Greek philosophy. Just as its money provided a way to unify the world of material transactions, Milesian philosophy provided a way to unify the universe.

  According to Bertrand Russell, “Western philosophy begins with Thales.”3 Thales was born in Miletus around 624 B.C.E. and is credited with a number of mathematical discoveries; it is said that he used his knowledge of geometry to compute the height of the Pyramids and the distance of a ship at sea. He is supposed to have predicted an eclipse of the sun in 585 B.C.E. And he also proposed the original (and often copied) theory of everything. Today, many physicists think that everything is made from infinitesimally small strings vibrating in a ten-dimensional space. According to Thales, everything was made of water. The earth, which was made of one form of water, floated on an infinite ocean. Earthquakes were caused when the earth sloshed around in this pool.

  Thales’s water-based theory might not seem like a huge advance over then-prevalent ideas that everything was controlled by gods. But as Aristotle later pointed out in Metaphysics, it did answer a logical conundrum, which is how things change from one form to another: they didn’t really, because they were all made of the same thing.

  The choice of water may have reflected the fact that Miletus was a coastal city, where life and commerce were dominated by the sea. But other Milesian thinkers soon chipped in with their own versions. Thales’s student Anaximander pointed out that water could not describe all the opposites found in nature—for example, it could be wet but not dry—and therefore a special type of material was called for, which he called apeiron (having no limit). His student Anaximenes, in turn, argued that there was no need to invent some new, invisible substance. Everything in the universe was made of air. After all, when water is heated it evaporates, which seemed proof that it turned into air; and when air is cooled, water condenses out of it.

  The idea, known today as material monism, that matter was made of one primordial substance was later picked up by Heraclitus (who thought it was fire) and Xenophanes (earth). Eventually the Greeks settled on a kind of compromise, championed by Aristotle, which was that matter was made up of the four elements of earth, water, air, and fire, with the fifth element, the ether, being reserved for the heavens. The idea that all things—including land, clean water, fresh air, and energy—are measured by money, though, never went away. The reason is related to another strand of Greek thought, which we could call “immaterial monism.”

  Immaterial Monism

  The most influential of the pre-Socratic philosophers was Pythagoras. According to his biographer Iamblichus, as a young man Pythagoras visited Miletus, where he met with Thales (who was by then an old man) and Anaximander.4 Pythagoras is famous today for the theorem concerning right triangles that bears his name, but the most significant discovery attributed to him is actually about music—he found that harmonies, as played, for example, on the lyre, are related by simple mathematical ratios. If you fret a string halfway up, then it produces a note that is an octave higher. Fretting two-thirds of the way up produces a musical fifth; three-quarters of the way up a fourth; and so on.

  This discovery led Pythagoras to develop his own theory of everything—based this time not on a specific material, such as water or air, but on the abstract concept of number. Music, after all, was considered the most subtle and mysterious of art forms, so if it could be reduced to number, then—so it seemed—could anything else. The Pythagoreans, as his followers were known, therefore believed that number was the ultimate reality, the stuff of which the universe is made. According to the Pythagorean version of the big bang theory, the universe began in a state of unity, which then divided into two opposite components, the Limited (peiron) and the Unlimited (apeiron). These mixed together to form numbers, which made up the structure of the cosmos.

  The Pythagorean enthusiasm for number was undoubtedly influenced by the development of money. His followers bel
ieved that Pythagoras was a demigod descended from the god Apollo, but he was also the son of a gem engraver, and according to classicist W. K. C. Guthrie, he “derived his enthusiasm for the study of number from its practical applications in commerce.” He was likely also involved in the design of coinage for his region in what is now southern Italy. As Guthrie noted, “The impact of monetary economy … might well have been to implant the idea that one constant factor by which things were related was the quantitative. A fixed numerical value in drachmas or minas may ‘represent’ things as widely different in quality as a pair of oxen, a cargo of wheat and a gold drinking-cup.”5 Just as a coin tied an abstract idea (numerical price) to a material structure (metal), so the Pythagorean philosophy tied the concept of number to material monism.

