The Evolution of Money

by David Orrell

  In any case, the Aztec emperor Moctezuma II met Cortés peacefully, and allowed him and his men to enter Tenochtitlán, a city with a population of more than 200,000 people. There he presented the Spaniards with lavish gifts of gold and silver, presumably in an attempt to placate them. Unfortunately, his gifts seemed to have the opposite effect. As recorded in the Florentine Codex (an account from the Aztec perspective by Bernardino de Sahagún): “They picked it up and fingered it like monkeys. It was as if their hearts were satisfied, brightened, calmed. For in truth they thirsted mightily for gold; they stuffed themselves with it; they starved for it; they lusted for it like pigs.”3 Even Cortés himself reflected that his soldiers were stricken by a “disease of the heart which can only be cured by gold.”4 Perhaps he was thinking about that mortgage.

  The ensuing battles between the Spanish and the Aztecs ended with the death of Moctezuma, the sacking of Tenochtitlán, and eventually the conquest of the entire continent. The fight would not have been so one-sided had it not been for the fact that one of Cortés’s men was carrying smallpox, to which the native populations had no prior exposure or immunity. It hit them like the Black Death. Millions also died laboring in gold and silver mines; from exhaustion, hunger, disease, accidents such as rockfalls and cave-ins, or exposure to the mercury used in the refining process. The population of the Americas decreased by about 90 percent, and the sudden halt in farming—followed by regrowth of forests—was so large that it led to a noticeable dip in global carbon dioxide levels.5 As author Mark Cocker wrote, “When viewed as a single process, the European consumption of tribal society could be said to represent the greatest, most persistent act of human destructiveness ever recorded.”6 And it was motivated entirely by the lust for riches: the “asshole effect” writ large.

  Both slavery and the use of metal money had declined during the Middle Ages, but were now back with a vengeance. The strategy of the conquistadors was essentially a repeat of that used during the Axial Age by the Greek and Roman Empires: invade foreign lands; destroy their armies; set the survivors to work as slaves in mines digging up precious metals; turn these into coins to pay the army and finance further adventures; and tax the population in those same coins so they have to play along.

  One difference was that the operation was on a much grander scale. The amount of gold and silver completely dwarfed anything the world had seen before. From 1500 to 1800, American mines produced about 150,000 tons of silver and 2,800 tons of gold, amounting to about 85 percent of the world’s silver supply and 70 percent of the gold.7 A single mountain in Peru, known appropriately as Cerro Rico (rich hill), gave the Spanish some 45,000 tons of pure silver—an amount that would have kept Alexander the Great’s huge army in pay for a couple of hundred years (the mountain is still being mined by the locals but is in danger of total collapse).8 Gold production in the Portuguese colony of Brazil produced more than 16 tons a year, with labor supplied from about 150,000 slaves. Because of high death rates among the locals, most of the slaves were imported from Africa as part of the newly globalized slave trade.

  Another important difference was that the process had now been partly privatized. Cortés arranged the funding for his own mission, and he was also responsible for dividing up the loot afterward. The Crown retained rights over the land and charged a 20 percent fee called the quinto real (royal fifth) on any treasure extracted. Together with other taxes, this meant that most of the conquistadors made little money, and some even ended up in the red because they were forced to pay for their own equipment and expenses from government suppliers. Hence their insatiable appetite for new conquests—the big payoff was always on the horizon. Even Cortés found himself broke, after betting it all (again) on a failed venture in California.

  The biggest difference, though, was in the power and status of money. Money was no longer primarily an instrument of state power, as it had been in the Axial Age, or a component of a social order dominated by the Church, as under feudalism, but was itself a dominant force that was finding its own balance and creating its own patterns. This shift in the standing of money was part of a larger shift in thinking during the Renaissance, which was again related to developments in science and mathematics. And the sudden influx of precious metal would lead, paradoxically, to an emphasis on scarcity that persists in economic thinking to the present day (box 4.1).

  Box 4.1

  The Silver Dollar

  In the early sixteenth century, precious metals, including silver, were discovered in the Czech town of Joachimsthal, near the German border. Silver coins minted from the area were known as Joachimsthalers. This was later shortened to “thalers” or “talers,” pronounced in English as “dollars.” The large silver coins were popular, with more than 10 million put in circulation, and were copied throughout Europe.

