The Origin of Money 9 – Bonds and the Invention of the ‘National Debt’

The Venetian government is the first we know of which became a debtor to its own citizens, or conversely, where citizens became creditors on the government. As with most innovations in finance, it was the need to raise funds for war that drove the need to raise revenue quickly.

Other city-states had to compete with Venice, and the system spread, first to Genoa, and then to other republics in Northern Italy like Florence, Milan and Sienna. These city-states were all expanding militarily, and they needed money to do it. Since they were republics, they had advantages that the absolute monarchies of Northern Europe did not have, including accountability to their citizens. The merchant classes essentially borrowed from themselves to fund the wars.

These methods of short and long term debt financing spread to Northern Europe but were done on the municipal, not state level, since states were largely still absolute monarchies who could, and did, repudiate their debts on a regular basis.

In Northern Europe tax collection was highly decentralized during the Middle Ages, and national governments relied on municipal and provincial tax receipts for revenue. Many localities in Western Europe turned to securities (annuities, lotteries, tontines, etc.) for short-term and long-term borrowing which were allowable under the Church’s ban on usury. Both France and Spain eventually incorporated these into the nation’s overall financial structure, however, these were still primarily local, not state liabilities. Both governments used debt instruments for borrowing, but these were intermediated by banks and unlike the Italian republics, borrowing costs were high because they were less reliable. The kings of France and Spain, unrestrained by effective parliaments, were serial defaulters.

The Seven United Provinces (today’s Belgium and the Netherlands), which, like the Italian City-states, were trading empires run by a wealthy merchant oligarchy, used these new methods of financing and banking to fund their rebellion against Spain as well as expand their burgeoning overseas trading empire. These securities eventually became negotiable, and markets emerged for buying, selling, and trading these debts. The United Provinces is likely the first place where these became national liabilities. The center of financial innovation shifted from Northern Italy to Holland.

From there “Dutch finance” spread across the Channel to England during the Glorious Revolution of 1688. To manage his mounting war debt, William of Orange took out a loan from the merchant bankers of England in exchange for certain prerogatives from the crown. England was the first major country to consolidate its debt, nationalize it, and monetize it, therefore setting the stage for the public/private hybrid system of money creation and banking that we use today.

Italy Invents the State Bank

It all started with the Crusades. Seaports like Venice and Genoa were launching points for the armies marching south to conquer the Holy Land. The vast amounts of money flowing into these cities during this time allowed them to remove themselves from the feudal order and become self-governing communes. The shipping expertise gained by ferrying soldiers back and forth to the Middle East allowed the Venetians and Genoese to develop the skills to become Europe’s primary merchants and traders, importing exotic goods from the Islamic world into western Europe, and becoming fabulously wealthy in the process.

It was through the Islamic trade centered around the Silk Road and the Indian ocean—the first modern “global economy”–that the Italians learned all sort of innovations that we saw last time, from paper to base-10 place notation, to algebra, to checks, to bills of exchange. These ideas would be used to usher in the “commercial revolution” of the late Middle Ages. They would also make Northern Italy the crucible for European banking and finance.

To fund their expansion, these thassalocracies needed money. Trading empires, as Paul Colinveax would remind us, require superior military technique. At this time, military empires relied mainly not on conscripts (most people in these republics were merchants and artisans), but on professional soldiers, i.e. mercenaries. As Carroll Quigley put it, “the existence of mercenary armies made money equivalent to soldiers and thus to power.” (p. 373)

For much of the fourteenth and fifteenth centuries, the medieval city-states of Tuscany – Florence, Pisa and Siena – were at war with each other or with other Italian towns. This was war wages as much by money as by men. Rather than require their own citizens to do the dirty work of fighting, each city hired military contractors (condottieri) who raised armies to annex land and loot treasure from its rivals. [2]

The main way states raised money during this period, as we saw last time, were taxes and seignorage. Taxes were levied almost exclusively on commercial activity for most of history (since most other activity took place outside of the commercial/money economy). This was unlikely to be as effective in an entrepot dependent upon shipping and trade. Feudal rents and dues were levied by kings, but were less available to city-states outside of the feudal system. Siegnorage was a major way of raising revenue as we saw last time, but for a merchant-based society, devaluing the currency was less likely to be helpful or popular.

The solution arrived at was to borrow money from the city’s wealthy merchant and banking classes.

During the thirteenth and fourteenth centuries major cities such as Florence, Genoa, Milan, and Venice were able to extend their territorial control; those of Venice and Genoa attained the importance of maritime empires.

The formation of a territorial state came at enormous costs. How did urban governments raise the money needed to cover such expenses? Since increasing or raising new taxes required time and, above all, public acceptance, the easiest way was to borrow from the wealthiest citizens.[3]

Despite the ban on usury, no medieval European government – municipal, territorial, or national – was able to function without borrowing, given that its powers to tax and exact rents were limited, while it was often engaged in costly wars. But such loans were usually for short terms, often at punitive rates of interest.

During the twelfth century, the Italian progenitors of the ongoing Commercial Revolution developed what became a system of municipally funded debts, debts that subsequently became permanent. Genoa took the lead, in 1149, when it agreed to give a consortium of the city’s lenders control over a compera, a consolidated fund of tax revenues to be used in paying the city’s creditors.

Venice followed suit in 1164, by securing a loan of 1,150 silver marci against the tax revenues from the Rialto market for twelve years. In 1187, in return for a loan of 16,000 Venetian lire, to finance the doge’s siege of Zara, creditors were given control over the salt tax and certain house rents for thirteen years; thereafter, the Salt Office was made responsible for all such loan payments…by 1207, the Venetians had adopted what had already become the hallmark of public finance in the Italian republics: a system of forced loans, known locally as prestiti, whose interest charges were financed by additional taxes on salt, the Rialto market, and the weigh-house.

Between 1262 and 1264, the Venetian Senate consolidated all of the state’s outstanding debts into one fund later called the Monte Vecchio – mountain of debt – and decreed that debt-holders should receive annual interest at 5 per cent, which the Ufficiale degli Prestiti was required to pay twice yearly from eight specified excise taxes. These prestiti debt claims (with interest payments) were assignable through the offices of the procurator of San Marco and, by 1320 at the latest, a secondary market for them had developed. [4]

A loophole in the medieval prohibition on usury allowed this to take place. Although we regard usury and interest as one in the same, in fact medieval law made a distinction between the two:

Usury is sometimes equated with the charging of interest, but by the thirteenth century it was recognised that the two ideas were different.

Usury derives from the Latin usura, meaning ‘use’, and referred to the charging of a fee for the use of money. Interest comes from the Latin intereo, meaning ‘to be lost’, and originated, in the Roman legal codes as the compensation someone was paid if they suffered a loss as a result of a contract being broken. So a lender could charge interest to compensate for a loss, but they could not make a gain by lending.

It is easier to understand this with a simple example. A farmer lends a cow to their cousin for a year. In the normal course of events, the cow would give birth to a calf and the cousin would gain the benefit of the cow’s milk. At the end of the loan, the farmer could expect the cow and the calf to be returned. The interest rate is 100%, but it is an interest since the farmer, if they had not lent the cow to their cousin, would have expected to end the year with a cow and a calf. Similarly, if the farmer lent out grain, they could expect to get the loan plus a premium on the basis that their cousin planted the grain, he would reap a harvest far greater than the sum lent. [5]

These concepts gave birth to the idea of the medieval census:

A census originated in the feudal societies as an “obligation to pay an annual return from fruitful property”. What this means is that the buyer of the census would pay a landowner, for example, for the future production from the land, such as wheat or wine, over a period of time.

As economic life in western Europe became based on money transactions rather than barter transactions, censii lost the link to specific produce, cartloads of wheat or barrels of wine. The buyer of the census would accept regular cash payment instead of the actual produce, and this was legitimate in the eyes of the canon lawyers as long as the lump-sum paid buy [sic] the buyer ‘equated’ with the value of the ‘fruitful property’ being produced by the seller.

Anyone who could became involved in censii. A labourer might sell a census based on the future revenue from their labour, states sold them based on the future revenue from taxes and monopolies, and the Church invested bequests by buying censii. Censii issued by governments, usually linked to specific tax revenues, became known as rentes. Censii could be ‘temporary’, lasting a few years, or ‘permanent’, until one of the parties died.

In today’s terms, temporary censii resemble modern mortgages, permanent censii resemble the ‘annuities’ pensioners live off today. They could be ‘redeemable’, by one or both parties, meaning that the contract could be cancelled. [6]

The Venetian government required a “forced loan” from their wealthiest citizens in line with their income (i.e. it was progressive) to fund the war effort. Since the loans were forced loans, interest was compensation for the lost money, which was allowable under the Church’s anti-usury doctrine. The government paid an “interest” of 5 percent per year in biannual installments of 2.5 percent to compensate for the lost money. To do this, the government allocated dedicated revenue streams from commercial taxes to pay the interest.

Prestiti were a development from the rentes created by states. Around the twelfth century the Italian city-states of Venice, Genoa and Florence began to forcefully sell temporary rentes to their rich citizens. By the mid-thirteenth century the different issues of rentes were consolidated into a mons (mountain) and everyone who had been made to buy a rente was given a share, proportionate to their contribution, in the mons. [7]

The loans were basically irredeemable—there was no pledge by the government to pay back the principal in a fixed amount of time. These were not bearer bonds; rather, the names of the creditors were recorded in government ledgers at the loan office (Camera degli imprestiti). They were assignable in that the revenue stream could be transferred to a third party with the consent of the owner, but they were not negotiable, however, at least at first. You could not simply sell your bonds on the open market without the knowledge of the original debtor (the government), i.e. they were not easily transferable. Nor were they legal tender which could be used in lieu of cash.

Venice created its mons, the monte vecchio, in 1262 and the shares, known as prestiti, entitled the holder to be paid 5%, a year, of the sum they lent, which was written on the prestiti and known as the ‘face value’. While there was no obligation for the states to pay the coupon, the annual payment, there was an expectation that they would if it could be afforded and the mountain itself was paid back as and when funds allowed. [8]

Eventually, as borrowing costs grew to encompass more and more of state revenue, dedicated agencies were established in order to manage the consolidated debt these states owed to their citizens and others:

During the last quarter of the thirteenth century the demand for loans on Venetian citizens grew: they had to deposit a part of their assessed wealth into state coffers, the sums were registered on public books, and tax revenues were devoted to paying interest. By 1274 Genoa adopted a similar measure, and some loans were consolidated and managed by a single state agency.

The republics of Venice and Genoa were thus the first to transform their floating debt into a consolidated debt; later, some Tuscan communities would follow suit.
The main features of such a system were extraordinary financing through irredeemable forced loans; moderate interest rates; credits that were heritable, negotiable and usable payment; an amount consolidated and managed by a specific authority; and specific tax revenues designated for paying interest. [9]

The Genoese set up a dedicated private bank to manage the public debt around 1400 called the Casa di San Giorgio. Today it is recognized by financial historians as the first modern state bank, and in time, it became more powerful than the state itself! Many European monarchs regularly used it for borrowing, and it even funded some of the first expeditions to the New World (Christopher Columbus’ childhood home was nearby):

On March 2 1408, eight men gathered in the great hall of the Casa di San Giorgio, a trading house on what was then the main street in Genoa, a few metres from where the waters of the Ligurian Sea lap the Italian shore. They were merchants, rich and powerful representatives of the city’s most influential families, and they were meeting to discuss a matter of the utmost gravity. The once-glorious republic of Genoa had fallen on hard times. After years of war with Venice and a crushing defeat at the battle of Chioggia in 1381, the state was effectively bankrupt. The task was to rescue it.

A few months earlier, towards the end of 1407, Genoa’s Council of Ancients had authorised the Casa di San Giorgio to carry out this job. It would be accomplished by creating a bank that would facilitate the repayment of Genoa’s debts in return for interest at 7 per cent and the right to collect taxes and customs owed to the city. The purpose of the meeting that spring day was to declare the Banco di San Giorgio open for business.

..The Banco di San Giorgio would, in time, become as powerful as the republic that created it – more powerful, according to Niccolò Machiavelli. It would survive for nearly 400 years. It would become the world’s first modern, public bank, not just a forerunner of the Bank of England but its prototype…in a short space of time, it became so entwined with the republic of Genoa that the bank and the state were indistinguishable.

Machiavelli described the relationship as “a state within a state”. The Banco di San Giorgio grew so influential that it replaced the Fuggers, the German banking dynasty, as the source of financing for Europe’s cash-starved, perpetually warring monarchs. A century and a half after it was created it had restored Genoese power and influence as a maritime and commercial state to such an extent that the period from 1557 to 1627 was termed the Age of Genoa by Fernand Braudel, the great French historian…Christopher Columbus, Genoa’s most illustrious son, would be a customer…[10]

The management of state finances became increasingly concentrated in the hands of a professional bureaucracy which was separate from direct control by the state. The republics made very sure that the money was paid back reliably. This made loaning to them much more reliable than loaning to monarchs, and they were able to raise more revenue for their operations:

One reason that this system worked so well was that they and a few other wealthy families also controlled the city’s government and hence its finances. This oligarchical power structure gave the bond market a firm political foundation. Unlike an unaccountable hereditary monarch, who might arbitrarily renege on his promises to pay his creditors, the people who issued the bonds in Florence were in large measure the same people who bought them. Not surprisingly, they therefore had a strong interest in seeing that their interest was paid. [11]

Because of their dependability, these government-backed IOUs soon became highly desirable places for rich merchants and nobles to store their wealth, much as they are today, secured by the government’s promises to pay. The guaranteed returns provided a reliable income stream for those able to purchase the bonds. The merchant classes and various institutions bought up the bonds and used them as collateral, endowments for charities, even gifts and dowries, and passed them down to their assignments and heirs.