  The Pythagorean, number-based theory of everything was powerful because it promised a way to understand and control the world. The use of mathematics, which it championed, advanced hand in hand with the use of money, since both are ways of thinking about the world in terms of number and computation. The Pythagoreans may not have been the first economists, but they certainly helped to prepare the ground. And their belief in the mystical power of number is reflected today when we obsess over figures such as gross domestic product (GDP).

  Box 2.1

  Duality

  To the Pythagoreans, each number had its own mystical meaning. The number 1 stood for the initial, unified state of the universe. Two represented the polarization of unity into duality and was associated with mutability and the feminine. Three signified all things that have a beginning, a middle, and an end. Four represented completion, as in the four seasons that make up a year. The greatest and most perfect of all numbers was 10, the sum of the first four numbers, which symbolized the universe.

  In line with their belief that 10 was a very important number, the Pythagoreans also produced a list of ten opposites that represented the organizing principles of the universe. These were:

  Limited Unlimited

  Odd Even

  One Plurality

  Right Left

  Male Female

  At rest In motion

  Straight Crooked

  Light Darkness

  Square Oblong

  Good Evil

  The list is somewhat similar to the Chinese yin–yang system of opposites, with the left column yang-like and right column yin-like; but rather than seeing these as part of a whole, the Pythagoreans explicitly associated the left side with good and the right side with evil.

  Pythagorean thought has been highly influential for generations of philosophers and scientists, from Aristotle to Newton to modern physicists, so it is not surprising that its legacy is also apparent in mainstream economics—with its emphasis on things like scarcity (Limited), stability (At rest), linearity (Straight), symmetry (Square), and rationality (the Light of reason).

  Mind Versus Body

  As shown in box 2.1, the Pythagoreans saw the universe as governed by opposing principles, and so their philosophy was fundamentally dualistic. They also had a preferred side that defined a kind of aesthetic; for example, limited was better than unlimited, linearity was better than nonlinearity, stability was better than change, and symmetry was preferable to asymmetry (the most perfect and beautiful shape was the sphere). This duality can be viewed in part as a way to resolve a fundamental disconnect between numbers and the natural world, by dividing the world into things that are consonant with simple numerical analysis (good) and things that don’t quite fit with the grid (evil). For example, there is only one way to draw a straight line between two points, and it is easily described by a mathematical equation. But if the line is crooked, it can follow an infinite (unlimited) number of different paths. Similarly, things that are stable and symmetric are more amenable to mathematical treatment than are things that are oddly shaped and don’t stay still. In natural organic systems, there aren’t many straight lines or other regular shapes—as the mathematician Benoit Mandelbrot observed, “Clouds are not spheres, mountains are not cones, coastlines are not circles, and bark is not smooth, nor does lightning travel in a straight line.”6

  The split between good and evil properties, between number and the living world, was related to a broader split in Greek culture between mind and body (or between virtual symbols and physical realities). The former was associated in Greek culture with the male principle, and the latter with the female principle. There were no female philosophers to argue against this, because schools such as Plato’s and Aristotle’s did not admit women.

  Plato took this split to its logical conclusion with his theory of forms. According to Plato, any real-world object, say a chair, is an imperfect version of a form, in this case the Chair form, which exists in some higher plane of reality. Such forms can be known only through the intellect, because our poor plodding bodies are seated in the real world—on chairs, not Chairs. Forms are static and unchanging, while real things move and decay. Mathematical equations live in the world of forms—as does the virtual aspect of money, which obeys mathematical rules and exists outside time and space. As we’ll see, that is both its main advantage and the fatal flaw that leads it into conflict with natural systems.