  The most famous version, known as the Maria Theresa taler, was named after the Austrian empress. After she died in 1780, an estimated 800 million coins were minted until 1975, all with the same 1780 date.

  However, it was the Spanish version of the dollar, also known as the peso de ocho (piece of eight) because it was worth 8 reales, that became the first truly international currency. Minted in Spain but also in Mexico and Peru, it served as the basis for the U.S. dollar, the Canadian dollar, the Chinese yuan (from the word for “round things,” which referred to Spanish dollar coins), the Japanese yen (an abbreviation), and so on. In Spanish, it became known as the peso.

  The silver peso (Spanish dollar) of Philip V, minted in Mexico in 1739. (https://en.wikipedia.org/wiki/Spanish_dollar#/media/File:Philip_V_Coin.jpg)

  The U.S. version was first issued by the U.S. Mint in 1794 and was discontinued for domestic use in 1873 as the country moved toward the gold standard. The silver coins had an eagle on one side, and a Native American or mythological figure on the other (George Washington objected to having his image on the coin because he didn’t want to be perceived as casting himself in the mold of an English monarch).* Unlike European currencies such as the Spanish dollar and British pound, the U.S. dollar was based on the decimal system. A dollar could be divided into dimes, cents, and even mills (one-thousandth, though such coins were never minted).

  *Only in the early twentieth century did the faces of presidents make an appearance on coins.

  New World Order

  Christian cosmology had long been based on the Aristotelian idea that the heavenly bodies circulate around the earth, encased in crystalline spheres. The first cracks in this model appeared in 1543, when the Polish astronomer Nicolaus Copernicus—who had spent several of his formative years studying science and the humanities in Italy—proposed that the earth might go around the sun, rather than vice versa. In 1577, the Danish astronomer Tycho Brahe observed a comet that passed between the planets, so if Aristotle’s crystalline spheres had actually existed, it would have broken through them. In the early seventeenth century, supported by his Medici patrons, Galileo mapped out the heavens using his telescope; on discovering that Jupiter had moons, he named the four he could see after Medici children he had tutored—thus immortalizing them not in a painting but in the sky itself. The Christian image of the universe, with man safely ensconced at its center under the eye of a watchful God, was being replaced by a rational, scientific worldview in which the universe was governed by mechanistic forces and mathematical laws. Following in the footsteps of money, scientists were reducing the physical world to number.

  As money became an increasingly important part of everyday life, it began to be seen not just as a sterile, static medium of exchange, as Aristotle had viewed it, but as something with a dynamism of its own. The ban on usury, which had been debated in the Middle Ages but had never gone away, was finally dropped. In England, King Henry VIII’s Act Against Usury (1545) was more of an act for usury, since it permitted the charging of commercial interest rates up to 10 percent.9 The Scholastic idea of a just price was also modified by an understanding of inflation. It had always been known that coins could lose va
lue if their metal content was reduced, but inflation could also be a problem if the money supply was increased, for example, after the discovery of a new continent packed with massive quantities of gold and silver.

  Before Copernicus set about rewriting the model of the universe, he published a small treatise called Monetae cudendae ratio (On the Minting of Coin, 1526). As he wrote: “Innumerable though the evils are with which kingdoms, principalities and republics are troubled, there are four which in my opinion outweigh all others—war, death, famine, and debasement of money … in the States which make use of degraded money, reigns cowardice, laziness and indolence.”10 To protect the value of a currency against such depredation, he advised—in what is perhaps the first statement of what is now known as the quantity theory of money—that “money usually depreciates when it becomes too abundant.”11 The flow of precious metal into Spain and its dispersal to other countries meant that more money was chasing the supply of goods and services, which bid up their prices in what historians now refer to as the “price revolution.” (Of course, metal by itself is not money—money objects are created from metal objects by stamping them with a number. But if the international currency system is based on metal coins, that tends to set the price of the metal; and if the metal supply expands, the effect is similar to increasing the money supply, even if it is not converted into coins. In a sense, the stamp is extended to quantities of the metal by weight.)