Over time, as issuing bonds became more common, more and more people became dependent on bonds for their income. Much like today, many of the holders of bonds were not just individuals but institutions and endowments who relied on the bonds as a source of income. This parallels today, where holders of bonds are often institutional holders like retirement accounts and insurance companies:

Throughout the sixteenth and seventeenth centuries it seems that most of the bonds were in the hands of guilds and ecclesiastical and charitable institutions that looked to state debt to assure a sound, even if relatively low, return. The economic importance of the redistribution of money through the government debt can not be neglected…Both in Florence and Genoa, government creditors drew a significant share (about one-fifth) of their income from bonds. Accordingly, a flow of money spread through the city and revived the local economy. [12]

Initially, only citizens of the Republic could buy bonds, but over time, bonds were issued to outside sources. Nonetheless, it appears that the debt in Italian city-states was held mainly by its own citizens, and not by foreign creditors. Buying bonds was seen as a sort of civic duty for the city’s wealthy individuals:

To loan to the commune was regarded as a duty, part of belonging to the urban community. Loans were connected, to a certain extent, with the concept of charity and gifts to the res publica.

Some governments, such as Florence, at first forbade foreigners to held state bonds, while it seems that in Venice since the thirteenth century foreigners were allowed to buy government credits. Some devices, nevertheless, were adopted in order to bypass such prohibitions; the easiest solution was to grant citizenship to those who were willing to buy government bonds…At any rate, the foreign presence among bondholders seems to have been a limited phenomenon: by the early fifteenth century about one tenth of the Florentine debt was held by foreigners; in 1629, 92 percent of the principal of S. Giorgio belonged to Genoese citizens and institutions…Unlike some Italian princely states, such as Milan and the papal state, and German cities, the urban governments of Venice, Florence and Genoa succeeded in raising enormous amounts of money from their citizens and very seldom borrowed from foreigners…[13]

Today, governments sell bonds directly to the public in what is called a primary market. From there, they are traded by investors in secondary markets. At this time, there was no primary market for bonds—only a select few insiders could loan to governments. But soon a thriving secondary market emerged where such debts were bought and sold. The prices of bonds varied, depending on the reliability of the debtor (the state). Because interest was paid on the face value of the bond, if you could buy a bond on the cheap, you would be assured a nice payout. This was effectively an end-run around the Church’s ban on usury:

Quickly a market for Prestiti emerged, where holders who needed ready cash would trade them with people who had a surplus of cash and wanted to save. During times of peace and prosperity they had a high price, but during war and uncertainty, they traded at a low price.

For example, Venetian prestiti traded for their face value around 1340 when the Republic paid off a lot of the mons, but in 1465, during a disastrous war with the Ottoman Turks, they fell to 22% of face. The Florentine prestiti actually had a built in facility where a holder could go to the state and sell them for 28% of their face value, however their market price was never so low as to make this profitable.

The legitimacy of the prestati was debated by the canon lawyers. On the one hand the coupons, the regular cash payments can be seen as compensation for the forced nature of the original loan. The lender had no choice and so does suffer a loss. However, if a prestiti with a face of 100 ducats was sold for 22 ducats, the buyer would be receiving interest at a rate of 5∕22 = 23%; in what way had this buyer of the prestiti been forced to enter into the contract? An interest payment of 23% in these circumstances seemed to be “asking for more than what was given”.

Prestiti are important in that are one of the earliest representations of an actively traded financial instrument. The prestiti does not represent bushels of wheat or barrels of oil, it is a contract where by a state promises to pay a specified amount of money. Whether or not the state does pay out on the contract, is unknown and uncertain, hence the value of the contract is also unknown and uncertain. [14]

In the end, the ability to have people voluntarily lend to the government provided advantages that were simply too great to ignore. Such governments were able to raise large amounts of cash quickly; they were able to raise money from a much wider circle than just the immediate tax base; and they were able to overcome limitations in the amount of specie circulating. This made state borrowing very effective and the places that engaged in it very powerful. In addition, bonds provided reliable places for wealthy citizens to store wealth outside of banks, and the interest payments helped local economies flourish. Money was becoming an important source of military power, too. Luciano Pezzolo summarizes the advantages of bond issuance by Italian city-states:

First, the enormous concentration of capital in some Italian cities allowed governments to transform, through public credit, private wealth into military power, to build a territorial state, and to control a wider economic area…Italian governments collected money from taxpayers at 5 to 7 percent, whereas the major European monarchies of the Renaissance were compelled to borrow at a much higher price.

Second, the debts took on a political function. To be creditors in the government meant sharing the destiny of the regime, and consequently supporting it. In Florence, the Medicean regime tied itself to an oligarchy that profited from the management of government debt. Thus, debt helped create stability.

Third, the social structure was supported by state debt: the considerable bond income drawn by charitable and social institutions and redistributed it the poor maintained a paternalistic policy that was a pillar of the urban political and social system.

Fourth, both government bonds and interest provided an effective surrogate of cash money in the later Middle Ages during a period of bullion shortage. The trade of bonds and interest claims opened up sophisticated forms of speculation and implemented financial techniques that are quite familiar to modern brokers.

Finally, the means devised by governments to finance the deficit offered new forms of social security and investment (dowries, life annuities, lotteries) that are at the roots of [the] later financial system. [15]

In this, we can discern something like David Graeber’s military-coinage-slavery complex emerging around the bond markets:

1.) Governments would raise money for military operations by dedicating future expected revenue streams to loan repayments, effectively becoming debtors to their citizens. That is, they could borrow against future revenues.

2.) The proceeds from the territorial/commercial expansion would be used to pay interest on the loans.

3.) The interest money would then flow back into the domestic economy, causing economic expansion at home, as more people became dependent on the government debt as a store of value and a source of income.

4.) Economic expansion abroad and at home would allow governments to deliver better services to its citizens, ensuring broad popular support.

5.) The dependency on regular payouts by lenders would encourage them to support the political stability of the regime.

6.) City-states which avoided default were able to gain a fundraising advantage over their rivals. Hence, there was a strong incentive to make reliable payments and not to default.

Thus, the concept of the “national debt” was born. This gave rise to a brand new “money interest” whose wealth was held in government debt rather than coin.

Debt Financing Spreads to Northern Europe

Now contrast this with Northern Europe. Most nation-states were still under the feudal system. It would have made no sense for a ruler to borrow from himself, since they theoretically “owned” everything in the kingdom. Instead of borrowing from their citizens, therefore, these kingdoms continued to rely upon other sources of income.

Under the feudal system tax collection was highly decentralized and done mainly at the local level. Wealthy kingdoms, such as France, used tax farming (publican) methods very similar to those of ancient Rome:

Fiscal revenues consisted of a mixture of direct (income or wealth) taxes, indirect (consumption) taxes, and feudal dues arising from the royal demesne. The assessment and collection of these revenues was decentralized. For direct taxes, a global amount was set by the government, and then broken down into assessments for each province, where local authorities would proceed with the next level of assessment, and so on to the local level.

For indirect taxes, collection was carried out by tax farmers on behalf of the government. The procedure was much like the one in place since Medieval times for running the royal mints. The right to collect a given tax was auctioned to the highest bidder. The bidder offered a fixed annual payment to the king for the duration of the lease. Meanwhile, he took upon himself to collect the tax, hiring all the necessary employees. Any shortfall in revenues from the promised sum was made up by the entrepreneur; conversely, any revenue collected above and beyond the price of the lease was retained as profit by the entrepreneur…

Spending is decentralized as well to various treasurers. Each tax had an associated bureaucracy of collectors and treasurers, either government employees or officers (direct taxes) or employees of the tax farmer. The treasurers spent some of the monies they collected, upon presentation of payment orders emanating from the government, and turned over the remainder, if any, to the royal treasury in Paris. [16]

Although it’s anathema under modern economic dogma, government monopolies on various business activities were considered a legitimate way to raise revenue.

Government monopolies, such as salt and recently introduced tobacco, were also farmed out in the same fashion. Indeed, the ability to create monopolies was one of the king’s resources; one of the more outlandish examples being the exclusive right to sell snow and ice in the district of Paris, sold for 10,000L per year in 1701. [17]

Another method was through the sale of political offices. Governments would create offices and sell them at a profit, and the salary paid was essentially interest on the lump sum payment for the original position:

An officer was someone who held a government position not on commission or at the king’s leave, but as of right, and enjoyed various privileges attached to the position (in particular the collection of fees related to his activities). Offices were sold, and the king paid interest on the original sale price, which was called the wages of the office (gages). A wage increase was really a forced loan, requiring the officer to put up the additional capital. Officers could not be removed except for misconduct; however, the office itself could be abolished, as long as the king repaid the original sum. Thus, offices as a form of debt also carried the same repayment option as annuities. [18]

And, as in Italy, the census evolved into annuities which were sold by municipalities as a way of long-term borrowing.

Offices and annuities (which I will generically call bonds, and whose owners I will call bondholders) could be transferred or sold, but with fairly high transaction costs. Both were considered forms of real estate, and could be mortgaged. In the late 17th century the French government, like others in Europe, had begun experimenting with life annuities, tontines, and lottery loans, but on a limited basis, and had not yet issued bearer bonds. Even the short-term debt described above was registered in the sense that the payee’s name was on the instrument, and could be transferred only by endorsement.

A final form of borrowing combined tax creation and lending. The procedure consisted in creating a new tax for some limited time and immediately farming its collection in exchange for a single, lump-sum payment representing the tax’s net present value. [20]

Besides, absolute monarchs could always repudiate their debts, and there was not much recourse for creditors since monarchs had their own armies and made the laws. The kings who did take out loans for military campaigns ended up paying very high interest rates for this reason.

By the early sixteenth century, the Habsburg Emperor, French kings, and princes in the Low Countries had all affirmed their powers to regulate municipal public finances, especially rentes, and the municipal taxes that were used to pay annual rent charges. But this method of financing governments still remained municipal, because only municipalities sold rentes, so that the national institutions required for a funded, permanent public debt had yet to be created…the first national monarchy to establish a permanent, funded national debt based on rentes, by the early sixteenth century, was … the newly unified Habsburg kingdom of Spain.

Both the French and Spanish crowns sought to raise money … but they had to use towns as intermediaries. In the French case, funds were raised on behalf of the monarch by the Paris hôtel de ville-, in the Spanish case, royal juros had to be marketed through Genoa’s Casa di San Giorgio (a private syndicate that purchased the right to collect the city’s taxes) and Antwerp’s heurs, a forerunner of the modern stock market. Yet investors in royal debt had to be wary. Whereas towns, with their oligarchical forms of rule and locally held debts, had incentives not to default, the same was not true of absolute rulers. [21]

Despite this ability to borrow, by the 1500-1600’s France and Spain had become serial defaulters.

…the Spanish crown became a serial defaulter in the late sixteenth and seventeenth centuries, wholly or partially suspending payments to creditors in 1557 , 1560, 1575 , 1596, 1607, 1627 , 1647, 1652 and 1662. [22]

The Netherlands, by contrast, used these financial techniques to fund their war of independence from Spain and in the process became the financial center of northern Europe.

Part of the reason for Spain’s financial difficulties was the extreme costliness of trying and failing to bring to heel the rebellious provinces of the northern Netherlands, whose revolt against Spanish rule was a watershed in financial as well as political history. With their republican institutions, the United Provinces combined the advantages of the city state with the scale of a nation-state. They were able to finance their wars by developing Amsterdam as the market for a whole range of new securities: not only life and perpetual annuities, but also lottery loans (whereby investors bought a small probability of a large return). By 1650 there were more than 6 5,000 Dutch rentiers, men who had invested their capital in one or other of these debt instruments and thereby helped finance the long Dutch struggle to preserve their independence. [23]

The center of European trade moved from the Mediterranean to the North Atlantic starting in the mid-1400’s with the advent of pelagic shipping vessels and the discovery of new routes to Asia by circumnavigating Africa. Portugal and Spain took the lead here. Spain’s “discovery” of the American continent ensured that trade would now be centered on the Atlantic coast, and the Islamic trade in the Mediterranean withered and became less significant, especially after the fall of Constantinople to the Turks in 1453. Eventually, European maritime trade became centered in Antwerp. When the Spanish conquered the southern Netherlands, what we now call Belgium, in 1585, they took Antwerp, which was the main port for Northern Europe. Many of the more highly skilled merchants fled to Amsterdam, which would then become ground zero for the financial revolution.

The reason for the primacy of the Dutch Republic in trading and finance might simply boil down to geography. Holland and the Netherlands are below sea level, which is why they are called the Low Countries. The land had forcibly been reclaimed from the sea by dykes over the centuries. This made the Dutch dependent upon fishing, shipping and trading far more than just about anywhere else, since the water table was too high for farming and there was not much arable land. Yet at the same time the population density of these areas was quite high. So their entire economy had to be dependent almost exclusively on shipping and trade since there were no other options, unlike in France, Spain, Portugal and England.

