by David Orrell
Indeed, while finance was booming in the fourteenth and fifteenth centuries, it did not seem to translate into a general improvement in living conditions for the masses. Up until about 1300, the quality of life for common people, especially women, had attained something of a peak, at least by certain metrics.31 Women played an important role in many crafts and industries and formed associations with monopolies in cloth production, brewing, dairy, cooking, and so on. Workers of all kinds had ample supplies of food, decent working conditions, and far more holidays than we have today (from 90 to as many as 170 in some regions). This began to change in the fourteenth century, for a number of reasons. Power became more centralized under strong monarchs. Chivalric knights were replaced with massive armies, now armed with muskets and gunpowder, who clashed in increasingly expensive wars. Governments debased their currencies to pay the bills (box 3.2), or simply defaulted. Construction of cathedrals came to a halt. The most shocking change was in the status of women. A widespread hysteria about satanic witches meant that as many as 100,000 (mostly female) accused witches were put to death.32
Box 3.2
Debase or Recoin?
Although one of the main functions of money is to act as a store of value, coins have often been subject to debasement in their metal content. As discussed in chapter 1, for example, the decline in the silver content of the Roman denarius mirrored the decline of the Roman Empire. In the sixteenth century, Henry VIII of England was known by his subjects as “Old Coppernose,” because his portrait on his “silver” coins turned to copper with use (higher-quality gold coins were used for foreign trade). In 1920, the silver content of all British coins was reduced from 92.5 percent to 50 percent; the silver vanished altogether in 1947.
France saw 123 debasements in the period 1285 to 1490, with one in 1349 responsible for almost 75 percent of the king’s takings. This abuse led to a Tea Party–like anti-inflationary protest from the philosopher and mathematician Nicolas Oresme (1320–1382): “I am of the opinion that the main and final cause why the prince pretends to the power of altering the coinage is the profit or gain which he can get from it … every change of money, except in the very rare cases which I have mentioned, involves forgery and deceit, and cannot be the right of the prince.”*
By issuing new coins with the same face value but less precious metal, the seignoirage earned by mints is boosted accordingly. Debasement, as Oresme noted, therefore acts as a kind of stealth tax on the population. A less subtle way of doing the same thing is the practice known as “recoinage,” in which old coins are exchanged for a smaller number of new ones.
As an example of this approach: in England around the end of the tenth century, before the adoption of sterling, every six years all existing coins were declared invalid and were recalled to be replaced with new ones at the rate of three new for four old. The seignoirage therefore amounted to 25 percent every six years. Unlike with debasement, though, the new coins contained the same amount of metal, so recoinage did not cause inflation (new coins could be introduced to maintain the money supply). In fact, inflation appears to have been very low during this period.
One coin that was explicitly designed for recoinage was the bracteate, which was the main coin type in large parts of northern Europe, including Germany, Austria, and Scandinavia, in the twelfth and thirteenth centuries. These were local currencies, so the coins would circulate only in a small area, such as a town or region. The pieces were typically made of a wafer-thin sheet of silver, and the impression was made by stamping on one side over a soft surface so it appeared as a negative on the reverse. Because of their fragility, the coins lasted for only a short time, but that wasn’t a problem, because once or twice a year they were called in to be replaced.†
Recoinage came to an end in the fourteenth century, as some rulers abused the practice with frequent recalls, and local currencies yielded to powerful national currencies. However, the practice has its advantages, which have since been exploited in the design of some alternative currencies. The fact that such currencies effectively earn negative interest deters hoarding, encourages the spending of money, and boosts the economy. As the German economist Silvio Gessel argued in 1913, “Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods either by the purchaser or the seller … we must make money worse as a commodity if we wish to make it better as a medium of exchange.”‡ The greatest impediment to negative interest is that money gains its power from its association with number—and numbers don’t rust.
*Nicole Oresme, The De Moneta of Nicholas Oresme, and English Mint Documents, trans. Charles Johnson (London: Nelson, 1956), 24.
†Roger Svensson, “The Bracteate as Economic Idea and Monetary Instrument,” IFN Working Paper No. 973, Research Institute of Industrial Economics, Stockholm, 2013.
‡Silvio Gesell, The Natural Economic Order, trans. Philip Pye (London: Peter Owen, 1958).
The descent toward chaos was accelerated by the Black Death. The outbreak, which peaked in 1348, killed an estimated one-third or more of Europe’s total population. The microbe that caused it is believed to have been imported from the Silk Road. The lethality of the outbreak was due not just to the virulence of the disease but to the fact that it arrived at a time when many people were malnourished and therefore vulnerable.33 The staggering damage inflicted by the plague on medieval Europe led to societal changes—including a doubling of many wages due to labor shortages—that paved the way for the Renaissance.34
In Italy, banking was initially dominated by the Bardi and Peruzzi families of Florence, but these fell into bankruptcy in the 1340s. The temporary demise of Florentine banking has been blamed on factors such as King Edward III’s default on war loans and was capped by the appearance of the Black Death. Into the gap entered the Medicis: the most famous and powerful banking family of history. The Medicis started off as money-changers but soon branched out into other areas of finance, including bills of exchange, and over the course of the fifteenth century expanded from a single office to branches in fifteen cities across Europe. They were involved not just in banking but also in trade, organizing shipments of every kind of product (at one point they even had a sideline in castrated choirboys).