  Money and wealth also showed a different form of dynamism, which was a distinct tendency not to stay in the same place. People have long speculated about what happened to all the treasure that flowed into Spain. A portion was lost to theft, piracy, or shipwreck, but most of it ended up leaving the country because of trade. As Voltaire noted, much of the wealth “entered the pockets of the French, English, and Dutch,” with another part going “to the East Indies to pay for spices, saltpeter, sugar, candy, tea, cloths, diamonds, and monkeys.”12 Price and wage inflation meant that Spanish goods became relatively expensive compared with foreign goods. The wealth also tended to concentrate with the state and nobility, who squandered it on gold-plating their palaces, coaches, books, and anything else they owned (as with the Aztecs, the ornamental value of gold seemed at this point to be prized more than its use as money). Spain from the mid-fifteenth century became a net debtor nation, borrowing from creditors in Italy, Holland, and Germany at interest rates as high as 18 percent. Gold shipments peaked in the mid-sixteenth century; silver, a few decades later.13 In the space of 150 years, between 1550 and 1700, the country defaulted on its debt fourteen times. One problem was that gold inflamed the country’s ambitions, leading to costly military ventures such as the failed invasion of England by the Spanish Armada in 1588. It also didn’t help that in 1492, the Spanish monarchs had expelled the Jews and Muslims, who made up much of the merchant, administrative, and intellectual classes.

  The main problem, though, was that gold boosted the money supply but had no such effect on the productive activity that underlies an economy. In a 1730 essay, the Irish-French banker and political economist Richard Cantillon described what today we would call the resource curse:

  When the excessive abundance of money from the Mines has diminished the inhabitants of a State, accustomed those who remain to a too large expenditure, raised the produce of the land and the labour of workmen to excessive prices, ruined the manufactures of the State by the use of foreign productions on the part of Landlords and mine workers, the money produced by the Mines will necessarily go abroad to pay for the imports: this will gradually impoverish the State and render it in some sort dependent on the Foreigner to whom it is obliged to send money every year as it is drawn from the Mines. The great circulation of Money, which was general at the beginning, ceases: poverty and misery follow and the labour of the Mines appears to be only to the advantage of those employed upon them and the Foreigners who profit thereby. This is approximately what has happened to Spain since the discovery of the Indies.14

  Or as Gonsalez de Cellorigo put it in 1600, “Spain is poor because she is rich.”15 (As discussed in chapter 8, local currencies are designed to keep money circulating within a specific city or region for just this reason.)

  The trade with Asia—which was again dominated by merchant bankers from Italy, Holland, and Germany—turned out to be the real source of wealth. China had ceased its innovative experiment with paper currency after bouts of hyperinflation, coupled with the discovery of new mines, made metal again popular as money.16 A booming economy, the opening of new trade routes, and a tax system based on silver all fueled growing demand. By the late sixteenth century, China was importing 90 percent of its silver (almost 50 tons a year), which was paid for by exporting enormous quantities of goods such as silk and porcelain (often called “china” in English because it usually came from there). Gold came too, but it was valued and hoarded for its beauty rather than being used as money.

  So if China was inundated with silver, why didn’t prices go up there as in Spain? The most likely reason is that output was expanding along with the money supply, so instead of more money chasing a fixed supply of goods and services, more money was chasing an increased supply of goods and services, and Copernican inflation was held at bay. But when bullion imports declined in the mid-seventeenth century, the result was a drastic economic contraction, as inflation went into reverse.17

  The Age of Mercantilism

  Gold may appeal to dictators, but it also boosts a sense of individual power and liberty. In sixteenth-century Europe, the flood of gold and silver into Europe meant that even the lower classes had access to coins. As in ancient Greece, this acted as both an individuating and a democratizing influence by allowing more people to participate in the money economy.18 Something similar was happening at the macro level, where the feudal system was being replaced by centralized and militarily powerful nation-states. These were organized economically around an emerging doctrine, today known as mercantilism, that aimed to build and maintain a nation’s military reach and power not so much by increasing economic activity as by accumulating as much “treasure” as possible.19 Underlying mercantilism was bullionism: the idea that wealth is measured by a weight of precious metal. In this sense, Spain was both a good and a bad example—it was good at getting the stuff, less good at holding onto it.