The Dutch utilized much of the same methods of borrowing as the rest of Europe, but much more effectively:

The Netherlands successfully liberated itself from Spain between 1568 and 1648. The Dutch established the Dutch east India Company in 1602 and the Dutch West India Company in 1621. The Netherlands didn’t have to pay for an expensive court, fought their wars at home rather than abroad, profited from international trade, and saved money. The Amsterdam Exchange dealt not only in shares of the Dutch East India Company and Dutch West India Company, but in government bonds as well.

Most securities were in the form of Annuities issued by the individual provinces, the United Provinces and the towns. This is the essential way in which Dutch lending differed from Italian lending. The Italian credit system relied upon a system of private international banking. The Medicis and other commercial bankers would lend their funds to states, knowing the risks involved. The Italians also had officially chartered banks that intermediated deposits and loans.

Outside of the Italian city-states, loans to heads of state were basically personal loans that clearly ran the risk of default. Spanish, French and English kings borrowed when they had to, defaulted when they couldn’t pay, but had no system of drawing upon the savings of the public. The Dutch, on the other hand, developed state finance based upon the government’s ability to pledge its revenues against the annuities they had issued. Having no royal court, and relying upon local governments, the Dutch paid off loans on time with little risk of default. As risk declined, interest rates fell to 4%, the lowest they had ever been in history, and a rate consistent with the low level of default risk that governments enjoy today. [24]

The Dutch also set up a bourse where national debts could be traded as negotiable securities. They set up a state bank to manage trade. They also developed the modern corporation, where corporate shares were freely tradable, hence establishing the first stock market (the Amsterdam exchange).

The Dutch Republic became the main place where international debts could be bought and sold in secondary markets. While it was neither the first bank or exchange, what made it unique was the fact that this was consolidated in one specific location, with government backing, as well as the scale of operations. Securities from all over became speculative commodities. This was the beginning of trading debts and money that engendered speculative bubbles like Tulip mania. In fact, you could even gamble with assets that you didn’t actually own, setting up the stage for the modern Casino Capitalism.

The novelty at the beginning of the seventeenth century was the introduction of a stock market in Amsterdam. Government stocks and the prestigious shares in the Dutch East India Company had become the objects of speculation in a totally modern fashion. It is not quite accurate to call this the first stock market, as people often do. State loan stocks had been negotiable at a very early date in Venice, in Florence before 1328, and in Genoa, where there was an active markets in the luoghi and paghe of the Casa di San Giorgio, not to mention the Kuxen shares in the German mines which were quoted as early as the fifteenth century at the Leipzig fairs, the Spanish juros, the French rentes sur l’Hotel de Ville (municipal stocks) (I522) or the stock market in the Hanseatic towns from the fifteenth century. The statutes of Verona in 1318 confirm the existence of the settlement or forward market (mercato a termine). In 1428, the jurist, Bartolomeo de Bosco protested against the sale of forward loca in Genoa. All this evidence points to the Mediterranean as the cradle of the stock market.

But what was new in Amsterdam was the volume, the fluidity of the market and the publicity it received, and the speculative freedom of transactions. Frenetic gambling went on here – gaming for gaming’s sake: we should not forget that in about 1634, the tulip mania sweeping through Holland meant that a bulb ‘of no intrinsic value’ might be exchanged for ‘a new carriage, two grey horses and a complete harness’! Betting on shares however, in expert hands, could bring in a comfortable income… Exchanges and growing rich while the merchants said they Were becoming poorer. In every centre, Marseilles or London, paris or Lisbon, Nantes or Amsterdam, brokers, who were little hampered by the regulations, took many liberties with them.

But is is also true that speculation on the Amsterdam Stock Exchange had reached a degree of sophistication and abstraction which made it for many years a very special trading-centre of Europe, a place where people were not content simply to buy and sell shares, speculating on their possible rise or fall, but where one could by means of various ingenious combinations speculate without having any money or shares at all. This was where the brokers came into their own… All the same, such practices had not yet attained the scale they were to reach during the following century, from the time of the Seven Years War, with the increased speculation in shares in the British East India Company, the Bank of England and the South Sea, above all in English government loans…Share prices were not oficially published until 1747 however, whereas the Amsterdam Exchange had been billing commodity prices since 1585.

Several other changes took place as well. To resolve the multiple currencies circulating, state banks became established by governments, and monetary exchange ever more centered around bank credits rather than government-issued monies. You would deposit your coins in the bank and be given a credit for it, which would hold its value, protected from the arbitrary currency fluctuations decreed by sovereigns. Credit creation led to fractional reserve banking. Joint-stock companies were applied to banking, and even made loans to governments.

The seventeenth century saw the foundation of three distinctly novel institutions that, in their different ways, were intended to serve a public as well as a private financial function.

The Amsterdam Exchange Bank (Wisselbank) was set up in 1609 to resolve the practical problems created for merchants by the circulation of multiple currencies in the United Provinces, where there were no fewer than fourteen different mints and copious quantities of foreign coins. By allowing merchants to set up accounts denominated in a standardized currency, the Exchange Bank pioneered the system of cheques and direct debits or transfers that we take for granted today. This allowed more and more commercial transactions to take place without the need for the sums involved to materialize in actual coins. One merchant could make a payment to another simply by arranging for his account at the bank to be debited and the counterparty’s account to be credited.

The limitation on this system was simply that the Exchange Bank maintained something close to a 100 per cent ratio between its deposits and its reserves of precious metal and coin…A run on the bank was therefore a virtual impossibility, since it had enough cash on hand to satisfy nearly all of its depositors if, for some reason, they all wanted to liquidate their deposits at once. This made the bank secure, no doubt, but it prevented it performing what would now be seen as the defining characteristic of a bank, credit creation.

It was in Stockholm nearly half a century later, with the foundation of the Swedish Riksbank in 1656, that this barrier was broken through. Although it performed the same functions as the Dutch Wisselbank, the Riksbank was also designed to be a Lanebank, meaning that it engaged in lending as well as facilitating commercial payments. By lending amounts in excess of its metallic reserve, it may be said to have pioneered the practice of what would later be known as fractional reserve banking, exploiting the fact that money left on deposit could profitably be lent out to borrowers…

The third great innovation of the seventeenth century occurred in London with the creation of the Bank of England in 1694. Designed primarily to assist the government with war finance (by converting a portion of the government’s debt into shares in the bank), the Bank was endowed with distinctive privileges. From 1709 it was the only bank allowed to operate on a joint-stock basis; and from 1742 it established a partial monopoly on the issue of banknotes, a distinctive form of promissory note that did not bear interest, designed to facilitate payments without the need for both parties in a transaction to have current accounts. [25]

This last innovation – the use of private corporations such as banks to consolidate and manage the government’s debt, is at the heart of the modern financial system. The money we use is the government’s liability, backed by its ability to collect taxes. Yet now private banks would continue to be allowed to create credit by extending loans denominated in the same unit of account that the government required to pay the taxes, the ultimate form of financial settlement.

We’ll take a look at how that happened next time.


[1] Not used.
[2] Niall Ferguson; The Ascent of Money, p. 69
[3] William N. Goetzmann and K. Geert Rouwenhorst, eds.: The Origins of Value: The Financial Innovations that Created Modern Capital Markets, p. 147
[4] John H. Munro: The medieval origins of the ’Financial Revolution’: usury, rentes, and negotiablity. p. 514
[6] ibid.
[7] ibid.
[8] ibid.
[9] ibid.
[11] Niall Ferguson; The Ascent of Money, p. 72
[12] William N. Goetzmann and K. Geert Rouwenhorst, eds.: The Origins of Value: The Financial Innovations that Created Modern Capital Markets, p. 147
[13] ibid., p. 158
[15] William N. Goetzmann and K. Geert Rouwenhorst, eds.: The Origins of Value: The Financial Innovations that Created Modern Capital Markets, p. 163
[16] John H. Munro: The medieval origins of the ’Financial Revolution’: usury, rentes, and negotiablity. p. 514
[17] ibid.
[18] ibid.
[19] Niall Ferguson; The Ascent of Money, pp. 73-74
[20] John H. Munro: The medieval origins of the ’Financial Revolution’: usury, rentes, and negotiablity. p. 514
[21] John H. Munro: The medieval origins of the ’Financial Revolution’: usury, rentes, and negotiablity. p. 73-74
[22] Niall Ferguson; The Ascent of Money, p. 74
[23] Niall Ferguson; The Ascent of Money, pp. 74-75
[24a] Fernand Braudel: Civilization and Capitalism Volume 2: The Wheels of Commerce, pp 100-102
[25] Niall Ferguson; The Ascent of Money, p.Pp. 48-49

The Origin of Money 8 – Bills of Exchange and Banking

We saw last time that seignorage was used by medieval sovereigns to raise revenue. But this led to all sorts of problems because the values of the coinage were constantly being adjusted against the monetary standard. Even where there was a consistent monetary standard, there was no “official” currency equivalent to that standard, so a multitude of different coins circulated, with a multitude of shifting values. We also saw that when bullion and exchange values got too far out of whack, this led to chronic shortages of coins. This made trade difficult.

To overcome both the shortage of circulating money, and the constant variations in the value of the coins issued by states, what the merchant classes did was create a private, parallel currency system based around trade credit. This was done using bills of exchange, which were discounted by a clique of pan-European bankers centered mainly in Italy.

The net effect of this was the creation of a parallel money system based around debits and credits recorded by bankers in their ledgers using double-entry bookkeeping, without any coins changing hands. These credits would circulate as paper documents and be periodically settled at trade fairs. The bills could be converted into the local currencies at varying exchange rates. The volume of trade in late medieval Europe was far to great for the circulating coins to be adequate. Bills of exchange allowed trade to take place without using government-issued coins, which were clunky and cumbersome, not to mention uncertain.

The modern bill of exchange originated in Islamic trade and most certainly entered Europe through the Italian maritime city states during the thirteenth century.

In basic terms, exchange by bill required two networks – one of traders and one of bankers. A trader would draw a bill on a local banker, which he would then use as a means of payment for the specific goods imported from outside the local economy. The exporter of the goods would then present the bill for payment to his local representative of the banking network.

In their simplest form, the bills directly represented the value of the goods in transit. Their adoption facilitated long-distance trade, but there is nothing in these economic advantages themselves that would suggest that the bills would develop into credit money. Indeed, this is precisely what did not happen in Islam.

Exchange by bill per arte was the means by which the ‘nations’ of bankers enriched themselves by exploiting the unique opportunities afforded by the particular structure of the late mediaeval geopolitical and monetary systems. In doing so they expanded the early capitalist trading system. The bill of exchange system allowed an increase in trade without any increase in the volume or velocity of coins in the different countries; but this was an unintended systemic consequence of the exchange bankers’ entirely self-interested exploitation of the particular circumstances…Exchange by bill was also one of the practices that eventually led to issue of credit money by states…[1]

Bilateral exchange agreements had existed since Classical times, but until the advent of written contracts, they could not be disconnected from their original context and used as a means of third-party settlement.

Bills of exchange were documented in a “pure” unit of account, and thus were disconnected from precious metals and coins. That meant they could be issued without the limitations of gold and silver.

But until they could be used in the settlement of third-party debts outside of the limited network of exchange bankers, they could not function as a true currency. During the sixteenth century, some bills began to “leak” out of the banking system and be used in the settlement of other debts. Eventually a rule change allowed for the transferability of liabilities of the bill of exchange, making drawing a bill a more widely used means of payment after 1600.

But before any of this could happen, however, two relatively mundane and overlooked innovations had to be established. These were paper, and double-entry bookkeeping.

Paper and Double-Entry Bookkeeping

Before paper, people in medieval Europe wrote on parchment, which was made from the skins of animals. Parchment was expensive—a single bible required the skins of 250 sheep. However, most people didn’t couldn’t read (because they were farmers and didn’t need to), so there wasn’t much call for books. The main book was the Bible, meticulously handcopied by monks in monasteries, so the limited supply of writing media was no big deal.

Paper, like so many medieval innovations, was invented in China and came to Europe through the Arab world. It could be produced much more cheaply, and as a commercial class arose, the need for paper became more acute, leading to mass production:

The oldest known piece of paper was made in Shangsi Province in China around 49 BC. That’s about the same time sheepskin was replacing papyrus in the Roman world. So what is paper, really?

You make paper by spreading out a slurry of organic fibers and draining off the water. Paper is a kind of felt made of overlapping fibers. At first the Chinese made paper from hemp. They used it for wrapping and decoration — not for writing. They’d already been wrapping themselves in felt clothing.

In AD 105, one Ts’ai Lun used paper to replace bamboo blocks as a writing surface. He made it from fibers of bark, bamboo, and hemp. By AD 500, the Chinese had experimented with rattan and mulberry and had finally settled on bamboo paper…

Pergamon, in western Turkey, had become a parchment-based intellectual center, and parchment would become Europe’s writing material. But, in the 8th century, intellectual ascendancy passed to Baghdad, and it came to rest on the new writing medium of paper.