Cosimo de Medici was anointed ruler of Florence, and together with his grandson Lorenzo commissioned buildings and artwork that made the city into the tourist attraction it is today. Even now, people like Michelangelo Buonarroti (whose Sistine Chapel was funded by the Medicis) and Leonardo da Vinci (who cryptically wrote in a notebook, “The Medici made me and destroyed me”) remain the brightest stars of the art world. The artists repaid their patrons by immortalizing them in their paintings. Perhaps the most famous example is Sandro Botticelli’s Adoration of the Magi (1475), in which, under close inspection, all the Magi turn out to be Medicis. Instead of being portrayed as evil usurers, bankers had taken their place next to the gods. Of course, the way in which the art market has since effectively morphed into part of the luxury goods business, with the finest works battled over by oligarchs and hedge fund managers, would have amazed a person from the Middle Ages, when the word “art” still referred to skill at crafts, and beauty was not valued in monetary terms.
Caritas
While metal money did play an important role in the Middle Ages, and many developments such as bills of exchange can be viewed as precursors to modern finance, it can be misleading to view the period through a modern lens. As Jacques Le Goff notes, those interested in finance were “no more than tiny isolated islands in a vast medieval sea, the majority of people remaining remote from sophisticated practices in the case of everything we would put under the heading of money. At most we may accept that money, however limited its role in the Middle Ages, acted as a stimulus in the spheres of writing and commercial bookkeeping and in arithmetic applied to the necess
ities of daily life.”35
Rather than a kind of emerging proto-capitalist economy, it is probably more correct to see the medieval period as being based on a version of a gift economy.36 The economy, to quote Karl Polyani, “was embedded in the labyrinth of social relations.”37 And the core principle of social relationships, as taught by both the universities and the Church, was the idea of caritas. It was this, rather than money or “net worth,” that a person’s quality was measured against. It was this that defined relationships between people and also relations with God. The greatest gift of all was the free gift of life from God, and everything else—including money—could be seen as an extension of that. As Thomas Aquinas wrote, “Charity is the mother of all virtues, inasmuch as it informs all virtues.” If time is money, then interest sets the exchange rate, and the ban on usury reflected a static worldview in which everything had its place in God’s scheme.
The Middle Ages certainly saw a gradual monetizing of many aspects of life, including the payment of rents and taxes; however, most of this monetization involved gifts, such as almsgiving and bequests, which represented much larger sums than anything raised by taxation.38 Economic theories and ideas also seemed to be more related to the exchange of gifts rather than the hard calculation of commercial value. The concept of the “just price,” for example, was in some respects the opposite of the law of supply and demand, since it implied that prices should be stable even if conditions change. Saint Francis told his followers that “we ought not to have more use and esteem of money and coin than of stones.”39
Also, the fact that money was relatively unimportant did not imply that the period was an economic disaster. We often tend to think of the Middle Ages as a bleak time in which progress ground to a halt, but in many respects the opposite is true, at least for the period until around 1300 known as the High Middle Ages (before the plague, witch-burning, etc.).40 There is much that we can learn from antihoarding coins such as the bracteate or an economics with ethics at its core or the willingness to plan for future generations; and there are lessons too in the later, heady rise of a secretive, elite banking class and the link between wealth and power personified by the Medicis. One might also wonder how our own financial system would hold up in the event of a modern-day plague.
Above all, the idea of a society that was based on caritas and saw avarice as a deadly sin is in stark contrast to our money-based system, which replaces charity with the invisible hand and ethics with the unbridled pursuit of wealth. As the Scholastics knew, money has profound effects on human behavior, and those effects are not always positive. The U.S. psychologist Paul Piff, for example, has shown through a series of experiments that feelings of monetary wealth can lead to a psychological syndrome that he unromantically calls the “asshole effect.” In one experiment, his team monitored the behavior of drivers at crossroads, and found that drivers of high-status cars behave like feudal lords surrounded by serfs. They are four times more likely to cut off other drivers and three times more likely to not yield at pedestrian crossings. “While having money doesn’t necessarily make anybody anything, the rich are way more likely to prioritize their own self-interests above the interests of other people. They are more likely to exhibit characteristics we would stereotypically associate with, say, assholes.”41 According to neuroscientist Keely Muscatell, wealth calms the part of the brain associated with empathy (or caritas): “As you move up the class ladder, you are more likely to violate the rules of the road, to lie, to cheat, to take candy from kids, to shoplift, and to be tightfisted in giving to others. Straightforward economic analyses have trouble making sense of this pattern of results.”42 Even mentioning the word “money” has been shown to prompt people to act in a less ethical manner (slightly concerning about this book, then!).43
Aquinas saw man as a rational animal, whose narrow self-interest was subservient to a broader ethos of charity. In fact, the Middle Ages seem to have been a period of great emotional intensity—from the romance of chivalric knights, to the hysteria against witches. But it was also the time when rational man, led by the mathematicians, became very good at counting and calculating. In a predominantly gift economy, where one of the gifts happened to be money, these two aspects of rationality—like the two sides of coin money—were in a state of tension. The balance between them would change when Christopher Columbus discovered the New World—and claimed as his prize one of the largest monetary gifts of all time.