  The first economy to fully organize itself along these mercantilist/bullionist lines was England under Queen Elizabeth I. Not well endowed with gold and silver mines, it compensated through trade, exploration, and hard labor, which was supplied in part by colonial slaves. As with the Spanish conquistadors, the actual gritty work was largely privatized, in this case to companies such as the British East India Company. Founded in 1600, this was a joint-stock company that was granted a royal charter for trade monopolies, but whose shares were owned by wealthy investors rather than the government. The company eventually mutated into a quasi-military organization that virtually ruled India with its private armies for a century, even minting its own silver rupee coinage, which became the Indian standard.20 It also played a major role in the slave trade, sending African slaves to work in the colonies.

  Other countries launched their own East India Companies, the largest of which was established by the Dutch in 1602. Its shares were tradable on the Amsterdam Stock Exchange, a new institution whose invention galvanized the Dutch economy and gave the country a significant advantage over its competitors. The fact that investors could easily buy and sell shares was very attractive and made it easy for a company to raise capital. The Dutch East India Company soon dominated the spice trade and grew into the world’s first multinational corporation. Other businesses, including shipbuilding, were similarly boosted, with the result that Holland’s navy for a period ruled supreme, and the country’s coins became the dominant world currency.

  While economic thinking in the Middle Ages was dominated by monastic scholars who had taken an oath of poverty, the mercantilist era saw new economic ideas being developed by a range of p
ublic officials, journalists, and businessmen like Thomas Mun, who was a director of the East India Company. Just as the production of money was being privatized to an extent, so was the production of economic ideas. Under mercantilism, the total amount of wealth in the world was treated as fixed, so the economy was a zero-sum game: as Mun succinctly put it, “One man’s loss is another man’s gain.”21 The government should therefore use its money-fueled military power to find and control new resources, while employing trade tariffs, monopolies, and subsidies to encourage exports: “We must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in Value.” The power of private banks and foreign exchange markets acted as a check on monetary policy and government profligacy, since depreciations of the sort that had characterized the Middle Ages would be punished by a loss in international purchasing power.

  By acting as a kind of superbusiness, the state also became dependent on the business world to maintain its credibility. According to Sir James Steuart, whose tract An Inquiry into the Principles of Political Oeconomy (1767) introduced the phrase “supply and demand” into English, this relationship was “the most effective bridle ever was invented against the world of despotism.” It was less good at promoting what today we would call corporate ethics: the main trading pattern during Steuart’s lifetime was the “trading triangle,” which consisted of shipping weapons, iron, and textiles from Britain to Africa; swapping them for African slaves, who were taken to North or South America; and exchanging them in turn for gold, silver, sugar, and tobacco, which returned with the ships to Europe.

  A License to Print Money

  In the seventeenth century, European investors had access to many of the banking services that we enjoy today. They could buy and trade bills of exchange or pieces of paper that gave them a share in a company or government debt bonds. Establishments such as goldsmiths and notaries (which often functioned also as bankers) gave receipts in exchange for coins and bullion deposited with them.22 After a while, they realized that rather than let the gold sit there, they could lend most of it and charge interest on the loan. Alternatively, they could just lend receipts for the gold, in the form of notes.23 The borrower could use the note to pay someone else. That person could either redeem the note or use it to pay a third person, and so on. At some point, the note might be redeemed as cash, or it could just circulate indefinitely as a money object (in which case, the initial deposit would be left untouched). The original loan would continue to earn interest until it was repaid, in cash or in notes. Issuing notes was therefore a profitable business and meant that goldsmiths could pay interest on deposits, thus attracting more deposits. As Sir Dudley North observed, “Merchants kept their money with Goldsmiths and Scriveners [notaries or legal clerics], whose accounts show ten thousand cash, but they seldom have a thousand in specie.”24 Since 1609, the Amsterdam Exchange Bank had allowed merchants to set up accounts and transfer money, and therefore conveniently and safely carry out transactions on paper; from 1656, the Swedish Riksbank in Stockholm explicitly allowed loans that exceeded its reserves.25