Historian Jonathan Bloom drives home the importance of that fact. Before we had cheap and abundant paper, arithmetic involved erasing and shifting numbers — operations that could be done on slate, but not paper. In AD 952, Arab mathematician al-Uqlidisi used Indian algorithms to create neat once-through methods that could be done on paper. Paper drove the creation of our methods for doing multiplication and long division.

The use of paper slowly crept westward. Cairo was making paper by the 10th century, Tunisia and Islamic Spain by the 11th. Paper didn’t cross the Pyrenees into Europe. Rather, it entered by way of Islamic Sicily. It was being made in Italy by 1268.

Both Hebrew and Islamic scripture had first been put on parchment. Both religions were reluctant to put scripture on anything so modest as paper, despite its strength and durability. The flow of paper into Europe was also slowed by Christians, who called it an infidel technology. Central Europe didn’t take up paper until the 14th century, and England only at the end of the 15th.

No. 894: INVENTING PRINTING (Engines of Our Ingenuity)

No. 1456: PAPER IN SAMARKAND (Engines of Our Ingenuity)

The mass production of paper may have spurred the development of mechanization of production in Europe:

When Christian Europeans finally did embrace paper, they created arguably the continent’s first heavy industry. Initially they made paper from pulped cotton. This requires some kind of chemical to break down the raw material. The ammonia from urine works well, so for centuries the paper mills of Europe stank as soiled garments were pulverized in a bath of human piss. The pulping also needs a tremendous amount of mechanical energy. One of the early sites of paper manufacture, Fabriano in Italy, used fast-flowing mountain streams to power massive drop hammers. Once finally macerated, the cellulose from the cotton breaks free and floats in a kind of thick soup. The soup is then thinly poured and allowed to dry where the cellulose reforms as a strong, flexible mat.

50 Things that made the modern economy – Paper (BBC)

One of the very first things the Europeans did on this new, cheap material was carry out mathematical operations with the new Hindu/Arabic number system which was being imported the Arab world. This was popularized by one Leonardo Bonacci of Pisa, better known as Fibonacci:

Leonardo’s father, Guglielmo Bonacci, was a merchant looking after the Pisan interests in the Algerian port of Bejaia. While we might not imagine that medieval finance was very sophisticated, we would be wrong. The historian Alfred Crosby describes a series of transactions undertaken by an Italian merchant, Datini, which, although they took place two hundred years later, would have been similar to the types of transactions Guglielmo Bonacci would have been involved in…Datini would have engaged in forward contracts, loan agreements and transactions in at least five currencies (Arogonese, Pisan, Florentine, Venetian, North African). To make a profit, he needed to be an expert at ‘commercial arithmetic’, or financial mathematics.

Leonardo was born in Pisa around 1170 and educated, not only in Bejaia but, as far afield as, Egypt, Syria, Constantinople and Provence. He would write a number of books on mathematics, but his first and most influential was the Liber Abaci (‘Book of Calculation’), which appeared in 1202. The Liber was heavily influenced by the Arabic book ‘The Comprehensive Book on Calculation by Completion and Balancing’ written around 825 CE by al-Khwarizmi, who was himself motivated to write the book because

men constantly require in cases of inheritance, legacies, partition, law-suites and trade [a number]

and his book provided the easiest way of arriving at that number, using al-gabr (‘restoration’) and al-muqabala (‘balancing’). Fibonacci collated these Arabic techniques into a single textbook for merchants…facing the increasingly complex financial instruments and transactions emerging at the time.

The impact of the Liber Abaci was enormous. Fibonacci became an adviser to the most powerful monarch of the time, Frederick II, Holy Roman Emperor and King of Sicily. More significant, Abaco or rekoning [sic] schools sprang up throughout Europe teaching apprentice merchants how to perform the various complex calculations needed to conduct their business. [Luca] Pacioli, who taught Leonardo da Vinci maths, was a well known graduate. Less well known is the fact that Copernicus came from a merchant family and in 1526, seventeen years before his more famous, “epoch-making” ‘On the Revolutions of the Heavenly Spheres’, he wrote ‘On the Minting of Coin’ about finance.

The practical usefulness of the reckoning schools was that, by using positional numbers and algebra, merchants could execute complex financial calculations that would typically include an illicit interest charge, hidden from the mathematically unsophisticated, university based, Church scholars. The merchant bankers were using mathematics to keep one step ahead of the regulator and the effectiveness of the non-university mathematics would not have been lost on the sharper scholastics, observing market practice.

Who was the first Quant? (Magic, Maths and Money)

It’s difficult to imagine the financial techniques noted above without the use of our arithmetic calculations being able to be carried out on cheap, accessible paper. These two inventions—paper and base-ten positional notation, were to be fused into the invention that made modern accounting possible: double-entry bookkeeping. This allowed accounts to once again be free of cumbersome gold and silver, or even hazelwood tally sticks.

You’re a medieval businessman — trading wool, pepper, cloth. Money is owed you, you have debts, and it all needs to be recorded. But there’s a problem. You track it with a diary, using Roman numerals. For arithmetic you have only some finger-counting methods. Your records would curl a modern accountant’s hair.

Alfred Crosby writes about an explosion of trade in the High Middle Ages. No longer was European trade a mere matter among farmers and villagers. By 1400, after the Plague, Europe was enormously capital-intensive — its ships moved goods internationally. None of that could happen without bringing money under control.

And so there developed, according to one historian, an atmosphere of calculation. Scholars were learning the new mathematics of algebra — that game where quantities are balanced across an equal sign — where quantities are positive on one side and negative on the other.

So Crosby goes looking for the invention of the new algebra of record keeping — the method called double-entry bookkeeping, where we list debits on one side and credits on the other. It’s the method marked by the absolute requirement that those two columns sum to zero. It’s the basis for tracking all our vast financial affairs today. He finds that, in 1300, a Florentine bookkeeper began listing debits and receipts in different ledgers. In 1340, an accountant from Genoa listed payouts and receipts on the left and right sides of a single page. For two centuries, the method slowly evolved.

No. 1229: DOUBLE-ENTRY BOOKKEEPING (Engines of Our Ingenuity)

Economic historians can pinpoint roughly when this occurred by using the record books of Francesco Datini, which survive to the present day. Datini’s books show the process of changing over from a diary to a sophisticated accounting of inputs and outputs, escribed on paper:

Datini’s meticulously kept account books span almost fifty years and clearly show the transition from single-entry to double-entry bookkeeping. His surviving ledgers from 1367 to 1372 do not use the double-entry system, while those from 1390 onward do.

Datini was innovative not just in his early adoption of the new style of bookkeeping; when in 1398 he and a partner opened a bank in Florence, they accepted a new form of payment only just coming into Europe: cheques. Like many business practices new to medieval Europe, the cheque had long been used by Arab merchants, who gave us the English word ‘cheque’. As early as the ninth century a Muslim merchant could cash a cheque in China drawn on his bank in Baghdad.

Datini also dealt in bills of exchange, which were notes for the exchange at a future date of florins for one of the many different currencies circulating in Europe at this time, when every city minted its own coins. These bills first appeared in Europe in the twelfth century and became a powerful new financing tool. In Datini’s day, charging interest on a loan at a fixed rate was outlawed by the Church, which deemed it usurious (demanding interest rates on loans was no permitted anywhere in Europe until 1545, when Henry VIII legalised it in England.) Bills of exchange became popular because, while they attracted a profit, the eluded the Church’s ban on usury.

Paradoxically, their popularity rested on their unreliability. Bills of exchange were effectively gambles on exchange-rate variations, and the chance of making a profit from them was so uncertain, so precarious, that the Church did not recognize their profits as interest and therefore allowed their use.

Datini was one of the new breed of Italian international merchant bankers who in the fourteenth century created vast trading empires and networks of credit from London to Constantinople. In the next century these Italian international merchant bankers, most notably the Medici of Florence, would use their immense wealth to commission works of architecture, art and scholarship–and effectively finance the Renaissance. [2]

It was in Venice that Arabic numerals and double-entry bookkeeping first became commonplace, hence this method came to be known throughout Europe as the “Venetian method” of finance:

…By the 1430s the merchants of Venice had perfected a system of double-entry account keeping in two columns which became known as bookkeeping el modo de vinegia or alla viniziana: the Venetian method. It is this Venetian method that, through its extraordinary resilience and mutability, has come down to us today, transformed over several centuries from a rudimentary business tool into an efficient calculating machine. [3]

This system was popularized and spread by Renaissance Man Luca Pacioli, a close friend and confidant of Leonardo da Vinci.

The man responsible for its codification and preservation–the author of the world’s first printed bookkeeping treatise–is Luca Bartolomeo de Pacioli, Renaissance mathematician, monk, magician, constant companion of Leonardo da Vinci. As the origin of all subsequent bookkeeping treatises throughout Europe, Luca Pacioli’s bookkeeping tract is not only the source of modern accounting but also ensured the medieval Venetian method survived into our own times. And so accountants have named Luca Pacioli the ‘father of accounting’…[4]

While this was the beginning of the sophisticated use of double-entry bookkeeping in Europe using ledgers and Arabic numerals, the concept goes back a long way:

Double entry is used because of the basic fact that every movement of value has two aspects, and both should be recorded in a proper set of accounts. For the giver of value the transaction is a credit, for by giving value he has earned a credit, he is owed the equivalent. For the receiver the transaction is a debit, because he is a debtor for the value.

The basic rules of double-entry bookkeeping are as follows:
1) debit value in, credit value out;
2) debit receipts, credit payments;
3) debit assets, credit liabilities;
4) debit losses, credit profits.

Every transaction has to be recorded twice, or a multiple of twice, in any set of accounts, each as a debit and as a credit. There are no exemptions to this rule. The need to record things twice seems to have occurred to those responsible for accounts at least 4,000 years ago. When a sheep was due to the temple from a peasant, the temple would record the sheep as owed by the peasant, and list it as a part of the income of the temple. When the sheep actually appeared, the peasant’s record would be credited, the debt wiped out, and the temple would add the sheep to the list of the sheep it owned.

The accounts of that era went no further along the road of developing the full sophistication of a modern accounting system, but, as has been mentioned earlier, the basic element of a double record seems to have been there. [5]

These techniques were deployed by Italian bankers all across the continent, and it’s no coincidence that most financial centers in Europe such as London have a “Lombard Street” in their financial district even today.

Finance and Science

According to Tim Johnson, the sophisticated mathematical techniques engendered by finance at this time pushed forward the development of mathematics in Northern Europe, and eventually led to the scientific revolution.

Fibonacci’s mathematics revolutionised European commercial practice. Prior to the Liber Abaci, merchants would perform a calculation, using an abacus, and then record the result. The introduction of Hindu/Arabic numbers in the Liber enabled merchants to “show their working” as an algorithm, and these algorithms could be discussed and improved upon. Essentially after Fibonacci mathematics ceased to be simply a technique of calculation but became a rhetorical device, a language of debate.

Lady Credit (Magic, Maths and Money)

Financial techniques had to be sophisticated, due to not only the church’s ban on usury but also the multitude of shifting currencies all over Western Europe. As Johnson notes, many of the mathematicians who made great strides in mathematics and physics at this time came out of the financial system. Leonardo of Pisa’s treatise on math was explicitly described as helping merchants and traders carry out business transactions. Many advancements were attempts at calculating probabilities.

The most influential single Abaco graduate has to be the Dutchman, Simon Stevin. Stevin, who was born in 1548 in Bruges, had originally worked as a merchant’s clerk in Antwerp then as a tax official back back in Bruges, where he wrote his first book Tafelen van Interest (‘Tables of interest’) which he published in 1582, before moving to the University of Leiden in 1583. About this time, he was appointed as adviser to Prince Mauritz of Nassau, who was leading the Dutch revolt against the Spanish, and eventually became the Dutch Republic’s Finance Minister.

As well as being active in government, Stevin carried out scientific experiments, and it is believed his bookeeping [sic] inspired his physics. His most famous experiment showed that heavy and light objects fell to the earth, in the absence of air resistance, at the same speed, an experiment that disproved a belief of Aristotle and is usually attributed to Galileo dropping things from the Tower at Pisa some years later.

One of Stevin’s most important posts was as the director of the Dutch Mathematical School, established in 1600 by Mauritz to train military engineers. In this capacity, in 1605, he published a textbook for the School, the ‘Mathematical Tradition’, which was a comprehensive overview of mathematics and included a whole section on ‘Accounting for Princes in the Italian manner’.

In a very short period, the Dutch Mathematical School became the centre for merchants’ training in north western Europe. This success, in turn, forced the authorities at the University of Leiden, which provided the School with its facilities, to take practical sciences, in particular maths, a bit more seriously. The Dutch Mathematical School would inspire the soldier Descartes to study maths and would train Huygens and a whole generation of European scientists.

In addition, it was Stevin’s promotion of the use of decimals, to aid accounting, that inspired Newton to think of functions as power-series, giving birth to the discipline of Analysis. Newton essentially finished his work in physics with the publication of Principia in 1687, his last significant work, Optiks, published in English in 1704, was based substantially on research undertaken in the early 1670s. After almost a decade of troubles, Newton moved into finance in April 1696 when he was appointed Warden of the Royal Mint. This was a largely ceremonial post, but Newton took to it so much that he became the Mint’s operational manager, its Master, in 1699.