4
New World
What greater stupidity can be imagined than that of calling jewels, silver, and gold “precious,” and earth and soil “base”? People who do this ought to remember that if there were as great a scarcity of soil as of jewels or precious metals, there would not be a prince who would not spend a bushel of diamonds and rubies and a cartload of gold just to have enough earth to plant a jasmine in a little pot, or to sow an orange seed and watch it sprout, grow, and produce its handsome leaves, its fragrant flowers, and fine fruit.
GALILEO, DIALOGUE CONCERNING THE TWO CHIEF WORLD SYSTEMS
Money is gold, and nothing else.
J. P. MORGAN, TESTIMONY BEFORE THE BANK AND CURRENCY COMMITTEE OF THE HOUSE OF REPRESENTATIVES
What gives money its value? What backs the dollar or, for that matter, the bitcoin? Even today, many people think that bullion is still the “gold standard” for money. But as the Spanish discovered in the sixteenth century, a currency’s value is not just a question of metal content. This chapter shows how too much of a good thing can upset the financial system; how a Newtonian approach to money helped to build the British Empire; how paper came to be seen as valuable as gold; and how the invention of “fractional reserve” banking boosted economic growth, while introducing into the world of finance a term that we still write about—the bubble.
“In passed days I wrote very fully to you of my return from new countries, which have been found and explored with the ships, at the cost and by the command of this Most Serene King of Portugal; and it is lawful to call it a new world, because none of these countries were known to our ancestors and all who hear about them they will be entirely new.” Thus began a letter written in 1503 from the Florentine explorer Amerigo Vespucci to his former patron, the Medici banker Lorenzo di Pierfrancesco de’ Medici. The letter was later published with the Latin title of Mundus Novus (New World). For his troubles, Vespucci had the continent in question named after him—America.
Since at the time even Christopher Columbus thought that the “New World” was part of Asia, the fact that it was an entirely new continent was exciting news—particularly to the Castilian monarchy, which had funded the search for new trading routes to the Far East, and people like the Medicis who had given financial backing to a number of trips, including Columbus’s third voyage. More explorers soon followed in the wake of Vespucci and Columbus.1 One of them was the Spaniard Hernán Cortés, who took part in the conquest of Cuba and was rewarded for his service with a grant of land and slaves. After seven years, by which time he was one of the wealthiest men on the island, he was chosen by the governor of Cuba to head an expedition to the interior of Mexico.
When the governor changed his mind at the last moment (part of a long-standing feud), Cortés—in an apparently reckless toss of the coin—mortgaged his estate to help pay for the voyage himself. After a few stops and skirmishes with the natives along the Mexican coast, Cortés and his army of several hundred reached what is now Veracruz. In order to eliminate any possibility of retreat, and in another display of there-is-no-plan-B confidence, he ordered his men to scuttle their ships.
Of course, the New World was new only to Europeans, being as it was the home of sophisticated civilizations such as the Mayans, Incas, and Aztecs, who had developed their own systems of agriculture, writing, mathematics, law, religion, and trade. These systems were in some ways similar to their European equivalents, but there were also key differences—one of which was their attitude toward precious metals. Gold and silver were abundant, and p
erhaps for this reason were valued primarily for their beauty and were not made into coins (thus destroying the theories of generations of economists about the inevitable emergence of coin money based on precious metals). The Incas thought that gold represented the sweat of the sun and silver the tears of the moon, and used the metals to line their temples.
Aztec society, like those of the Incas and Mayans, was based primarily on a tributary system, with goods and produce flowing into the capital Tenochtitlán from various far-flung provinces. Markets were relatively small and local and were closely supervised by the government. Cacao beans were used for smaller purchases. Alternatively, the beans could be dried, roasted, and used to make a very bitter version of a chocolate drink (the Europeans later added sugar), which is more than you can say for most forms of money. Cotton capes of standardized length known as quachtli served for larger transactions. For example, merchants who wanted to “sponsor” a human sacrifice during the midwinter festival known as Panquetzaliztli could purchase a captured enemy soldier for up to 40 quachtli.2 Precious metals were not used as a form of currency, as in Europe; however, they were widely displayed as jewelry and ornamentation, reports of which further fueled the interest of people such as Cortés and his men.
Sweat of the Sun, Tears of the Moon
According to the Spanish account (the Aztec one has been lost to history), the rulers of Yucatán had predicted the appearance of a blond, bearded deity known as Quetzalcoatl, which translates roughly as “Feathered Serpent.” When Cortés arrived with his blond hair and sporting a beard, the Aztecs believed their forecast had come true and greeted him—not as an invading enemy, but as a god.