  Perhaps unsurprisingly, given the time and place of its emergence, money is a lot like Greek philosophy: it begins with the idea of unifying the world, like the euro, but this leads to a kind of schism between ideas and reality, because the only way it can achieve unification is by imposing abstract rules. The production of coins by stamping a metal blank can be seen as the physical manifestation of this conflict. The stamp represents the abstract, “male” world of virtual forms from Greek philosophy (not to be confused with gender reality), while the metal represents the material, “female” body (the word “matter” is from the Latin mater [mother]). It is the Greek philosophical divide, in your pocket. The process of stamping coins resembles the Aristotelian view of procreation: “The female always provides the material, the male provides that which fashions the material into shape; this, in our view, is the specific characteristic of each of the sexes: that is what it means to be male or female.”7 It is no coincidence that the materials for the first coins, gold and silver, were also used as ornamentation for women’s bodies.

  Money is frequently described as a symbol, but it is more accurate to say that money objects such as coins incorporate a specific type of symbol. The stamp on a coin typically consists of two parts that merge the ideas of power and number. The obverse or “heads”—which often features, for example, a portrait of the head of state—represents the mint’s authority, and the reverse or “tails” expresses the numerical value of the coin in chosen units. However, coins in Lydia were originally stamped on only one side, and for metaphorical convenience we can associate the stamp with heads and the physical matter with tails.8 Money functions as a link between these two things—the heads and the tails, the abstract idea and the embodied reality—which have very different properties.

  In the case of a coin, the link appears more direct because the metal has a physical worth that is always a positive amount. The U.S. “Jefferson nickel,” for example, has recently tended, subject to price fluctuations, to contain more than 5 cents worth of copper and nickel (but it is illegal to melt it down).9 Quarters contain about the same value of metal but are worth 25 cents, so no one melts them down. More serious forms of physical money, such as weighted gold, grant the holder a kind of independent, anonymous power. As a physical object, money can also be damaged, lost, stolen, hoarded, and liked or not for its aesthetic properties, and the material from which it is made can become plentiful or scarce. Above all, it can be valued.

  In contrast, the stamp is a symbol of abstract debt, which represents not real wealth but a contract between two parties, the creditor and the debtor. Its meaning relies on a banking system and a legal system, on mints and on merchants, and above all on trust (the word “credit” is from the Latin credere [“trust” or “belief”]). Debts correspond to negat
ive quantities, which (as physicist-turned-economist Frederick Soddy pointed out) don’t exist in the real world—it is impossible to have a negative house, even if you have an underwater mortgage. Numbers such as prices or net worth are additive, can be compared on a numerical scale, and obey unyielding mathematical laws; for example, compound interest means that abstract debts can grow without bounds, while real objects tend not to. Along with conquest by more conventional means, this particular feature of debt has historically been a major cause of people falling into slavery or peonage.

  Money always combines these ideas of negative debts and positive value; like a magnet, it contains opposing poles that are in a state of tension and stored energy. Most state currencies today are fiat currencies that represent government debt (the word is from the book of Genesis: fiat lux, [let there be light]); cybercurrencies exist only in electronic form, but even they retain a link to physical worth in two senses. First, any kind of money object is a valuable thing to be physically possessed—even if only in electronic form. Patterns formed by electrons on a computer are as “real” as the patterns of atoms that make up a metal. Numbers do not become scarce, but money objects can, because there are rules surrounding their production. Second, even virtual currencies retain a link to physical worth through the markets they create. A dollar is no longer officially redeemable for a set quantity of gold, but the use of dollars has led to an institution called the London Gold Fixing, wherein the current price is set (literally fixed, as it turned out, by corrupt bankers) in dollars.10 When we transfer funds electronically from one account to another, it might seem that we are just sending a number, but the number is attached to a currency unit, which is what makes it money and connects it to markets. Anyone with the right skills can invent a new cybercurrency, but it has no worth until markets emerge that make it tradable for other things (or a significant number of people believe it will happen).

 

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