Johnson attributes this to “reverse Quants”: instead of highly-trained mathematicians going to work in finance, at this time it financial mathematicians who went to work in academia. This allowed academia to push forward calculations that applied to the real world much further in Europe than elsewhere. Both Copernicus and Isaac Newton worked in the money system.

…the migration from academic careers in science to finance appear to be embedded, it is not a modern phenomena. However, possibly more significant is the less well-appreciated role of the ‘reverse-quants’ in the development of science. The influence is captured by events in France in 1304-1305 when economic instability and a market failure led the French King, Philip the Fair, to issue decrees fixing the price of bread. His decrees failed spectacularly, and this was seen by contemporary observers as evidence that ‘nature’ ruled, and not the authority of the King, and that market prices where an objective, ‘scientific’ measure. This enabled the likes of [Thomas] Bradwardine to re-assess the role of mathematics in science. Later, people trained in commercial arithmetic – financial mathematics – such as Copernicus and Stevin, were able to challenge the authority of Aristotelian science, and argue that the Earth revolved around the Sun and that heavy and light objects fall at the same speed.

We saw this before, when the use of money spurred the ideas of Greek science and philosophy–the idea of an unlimited, underlying substance underpinning all phenomena. He concludes:

European science did not start in the Renaissance, it existed in the High Middle Ages. The ‘renaissance’ of the ‘long twelfth century’ resulted in what the historian Joel Kaye describes as the transformation of the conceptual model of the natural world ,…, [which] was strongly influenced by the rapid monetisation of European society taking place [between 1260-1380]. and played a pivotal role in the development of European science. Thirteenth century scholars [were] more intent on examining how the system of exchange actually functioned than how it ought to function..

Who was the first Quant? (Magic, Maths and Money)

Some Debt Becomes Money

Alfred Mitchell-Innes described the “primitive law of commerce” as the exchange of a commodity for a credit. It was this that was at the heart of the private money creation scheme developed by Italian bankers. Debts and credits would always match up, meaning that theoretically the amount of money circulating would always equal the value of goods in transit.

It has been observed time and time again in the last 400 years that banks can create credit very freely, because they know that the drawing down of a loan automatically creates the deposit which balances the lending. When a bank has agreed to lend, the moment that the loan is drawn down by the payment of a cheque drawn upon it, a deposit to match it is also created at the receiving bank. Therefore the moment a borrowing takes effect, the saving to match it must arise as well. Even if the borrowing is to finance a capital project, the saving to match that capital investment must come into being automatically the moment the loan is drawn down to make a payment. As all money is effectively transferable debt, then money can be created by creating debt. Once it is realised that all money is some form of debt, it becomes obvious that money can only be created by creating debts…[6]

In the aggregate the accounts of banks are always in balance. So in theory a bank can grant unlimited loans in the knowledge that the amount lent will always appear somewhere as a deposit to balance the lending. The snag for the bank granting the loan would seem to be that the deposit might be made in another bank. Actually this is no problem at all. If one bank has a loan not backed by a deposit, another bank will have a deposit which is unlent. The two have to meet up; the bank with the excess lending will borrow, directly or indirectly, the excess deposit from the other bank….’A banker is one who centralises the debts of mankind and cancels them against one another. Banks are the clearing houses of commerce.’ To put it in the simple words of the treasurer of a large modern bank, ‘If we are short, we know the money has to be somewhere. Our only problem is to find it, and pay the price asked for it.'[7]

Felix Martin describes the basics of this system:

The system was simple. An Italian merchant wishing to import goods from a supplier in the Low Countries could purchase a credit note known as a bill of exchange from one of the great Florentine merchant houses. He might pay for this note either in the local sovereign money or on credit.

By buying such a bill of exchange, the Italian merchant achieved two things. First, he accessed the miracle of banking: he transformed an IOU backed by only his own puny word for one issued by a larger, more creditworthy house, which would be accepted across Europe. He transformed his private credit into money.

His second achievement was to exchange a credit for a certain amount of Florentine money into one for a certain amount of the money of the Low Countries where he was making his purchase. [8]

The bill of exchange itself was denominated in a private monetary unit created specially for the purpose by the network of exchange bankers: the ecu de marc. There were no sovereign coins denominated in this ecu de marc. It was a private monetary standard of the exchange-bankers alone, created so that they could haggle with one another over the value of the various sovereign moneys of the continent. Somewhat bizarrely to modem eyes, the foreign exchange transaction included in the bill of exchange therefore involved two exchange rates-one between Florentine money and the ecu de marc, the other between the ecu de marc and the money of the Low Countries…

The end result was to overcome a previously insurmountable series of obstacles. The exchange-banker would accept the importer’s credit in payment, knowing him and his business well from the local market. Meanwhile, the supplier in the Low Countries would accept the exchange-banker’s credit as payment, knowing that it would be good in its tum to settle either a bill for imports or for some local transaction-and satisfied that he was being paid in the local money.

Of course, the banker ran the risk that the exchange rates of the two sovereign moneys against the imaginary ecu de marc might change in between his issuing the bill of exchange and its being cashed in the Low Countries, but he made sure that his fees and commissions made this a risk worth taking. [9]

This wasn’t a sideshow: vast amounts of trade were conducted all over the continent using this method. This puts a wrinkle in the whole “money is gold” approach. With the bills of exchange we see that, fundamentally, money is credit and it always had been. From the stone money of Yap, to the tally sticks of Europe, we see that:

Money, then, is credit and nothing but credit. A’s money is B’s debt to him, and when B pays his debt, A’s money disappears. This is the whole theory of money: Debts and credits are perpetually trying to get into touch with one another, so that they may be written off against each other, and it is the business of the banker to bring them together. [10]

This is the essence of banking. As Felix Martin notes, “Strip away all the mystery of banking, and what are left with is an institution that matched debts and credits. It makes money by one of two ways: by discounting bills and by issuing loans.”

Here’s Alfred Mitchell-Innes description of the process of discounting bills of exchange. You might have to reread this a number of times in order to “get it”; I know I did! But once you do, you’ll see that it’s clear that this is the underlying process behind money and banking, and not storing or exchanging gold and silver:

The process of discounting bills is as follows: A sells goods to B, C and D, who thereby become A’s debtors and give him their acknowledgments of indebtedness, which are technically called bills of exchange, or more shortly bills. That is to say A acquires a credit on B, C and D.

A buys goods from E, F and G and gives his bill to each in payment. That is to say E, F and G have acquired credits on A. If B, C and D could sell goods to E, F and G and take in payment the bills given by A, they could then present these bills to A and by so doing release themselves from their debt. So long as trade takes place in a small circle, say in one village or in a small group of near-by villages, B, C and D might be able to get hold of the bills in the possession of E, F and G.

But as soon as commerce widened out, and the various debtors and creditors lived far apart and were unacquainted with one another, it is obvious that without some system of centralizing debts and credits commerce would not go on. Then arose the merchant or banker, the latter being merely a more specialized variety of the former.

The banker buys from A the bills held by him on B, C and D, and A now becomes the creditor of the banker, the latter in his turn becoming the creditor of B, C and D. A’s credit on the banker is called his deposit and he is called a depositor. E, F and G also sell to the banker the bills which they hold on A, and when they become due the banker debits A with the amount thus cancelling his former credit. A’s debts and credits have been “cleared,” and his name drops out, leaving B, C and D as debtors to the bank and E, F and G as the corresponding creditors.

Meanwhile B, C and D have been doing business and in payment of sales which they have made, they receive bills on H, I and K. When their original bills held by the banker become due, they sell to him the bills which H, I and K have given them, and which balance their debt. Thus their debts and credits are “cleared” in their turn, and their names drop out, leaving H, I and K as debtors and E, F and G as creditors of the bank and so on.

The modern bill is the lineal descendant of the medieval tally, and the more ancient Babylonian clay tablet…[11]

Loans are simply a variation on the same process, except they anticipate future sales:

Now let us see how the same result is reached by means of a loan instead of by taking the purchaser’s bill and selling it to the banker. In this case the banking operation, instead of following the sale and purchase, anticipates it. B, C and D before buying the goods they require make an agreement with the-banker by which he undertakes to become the debtor of A in their place, while they at the same time agree to become the debtors of the banker: Having made this agreement B, C and D make their purchases from A and instead of giving him their bills which he sells to the banker, they give him a bill direct on the banker. These bills of exchange on a banker are called cheques or drafts.

If this is familiar, it should be. As far back as the ancient Near East, promissory notes promised not to pay a specific person, but the bearer of the financial instrument (usually a stone tablet). This meant that liabilities could be transferred, and the stone tablet became a kind of proto-money, without the need of any sort of circulating medium like coins. As long as there was a unit of account, an agreement, and away for debts and credits to pair up, commerce could take place. The antecedent to the Bill of Exchange already existed in Babylon in 2500 B.C.:

The lending system of ancient Babylon was evidently quite sophisticated. Debts were transferable, hence ‘pay the bearer’ rather than a named creditor. Clay receipts or drafts were issued to those who deposited grain or other commodities at royal palaces or temples. Borrowers were expected to pay interest (a concept which was probably derived from the natural increase of a herd of livestock), at rates that were often as high as 20 percent. Mathematical exercises from the reign of Hammurabi (1792-1750 BC) suggest that something like compound interest could be charged on long-term loans…

It would not be quite correct to say that credit was invented in ancient Mesopotamia. Most Babylonian loans were simple advances from royal or religious storehouses. Credit was not being created in the modern sense…Nevertheless, this was an important beginning. Without the foundation of borrowing and lending, the economic history of our world would scarcely have got off the ground. And without the ever-growing network of relationships between creditors and debtors, today’s global economy would grind to a halt…[13]

As Geoffrey Gardiner notes, “If an obligation is assignable, it can be used both as a medium of exchange and as a store of value. If the obligation is not only assignable but is expressed in terms of the standard measure of value, it can properly be regarded as money…by nature all money is assignable debt. A pound note is theoretically a debt of the Bank of England. A bank deposit is a debt of the bank. A holding of gold is a portable form of debt.” [12] In fact, he argues that monetization of trade credit was the primary form of money since the very beginnings of civilization, a role that has been tragically ignored by conventional economists due to their focus on precious metals:

The process of converting a debt into a means of exchange can be called ‘monetising debts.’ If one looks at the history of economics one can surely see that the monetising of debts, usually trade debts, has been the most important process, the most important invention, in the history of commerce, ever since differentiation of labour first took place sometime in prehistory. One must agree with Mitchell Innes that gold and silver were not the essentials of a money system. That role was fulfilled by the documentary credit which originated in trade credit [14]

The petty loan sharks and money changers like the Medici scaled up to become rich and influential banking houses by using the power of the Venetian method and bills of exchange to underwrite international commerce.

In 1385 Giovanni [De Medici] became manager of the Roman branch of the bank run by his relation Vieri di Cambio de’ Medici, a moneylender in Florence. In Rome, Giovanni built up his reputation as a currency trader. The papacy was in many ways the ideal client, given the number of different currencies flowing in and out of the Vatican’s coffers. As we have seen, this was an age of multiple systems of coinage, some gold, some silver, some base metal, so that any long-distance trade or tax payment was complicated by the need to convert from one currency to another…

Of particular importance in the Medici’s early business were the bills of exchange (cambium per literas) that had developed in the course of the Middle Ages as a way of financing trade. If one merchant owed another a sum that could not be paid in cash until the conclusion of a transaction some months hence, the creditor could draw a bill on the debtor and either use the bill as a means of payment in its own right or obtain cash for it at a discount from a banker willing to act as broker.

Whereas the charging of interest was condemned as usury by the Church, there was nothing to prevent a shrewd trader making profits on such transactions. That was the essence of the Medici business. There were no cheques; instructions were given orally and written in the bank’s books. There was no interest; depositors were given discrezione (in proportion to the annual profits of the firm) to compensate them for risking their money. [15]

Though others had tried before them, the Medici were the first bankers to make the transition from financial success to hereditary status and power. They achieved this by learning a crucial lesson: in finance small is seldom beautiful. By making their bank bigger and more diversified than any previous financial institution, they found a way of spreading their risks. And by engaging in currency trading as well as lending, they reduced their vulnerability to defaults. [16]

In time, bills of exchange became disconnected from the initial issuer and the connection to specific goods. allowing it to circulate as proto-money. What really made bills of exchange into money was a change in the law allowing for its transferability. The Joint Liability Rule meant that the bill would always find someone willing to cover its liability, preventing the bills from becoming worthless. Bills began to spread beyond just the bilateral transactions mediated by merchant bankers thanks to the Joint Liability Rule:

“The term Bill of Exchange (BofE) refers to a financial instrument whereby a merchant (the issuer) ordered his agent abroad (the payer) to make a payment in a different currency on his behalf to another merchant (the beneficiary), often in a third location, at a set date in the future. The beneficiary could further transfer his claim to another party, an endorser, in exchange for currency, debt or merchandise.

…a seventeenth century legal innovation, the Joint Liability Rule (JLR), enabled the medieval BofE to develop into the dominant means of payment and credit in the early modern period. The JLR specified that in case of default, all endorsers, in addition to the issuer and payer, could be held legally liable for reimbursement. Through the endorsement on the back of the bill, each successive endorser not only surrendered his financial claim to the bill but also acknowledged his full liability for reimbursement in the event of default.

…the powerful mechanism of Joint Liability permitted merchants to conduct a larger volume of trade through BofE than would have been possible otherwise. My findings uncovered an European-wide and anonymous market for bills of exchange that provided liquidity and credit to a local merchant house. Bills originated and were settled in a geographic area that extended all over Europe, north of Africa, Ottoman Empire up to Syria, and the Caribbean Islands. Despite evidence of ongoing problems of adverse selection and moral hazard, I showed that bills worked to broaden trade in the sense that agents used them across business networks…

Bills of exchange displaced state currencies for the payment among the merchant classes. In essence, it was a competing currency system run through private banks, and one that posed a threat to state finance as more and more capital concentrated in the hands of the merchants.

My Fair Lady

In Babylonia, debt and credits were matched up by the temples. In Rome, they were matched up in the banks along the Via Sacra. In the Middle Ages, they were matched up at the great trade fairs.

Economic historians look at the great trade fairs of the middle ages which took place in the towns like Champagne, Lyon and Piacenza as the beginnings of capitalism. Goods were brought from all over the world and sold to a new class of wealthy townsfolk, i.e. the burghers or “bourgeoisie” who relied on money transactions rather than social relations to conduct their business affairs. And they were always looking to increase their money. In these “free towns,” the feudal system disintegrated, and social relations were coordinated by money and prices. Most medieval free cities had a market, a mint, and a fairground. They also had a class of money-changers who would eventually become merchant bankers.

The debts and credits were settled at the conto, which was held on the final day of the fairs:

As they continually wrote and accepted bills of exchange to finance trade between the great European cities, the exchange bankers would accumulate credit and debit balances.

The circle of exchange-bankers was a close-knit one, and willingness to allow outstanding balances to build up was therefore high. Nevertheless, to ensure a clear picture of who owed what to whom, it was necessary to have periodic offsets. These could be done bilaterally on an ad hoc basis; but the regular fairs provided a natural opportunity for a more generalised clearing-and this is precisely what they gradually became.

Every quarter, the clique of great merchant houses would meet at the central fair of Lyons in order to square their books. On the first two days of the fair there was a frenzy of buying and selling, of writing new bills or cancelling old ones, at the end of which all delegates’ books were closed for the quarter and the resulting balances between the houses were verified. The third day-the of Exchange” – was the heart of proceedings. The exclusive cadre of exchange-bankers would convene alone to agree on the conto: the schedule of exchange rates between the ecu de marc and the various sovereign moneys of Europe.

This schedule was the pivot of the entire financial system, since it was at these exchange rates that any outstanding balances had to be settled on the final day of the fair the “Day of Payments”-either by agreement to carry over balances to the next settlement date, or by payment in cash. [17]

In fact, it is sometimes argued that the primary purpose of the fairs was not buying and selling at all! Rather, periodic trade fairs originated as meeting places where debt and credits were assessed and settled. Over time, an ever-increasing trade in goods grew up around them, which eventually came to obscure the historical origins of the fairs.  In other words, the buying and selling was a peripheral development to the main activity of settling accounts. It was not gold or silver that was changing hands, so much as trade credits!

In these “economic zones” market exchanges prevailed, walled off by authorities through strict laws and regulations from the prevailing social forms of the countryside, which were more based in custom and tradition. Far from being “free trade,” such places were heavily regulated by authorities to ensure fair dealing.

Such concepts go back very far indeed, all the way back to the ritual temples and plazas of the Stone Age where suchexchanges took place. We’ve seen that feasting events were typically where the settling of debts and credits took place in pre-agricultural societies, for example the Sepik Coast Exchange in Papua New Guinea. In one memorable passage, Alfred Mitchell-Innes describes the role of fairs from ancient times in the development of money and commerce:

The clearing houses of old were the great periodical fairs, whither went merchants great and small, bringing with them their tallies, to settle their mutual debts and credits…The origin of the fairs…is lost in the mists of antiquity. Most of the charters of which we have record, granting to feudal lords the right to hold a fair, stipulate for the maintenance of the ancient customs of the fairs, thus showing that they dated from before the charter which merely legalized the position of the lord or granted him a monopoly. So important were these fairs that the person and property of merchants traveling to them was everywhere held sacred. During war, safe conducts were granted to them by the princes through whose territory they had to pass and severe punishment was inflicted for violence offered to them on the road.

It was a very general practice in drawing up contracts, to make debts payable at one or other of the fairs, and the general clearance at which the debts were paid was called the pagamentum. Nor was the custom of holding fairs confined to medieval Europe. They were held in ancient Greece under the name of panegyris and in Rome they were called nundinae, a name which in the middle ages was also frequently used. They are known to have been held in Mesopotamia and in India. In Mexico they are recorded by the historians of the conquest, and not many years ago at the fairs of Egypt, customs might have been seen which were known to Herodotus.

At some fairs no other business was done except the settlement of debts and credits, but in most a brisk retail trade was carried on. Little by little as governments developed their postal systems and powerful banking corporations grew up, the value of fairs as clearing houses dwindled, and they ceased to be frequented for that purpose, long remaining as nothing but festive gatherings until at last there linger but few, and those a mere shadow of their golden greatness.

The relation between religion and finance is significant…The fairs of Europe were held in front of the churches, and were called by the names of the Saints, on or around whose festival they were held. In Amsterdam the Bourse, was established in front of or, in bad weather, in one of the churches. They were a strange jumble, these old fairs, of finance and trading and religion and orgy…There is little doubt to my mind that the religious festival and the settlement of debts were the origin of all fairs and that the commerce which was there carried on was a later development. If this is true, the connection between religion and the payment of debts is an additional indication if any were needed, of the extreme antiquity of credit. [18]

The great French historian Fernand Braudel describes the role these fairs played in the Middle Ages in the transition from feudalism to capitalism:

the real business of the fairs, economically speaking, was the activity of the great merchant houses. They it was who perfected this instrument and made the fairs the meeting-place for large-scale trade. Did the fairs invent, or re-invent credit?…it is certainly the case that the fairs developed the use of credit… The fairs were effectively a settling of accounts, in which debts met and cancelled each other out, melting like snow in the sun: such were the miracles of scontro, compensation. A hundred thousand or so ‘ecus d’ or en or’  – that is real coins – might at the clearing-house of Lyons settle business worth millions; all the more so as a good part of the remaining debts would be settled either by a promise of payment on another exchange (a bill of exchange) or by carrying over payment until the next fair: this was the deposito which was usually paid for at 10% a year ‘(2,5% for three months). So the fair itself created credit.

If the fair is envisaged as a pyramid, the base consists of the many minor transactions in local goods, usually perishable and cheap, then one moves up towards the luxury goods, expensive and transported from far away: at the very top of the pyramid came the active money market without which business could not be done at all- or any rate not at the same pace. It does seem that the fairs were developing in such way as, on the whole, to concentrate on credit rather than commodities, on the tip of the pyramid rather than the base. [19]

This goes to our core point: money is transferable credit (or debt). Once these debits and credits could circulate, that is, pass from once person to another, then you’ve got money. Once again, money is a tool to discharge social obligations, in this case, it allowed merchants and creditors to settle their accounts with one other.

These fairs took place all over Europe, but typically one major “financial center” for these dominated, the location of which changed over time with the volume of trade. Eventually, as trade expanded, the fairs declined, replaced by permanent institutions located in the trading cities. The first place this happened was Amsterdam in the Netherlands. Amsterdam established a permanent merchant bank. It would later establish the first joint-stock companies and stock market as well (the Amsterdam Exchange).

The fairs were linked together, and communicated with each other. Whether handling goods or credit” they had been organized to make circulation easier…Goods, money and credit were caught up in this circular movement. Money was of course at the same time providing the energy for other, larger circuits and usually tended towards a central point, from which it would set off again. In the West, where a dear recovery began with the eleventh century, ‘ .. one centre finally came to dominate the European system of payments. In the thirteenth century it was the Champagne fairs…the system reconstituted itself as best it could around Geneva in the fifteenth century, then at Lyons; and as the sixteenth century drew to a close, around the Piacenza fairs, that is around Genoa. Nothing so much reveals the functions of these successive systems as the breaks marking the changeover from one to another.

After 1622 however, no single fair would ever constitute the obligatory centre of economic life, dominating the rest, For it was now that Amsterdam, which had never really been a city of fairs, began to assert itself, taking over the previous superiority of Antwerp: it was becoming organized as a permanent commercial and financial centre. The fortune of Amsterdam marks the decline if not of the commodity fairs of Europe, at any rate of the great credit fairs. The age of fairs had seen its best days. [20]

The place where payments cleared passed from itinerant bankers at fairs to the stately colonnaded buildings in classical style as commerce became ever-more important to the European economy. Once banks became essential to commerce, they eventually became essential to states to conduct their fiscal operations as well. The modern world begins when governments access the miracle of banking to fund their own operations, especially war funding. In so doing, they caused private banknotes to become “official” currencies, backed by the state’s debt.

This happened first in the Italian City-states immediately prior to the Renaissance during 1100-1400. These city states, run by merchants and bankers, turned to the burgeoning financial markets to fund their operations, especially wars—remember that soldiers are mainly professional mercenaries at this time, and not citizen-soldiers (which comes under Napoleon). So any aspiring empire needed money to pay for war and mercenaries.

The way their got it was to borrow from their wealthiest citizens. And in so doing, they created the notion of “national debt.” That’s what we’ll be looking at next time.


[1] Wray; credit and state theory of Money, pp. 198-199

[2] Jane Gleeson-White; Double Entry: How the Merchants of Venice Created Modern Finance, pp.24-26

[3] Jane Gleeson-White; Double Entry: How the Merchants of Venice Created Modern Finance, pp.24-26

[4] Jane Gleeson-White; Double Entry: How the Merchants of Venice Created Modern Finance, pp. 27-28

[5] Wray; credit and state theory of Money, p. 134

[6] Wray; credit and state theory of Money, pp. 151-152

[7] Wray; credit and state theory of Money, pp. 136-137

[8] Felix Martin; Money: The Unauthorized Biography, p. 106

[9] Felix Martin; Money: The Unauthorized Biography, pp 106-107

[10] Wray; Credit and state theory of Money, pp. 239

[11] Wray; Credit and state theory of Money, pp. 45-46

[12] Wray; Credit and state theory of Money, p. 132

[13] Niall Ferguson; The Ascent of Money, p. 30-31

[14] Wray; Credit and state theory of Money, pp. 169-170

[15] Niall Ferguson; The Ascent of Money, p. 43

[16] Niall Ferguson; The Ascent of Money, pp. 47-48

[17] Felix Martin; Money: The Unauthorized Biography, p. 107

[18] Wray; Credit and state theory of Money, pp. 40-41

[19] Fernand Braudel; The Wheels of Commerce, pp. 90-91

[20] Fernand Braudel; The Wheels of Commerce, p. 92

The Origin of Money 7 – Medieval Money

The Great Recoinage

As this article notes, the Crisis of the Third Century caused a disruption in Rome’s internal trade network. The effect this had was a shrinking of markets and reversion to more locally-based economies as the Roman political system broke down. Although it recovered somewhat under Diocletian, the path toward the Middle Ages was being paved.

For many centuries after the fall of Rome, during the so-called “Dark Ages”, the use of money and markets all but disappeared along with the Roman state. This alone should be proof that these are not ‘natural’ phenomena separate from political governance, but rather enabled and fostered by them. If libertarians are correct, we would have expected money and trade to flourish in the absence of “oppressive” taxes and government regulations.

Instead, what happened was a collapse of local and international trade and a dramatic fall in living standards. People returned to subsistence farming, economies reverted to barter, advanced technology was lost (e.g. concrete, wheel-turned pottery), and the Roman patronage system mutated into feudalism, with the villas transitioning into the self-sufficient manors of medieval Manorialism:

Immediately after the fall of Rome in the middle of the fourth century AD, its money disappeared. From a narrowly economic standpoint, the demand for media of exchange and payment sharply contracted. Imperial trade and production diminished, and mercenary soldiers’ wages no longer needed to be paid. But most importantly, the fiscal flows that constituted the social and political relations of the Roman Empire ceased to exist.

This situation held particularly on the Celtic margins of the former empire, where coinage became redundant for two centuries after having been in continuous use for over five hundred years. As the archaeological finds of large ‘hoards’ of money imply, it was no longer routinely needed and, given the very small silver content of the coins of the late Roman empire, it is likely that they were literally dumped. The two basic functions of money as a unit of account and means of payment were unable to operate. The social and political system that was ‘accounted for’ by the abstract money of account no longer existed. [1]

During the Carolingian Renaissance after A.D. 800, there was a “great recoinage” of Europe as coins were introduced back into circulation by Charlemagne. What he did was to reintroduce the standard units of account–Pounds, shillings and pence (we’ll use English terms, but the French equivalents are livre, sous and deniers). Much like the Mesopotamians earlier, the unit of account was fixed against a weight of silver; one livre was equivalent to one pound of silver. What he did not do, however, was introduce a “standard” currency that was equivalent to these units.

Instead Charlemagne licensed out the exclusive right to mint coins and issue money to his vassals; one might call this an early form of “franchising.” The metallic content of the coins varied greatly , but what they were worth was dictated by the ruling body that issued them in reference to the standard. If the ruler said their coins were worth, say, 1/2 a livre, or one sous, then that’s what they were worth, and so on. What this meant was that, although the standard was consistent throughout the realm, the worth of the coins issued by various mints was all over the board:

…the use of a standard money of account across the Christian ecumene did indeed eventually provide the foundation for a trans-European market… three kinds of coin were struck, but with countless variations in weight and fineness – by scores of authorities in many hundreds of mints…These circulated freely across European Latin Christendom; and all were evaluated against a benchmark money of account…[2]

Once again, the standard units of account, as determined by governments, is what allowed market transactions to take place by fixing the prices of things against one another for taxation purposes:

Charlemagne reinvented the Roman empire in the West, and part of this process was the re-introduction of the Roman monetary system into an ‘un-monetised’ feudal economy where exchange was rare, that is one without currency circulating.

Because coin was scarce, Charlemagne’s bureaucrats specified the exchange rate between common goods and money in order that the taxpayers could pay there [sic] tax. If you were a small holder and had been assessed for one shilling tax, if you did not engage in the market economy you would not have a shilling, so the government told you a shilling equated to a cow.

This fixed the prices of cows, an unintended consequence, since Charlemagne’s bureaucrats probably couldn’t care less about what was happening in the market place. However the impact was enormous – there was no incentive to move goods from places of abundance to places of scarcity…

Lady Credit (Magic, Maths and Money)

A standard unit of account allowed for taxes to be assessed and market transactions to occur, but because there were so many different types of currencies circulating at so many different values, it became very hard for commerce to take place, especially between different political entities. In the old Roman Empire, the same coins were used throughout the empire. In the fractured and decentralized political landscape of post-collapse Europe, however, hundreds of coins circulated with different values, since there was no single, unified, political authority to guarantee their value:

The persistence of Charlemagne’s monetary units formed the basis for this extensive remonetisation, but it also gave rise to its chaotic practical organisation. Whereas the original introduction of money to Europe had taken place under the auspices of a unified Roman political authority, its reconstitution was the definition of piecemeal…[3]

Throughout the feudal period the right of coinage belonged not alone to the king but was also an appanage of feudal overlordship, so that in France there were beside the royal monies, eighty different coinages, issued by barons and ecclesiastics, each entirely independent of the other, and differing as to weights, denominations, alloys and types.

There were, at the same time, more than twenty different monetary systems. Each system had as its unit the livre, with its subdivisions, the sol and the denier, but the value of the livre varied in different parts of the country and each different livre had its distinguishing title, such as livre parisis, livre tournois, livre estevenante, etc.[4]

What a mess! This meant in practice that people a hard time knowing what their money was “really” worth at any given point in time. It made money exchanges and market transactions very difficult.

Now, there are a few crucial concepts you need to understand in order to understand the history of money at this time.

The first thing to understand is this: coins have both an exchange value and a commodity value. Normally the exchange value is greater than the commodity value. The difference in these two is called seignorage. Because sovereigns had the exclusive right to issue coins, the difference between these two values was major source of revenue for medieval monarchs:

Seigniorage, also spelled seignorage or seigneurage (from Old French seigneuriage “right of the lord (seigneur) to mint money”), is the difference between the value of money and the cost to produce and distribute it. Seigniorage derived from specie—metal coins—is a tax, added to the total price of a coin (metal content and production costs), that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area.

Seigniorage (Wikipedia)

The coin is a token with its exchange value set by fiat. It’s value comes from it’s ability to pay taxes to the government. The commodity value, by contrast, is set by the market for that particular commodity (gold, silver, copper, bronze, nickel, etc.):

Coins did have a metal value, since they could theoretically be converted into bullion, which had its own price, albeit at some cost. But they also had a coin value, which was simply the value dictated by the sovereign, since coins could be used to pay taxes.

The metal value and the coin value were related, but they were related in the sense that the value of a currency today is related to the economic fundamentals of the country that issues it. That is, the relationship between metal value and coin value was managed by the government using a variety of policy instruments. One of those was setting the number of coins that would be minted from a given quantity of metal (and the number of those coins that would be skimmed off the top for the sovereign).

Mysteries of Money (The Baseline Scenario)

In other words, coins were a fiat currency! The sovereign reserved the right to dictate what the coins were worth. For example, In Renaissance England:

A central principle of late medieval English law, enshrined in the early 17th-century Case of Mixed Money, was that the sovereign had the absolute right to dictate the value of money:

“the king by his prerogative may make money of what matter and form he pleaseth, and establish the standard of it, so may he change his money in substance and impression, and enhance or debase the value of it, or entirely decry and annul it . . .”

If Queen Elizabeth said that worn, clipped coins had the same value as brand-new coins from the mint, even if the former had only half the silver content of the latter, then they had the same value. She could say that because the value of pieces of metal depends on what you can use them for, and so long as you (or someone else) can use them to pay debts and taxes, they have value.

Mysteries of Money (The Baseline Scenario)

The second thing to understand about this period is that the circulating media of exchange did not match the units of account. Think of a dollar or Euro coin (which Europe commonly uses). It has “one dollar” or “one Euro” inscribed on it. It is always worth one Euro. Devaluing the currency means devaluing the coin.

Medieval money, by contrast, did not have a face value written on it. Rather, what the coin was worth according to the standard units of account (pounds, shillings, pence) was determined and published by the state. So you could use pretty much whatever coins you wanted to pay for stuff, as long as the published values added up to the total.

People used all sorts of coins to settle accounts, and coins were constantly being evaluated against one another. Much of the faith in currency was determined by the finances of the issuing state. If their finances were not sound (or if they were in danger of being invaded or overthrown), then their currency wasn’t worth very much. Coins’ value wasn’t determined primarily by their metal content, although coins with more precious metal might retain more value just because the bullion in them was worth something.

The biggest difference is that in the medieval age, base money did not have numbers on it. Specifically, if you look at an old coin you might see a number in the monarch’s name (say Henry the VIII) or the date which it was minted, but there are no digits on either the coin’s face or obverse side indicating how many pounds or shillings that coin is worth. Without denominations, members of a certain coin type could only be identified by their unique size, metal content, and design, with each type being known in common speech by its nickname, like testoon, penny, crown, guinea, or groat. Odd, right?

By contrast, today we put numbers directly on base money. Take the Harriett Tubman note, for example, which has “$20” printed on it or the Canadian loonie which has “1 dollar” etched on one side.

…Back then, sticker prices and debts were not expressed in terms of coins (say groats or testoons) but were always advertised in the abstract unit of account, pounds (£), where a pound was divisible into 20 shillings (s) and each shilling into 12 pence (d). Say that Joe wants to settle a debt with Æthelred for £2 10s (or 2.5 pounds). In our modern monetary system, it would be simple to do this deal. Hand over two coins with “1 pound” inscribed on it and ten coins with “one shilling” on them. Without numbers on coins, however, how would Joe and Æthelred have known how many coins would do the trick?

To solve this problem, Joe and Æthelred would have simply referred to royal proclamation that sets how many coins of each type comprised a pound and a shilling. Say Joe has a handful of groats and testoons. If the king or queen has proclaimed that the official rate is thirty testoons to the pound and eighty groats in a pound, then Joe can settle the £2 10s debt with 60 testoons and 40 groats or any another combination, say 75 testoons. If the monarch were to issue a new proclamation that changes this rating, say a pound now contains forty testoons, then Joe’s debt to Æthelred must be settled with 100 testoons, not 75.

What makes medieval money different from modern money? (Moneyness)

The third major thing to understand is that medieval rulers used their power to dictate the value of currency to raise revenue when they needed to. This served as a proxy form of taxation. In fact, it was the major way the governments of the period raised revenue, since actual tax collection was costly and inefficient in this period as we saw above.

When the state’s coffers were bare, due to the need to pay mercenaries and wage war, or just due to the profligacy of the royal household, then the amount of revenue needed to be increased.

The way they did this was simple. The rulers simply declared that the coins were worth less according to the monetary standard than they were before. In other words, the coinage had been “cried down,” or, conversely, the monetary standard had been “cried up.”

…In an age when the imposition of direct taxes remained a logistical and economic challenge…the levying of seigniorage by the manipulation of the monetary standard represented an invaluable source of revenue. An important feature of the monetary technology of the day made this simple to do.

The dominant technology for representing money was coinage, with silver the metal of choice for higher-value coins, and bronze or other less valuable metals and alloys for smaller denominations. But unlike today’s coins, medieval types were typically struck without any written indication of their nominal value: there was no number stamped on either face-only the face or arms of the issuing sovereign or some other identifying design. The value of the coins was then fixed by edicts published by the sovereign on whose political authority they were minted.

This system had a great advantage for the sovereign. Simply by reducing the tariffed, nominal value of a coin, the sovereign could effectively impose a one-off wealth tax on all holders of coined money.

A certain coin, the sovereign would announce, is no longer good for one shilling, but only for sixpence. The coin had been “cried down”; or equivalently, one could say that the standard had been “cried up.” An offer might then be made to recoin the cried-down issue, upon presentation at the Mint, into a new type. The sovereign could then in addition levy a charge on the re-minting operation.[5]

So, in this situation, issuing coins, and then adjusting the value became the major way for medieval sovereigns to raise revenue, rather than taxation or borrowing. This was a separate phenomenon apart from the precious metal content the coins, which continued to be variable:

Under these circumstances, it is most unlikely that any metallic coin could have served as the standard, monetary policy did not primarily involve manipulation of the metallic content of coins. Rather, it entailed devaluation and revaluation of the money by ‘crying up’ and ‘crying down’ the money of account.

… Medieval sovereigns had few ways of raising revenue apart from the proceeds of their personal domains: levying direct or indirect taxes was far beyond most feudal administrative capabilities. Seigniorage was therefore a uniquely attractive and uniquely feasible source of income-and medieval sovereigns happily indulged in it…when the need arose, a sovereign could raise enormous sums by crying down or even demonetising altogether the current issue of the coinage and calling it in for re-minting off a debased footing.

In 1299, for example, the total revenues of the French crown amounted to just under £2. million: of this, fully one half had come from the seigniorage profits of the Mint following a debasement and general recoining. Two generations later, the recoinage of 1349 generated nearly three-quarters of all revenues collected that year by the king…[6]

Seignorage–the profits made by issuing money–was a major source of revenue for medieval governments, who could not rely upon taxes or selling bonds. Increasing taxes or confiscating property was very unpopular, and could cause a revolt if done to heavy-handedly. And besides, tax collection was fraught with problems. For a good overview, see section II of this review of Seeing Like a State.

The absolute power of medieval monarchs discouraged people from lending to them. Plus, charging usury was forbidden. In fact, many loans to monarchs by major banks were simply annulled! The English king Edward III borrowed a huge sum of money from Italian banks to fund what became the Hundred Years’ War in France, only to default, taking down the banking houses (which paved the way for the rise of scrappy new upstarts like the Medici).

However, the precious metal in the coins did serve as a “floor” under which the coin’s value could not fall. That is, the commodity value served as collateral for the credit of the issuing sovereign. This meant that the coins were always worth something. This facilitated their use among the subjects.

It’s true that certain standards were set by the mint, but these were unrelated to the coin’s exchange value; rather these were mainly to prevent counterfeiting. They also did not affect prices.

It must be said, however, that there is evidence to show that the kings …were careful both of the weight and the purity of their coins, and this fact has given color to the theory that their value depended on their weight and purity.

We find, however, the same pride of accuracy with the Roman mints; and also in later days when the coinage was of base metal, the directions to the masters of the mints as to the weight, alloy and design were just as careful, although the value of the coin could not thereby be affected. Accuracy was important more to enable the public to distinguish between a true and a counterfeit coin than for any other reason. [7]

The problem is that the cost of buying precious metal fluctuates constantly, depending on the vagaries of supply and demand. For example, the vast amounts of New World silver flowing into Europe from the mines in Potosí in Bolivia (along with better mining technology) caused a drastic fall in the price of silver (excess supply), which made profits for coins high. This had macroeconomic effects throughout Europe—More coins were minted causing inflation (the so-called ‘Price revolution’). However, if the exchange value of the coin fell below the bullion value, there was a strong incentive to melt the coins down (or shave or clip them) and sell the precious metal abroad:

How Much Is A Nickel Worth?

It depends on whether you are talking about its use value or its exchange value. Normally, the exchange value of a good used as money is equal to or greater than its use value. If the value of the metal in a nickel is only worth 3 cents melted down and sold in metal markets, you are better off using it in exchange rather than using it as a commodity. But when the use value exceeds the exchange value, the commodity money will go out of circulation. The U.S. mint has issued new regulations in an attempt to prevent this from happening to pennies and nickels.

… Start with $50.00 and purchase 1,000 nickels. Next, sell the 1,000 nickels for their metal content at 7 cents per nickel and collect $70.00. Use the proceeds to buy 1,400 nickels, sell the 1,400 nickels for $90.80, and you’ve nearly doubled you money already.

It’s unlikely that you’d receive the full 7 cents per nickel, but even at, say, 6 cents per nickel (so that the value is $72.00 instead of $90.80 after two rounds) there’s a powerful incentive to smuggle nickels out of the country. And at 2.13 cents per pre-1982 penny, the incentive is even higher.

When the values are reversed, when the exchange value exceeds the use value, you’re not allowed to go in the opposite direction either. For example, you cannot take 3 cents worth of metal and mint your own counterfeit (“plug”) nickels and realize a 2 cent profit on each one. But when the economic incentive is high enough – e.g. turning paper into $20 bills – some people still try.

How Much is a Nickel Worth? (Economists View)

As Mitchell-Innes notes, if coins were just standardized lumps of precious metal issued merely for the convenience of traders, there would have been no need to force people to use them! People would simply exchange the coins for whatever the precious metal in them was worth.

There are only two things which we know for certain about the Carolingian coins. The first is that the coinage brought a profit to the issuer. When a king granted a charter to one of his vassals to mint coins, it is expressly stated that he is granted that right with the profits and emoluments arising therefrom.

The second thing is that there was considerable difficulty at different times in getting the public to accept the coins, and one of the kings devised a punishment to fit the crime of refusing one of his coins. The coin which had been refused was heated red-hot and pressed onto the forehead of the culprit, “the veins being uninjured so that the man shall not perish, but shall show his punishment to those who see him.”

There can be no profit from minting coins of their full face value in metal, but rather a loss, and it is impossible to think that such disagreeable punishments would have been necessary to force the public to accept such coins, so that it is practically certain that they must have been below their face value and therefore were tokens, just as were those of earlier days.[8]

In fact, it was often very difficult for monarchs to get their hands on enough silver to issue coins. This was another reason that market exchanges were rare in the early Middle Ages—there simply wasn’t enough money circulating! Often, the only way to get more silver was to issue coins with less silver, or to melt down and reissue existing coins with less silver. In fact, getting silver may have even been a motivating factor for the Crusades according to Niall Ferguson:

The Roman system of coinage outlived the Roman Empire itself. Prices were still being quoted in terms of silver denarii in the time of Charlemagne, king of the Franks from 768 to 814. The difficulty was that by the time Charlemagne was crowned Imperator Augustus in 800, there was a chronic shortage of silver in Western Europe.

Demand for money was greater in the much more developed commercial centres of the Islamic Empire that dominated the southern Mediterranean and the Near East, so that precious metal tended to drain away from backward Europe. So rare was the denarius in Charlemagne’s time that twenty-four of them sufficed to buy a Carolingian cow. In some parts of Europe, peppers and squirrel skins served as substitutes for currency; in others pecunia came to mean land rather than money.

This was a problem that Europeans sought to overcome in one of two ways. They could export labour and goods, exchanging slaves and timber for silver in Baghdad or for African gold in Cordoba and Cairo. Or they could plunder precious metal by making war on the Muslim world. The Crusades, like the conquests that followed, were as much about overcoming Europe’s monetary shortage as about converting heathens to Christianity.  [9]

This differential between the commodity value and the exchange value set by the sovereign was to have dramatic consequences.

Cry Me Up, Cry Me Down

By adjusting the value of the currency, the effect these edicts had was to raise prices. As Wikipedia puts it, “…By providing the government with increased purchasing power at the expense of the public’s purchasing power, [seignorage] imposes what is metaphorically known as an inflation tax on the public.” People going to the markets suddenly found that their coins were worth less, so producers demanded more of them.

In mediaeval society, currency depreciation would take place all at once, even in a single day. While historians and economists alike have long told stories about monarchs who purposely debased coins (by reducing gold content)…[i]nstead, nominal value was announced by the monarch and maintained at government pay offices. A coin’s nominal value in circulation would be determined by its value in acceptance of payments to government. When the monarch found he had already issued too much credit (such that he was unable to purchase desired goods and services), he would simply reduce the official value of the coins already issued (such that, say, two coins would have to be delivered at public pay offices rather than one).

By doing so, monarchs ‘reduced by so much the value of the credits on the government which the holders of the coins possessed. It was simply a rough and ready method of taxation, which, being spread over a large number of people, was not an unfair one, provided that it was not abused’.

In short, government ‘cried down’ the coins in place of raising tax rates, but in the process this would devalue the market value of the government’s debt – an overnight devaluation that would be manifested as soon as markets adjusted prices upward in terms of government coin. [10]

To help understand this concept, think of a casino. I turn in my hard-earned dollars and get tokens (chips) in exchange that I can use inside the “monetary space” of the casino. Let’s say each dollar gets me a nice plastic or clay chip.

I then go and gamble. In the meantime, the casino has declared that the chips (tokens) are now worth, say 3/4 of a dollar. So, let’s say at the end of a long night at the poker table you end up breaking even–you wind up with the same amount of chips you started with.

You then go to redeem your chips at the window at the end of the night only to find out that they can now only be redeemed for 3/4 the value you came in with–they are worth less. You are now 1/4 poorer, despite having not lost any chips! This should give you some idea of the effects that “crying down” the currency, or “crying up” the standard had in the real world.

Not only that, but the casino’s “debts” to you are simultaneously lowered. Recall that coins were a record of the sovereign’s debt to the holders of the coinage. Thus, by reducing the standard, sovereigns could also lower the debts and liabilities they owed to the holders of the currency, i.e. to the general public. This also had the effect of transferring resources from the subjects to the sovereign:

We can now understand the effect of the “mutations de la monnaie,” which I have mentioned as being one of the financial expedients of medieval French kings. The coins which they issued were tokens of indebtedness with which they made small payments, such as the daily wages of their soldiers and sailors. When they arbitrarily reduced the official value of their tokens, they reduced by so much the value of the credits on the government which the holders of the coins possessed. [11]

But because it was such an effective way of increasing revenue to the crown, it was abused. The temptation was always there when monarchs played fast and loose with their finances, or wanted to make war on their neighbors:

Some kings…whose constant wars kept their treasuries permanently depleted, were perpetually “crying down” the coinage, in this way and issuing new coins of different types, which in their turn were cried down, till the system became a serious abuse. Under these circumstances the coins had no stable value, and they were bought and sold at market prices which sometimes fluctuated daily, and generally with great frequency.

The coins were always issued at a nominal value in excess of their intrinsic value, and the amount of the excess constantly varied. The nominal value of the gold coins bore no fixed ratio to that of the silver coins, so that historians who have tried to calculate the ratio subsisting between gold and silver have. been led to surprising results…The fact is that the official values were purely arbitrary and had nothing to do with the intrinsic value of the coins. Indeed when the kings desired to reduce their coins to the least possible nominal value they issued edicts that they should only be taken at their bullion value.

At times there were so many edicts in force referring to changes in the value of the coins, that none but an expert could tell what the values of the various coins of different issues were, and they became a highly speculative commodity. The monetary units, the livre, sol and denier, are perfectly distinct from the coins and the variations in the value of the latter did not affect the former, though, as will be seen, the circumstances which led up to the abuse of the system of “mutations” caused the depreciation of the monetary unit. [12]

Given these factors, if much of your wealth were held in coin, would you be pissed off? My guess is that you would be. The thing is, so were the holders and users of medieval currencies.

But what this meant in practice was that no one was really sure of the value of their money at any given point in time. This meant in practice that much of the medieval economy remained effectively unmonetized.

Of course, it was those whose business required the use of money—people such as landlords and merchants– who were the most pissed off. Felix Martin calls them the “money interest.” As the medieval economy became increasingly centered around monetary exchanges, this money interest became more powerful, and more determined to rein in the rulers:

The remonetisation of Europe over the so-called “long thirteenth century,” from the late twelfth to the mid-fourteenth century therefore generated two phenomena that would eventually come into conflict.

The first was the emergence of a class of individuals and institutions whose wealth was held, and whose business transacted, in money-a politically powerful “money interest” beyond the sovereign’s court. The second was the growing addiction of sovereigns to the fiscal miracle of the seigniorage-a miracle which grew in proportion with the increasing use of money.

The more activities were monetarised, and the more people were drawn into the money economy, the larger the tax base on which seigniorage was levied. As sovereigns were to discover, this apparently magical source of fiscal financing did in fact have limits. They were not technical, however, but political. At some point, the new money interest was bound to assert itself against the sovereign’s perceived excesses. This point was reached in the mid-fourteenth century. [13]

Cat-and-Mouse Game

Now, recall once again that coins had a commodity value that set the floor under what they were worth. If the standard were cried down too far, the metal in the coins will be worth more than they are worth in exchange. The commodity value will exceed the exchange value.

What, then, would the sovereign do? The only answer was to issue coins with less precious metal in them, to make sure their commodity value remained under their exchange value. This is, a falling exchange value (or, conversely, a rising precious metal value) inevitably meant issuing coins with less precious metal content.

Naturally, this [seignorage] process was unpopular with users of the sovereigns coinage. Fortunately for them, there was one partial, natural defence. High-value coins-minted from silver, for example-had an intrinsic value regardless of the tariff assigned to them: the price at which their metal content could be sold on the open market to smiths and jewellers, or indeed to competing mints. They included, as it were, portable collateral for the sovereign’s promise to pay.

This meant that there was a lower limit to the tariffed value which the issuing sovereign could assign his coinage. If a coin was cried down too far, the collateral would be worth more than the credit the coin represented, and holders could sell it to a smith for its bullion value. On the other hand, the alert sovereign could respond by reducing the silver content of the new type when the coinage was re-minted-a so-called “debasement.”

It was a recipe for a constant game of cat-and-mouse between the coin-issuer and the coin-user, with even a coin’s precious-metal content, which effectively served as collateral for the creditworthiness of its issuer, always vulnerable to erosion by the predations of the sovereign. [14]

If the standard got too far out of whack, the coins would simply be melted down and shipped abroad. Because melting down coins was illegal, people simply tended to “clip” them, shaving a bit off at a time, and collecting the shavings. Sovereigns eventually responded by making coins with edges that were hard to clip. In any case, “bad” money tended to drive out “good” (Gresham’s Law).

The net effect was that if the standard fell too far, there would be a chronic shortage of precious metal circulating in the kingdom, since coins would be melted down and shipped abroad. This would reduce the amount of currency circulating, leading to deflation. Consequently, a fall in the price of silver might cause more coins to be minted, causing inflation. This fluctuation in the metal content of the coins caused by fluctuations in the standard and the price of bullion led to the misconception that “debasing” the currency by issuing less precious metal in them is what caused price movements.

Because heavily indebted states were perennially “crying down” the currency, this gave rise to the erroneous belief that the precious metal content was related to the value of the currency. States with debt problems issued coins with less precious metal in them. But the problem was fundamentally not with the precious metal, but with the state’s finances.

All our modern legislation fixing the price of gold is merely a survival of the late medieval theory that the disastrous variability of the monetary unit had some mysterious connection with the price of the precious metals, and that, if only that price could be controlled and made invariable, the monetary unit also would remain fixed. It is hard for us to realize the situation of those times. The people often saw the prices of the necessaries of life rise with great rapidity, so that from day to day no one knew what his income might be worth in commodities.

At the same time, they saw the precious metals rising, and coins made of a high grade of gold or silver going to a premium, while those that circulated at their former value were reduced in weight by clipping. They saw an evident connection between these phenomena, and very naturally attributed the fall in the value of money to the rise of the value of the metals and the consequent deplorable condition of the coinage. They mistook effect for cause, and we have inherited their error. Many attempts were made to regulate the price of the precious metals, but until the nineteenth century, always unsuccessfully.

The great cause of the monetary perturbations of the middle ages were not the rise of the price of the precious metals, but the fall of the value of the credit unit, owing to the ravages of war, pestilence and famine. We can hardly realize to-day the appalling condition to which these three causes reduced Europe time after time…[15]

As Innes notes, during times of pestilence, war and famine (such as the Crisis of the Late Middle Ages), governments went heavily into debt to fund wars and output production was curtailed. Coinage was debased and prices went up. But the ‘debasing’ of the coinage, i.e. issuing coins with less precious metal in them, was not the cause!

Since coins were a record of government’s debts to the public, the “trust” in coins tended to reflect the faith in the government issuing the coin. If a government were heavily indebted, it would likely cry up the standard, and/or remint the coins. Hence, the value of coins tended to reflect the fundamental financial soundness of the issuer –the currency of heavily indebted states was worth less.

…prices rose owing to the failure of consecutive governments throughout Europe, to observe the law of the equation of debts and credits. The value of the money unit fell owing to the constant excess of government indebtedness over the credits that could be squeezed by taxation out of a people impoverished by the ravages of war and the plagues and famines and murrains which afflicted them…

The depreciation of money in the middle ages was not due to the arbitrary debasement of the weight and fineness of the coins. On the contrary, the government of the middle ages struggled against this depreciation which was due to wars, pestilences and famines – in short to excessive indebtedness. Until modern days, there never was any fixed relationship between the monetary unit and the coinage.

We imagine that, by maintaining gold at a fixed price, we are keeping up the value of our monetary unit, while, in fact, we are doing just the contrary. The longer we maintain gold at its present price, while the metal continues to be as plentiful as it now is, the more we depreciate our money. [16]

Problems with Money

These problems with money led to several reactions. The “money interest” went to great lengths to dissuade the sovereign from exercising his or her seignorage power too liberally. In one case, they even got a prominent medieval scholar, Nicolas Oresme, to write an entire treatise on money.

Oresme’s argument basically boiled down to this–although the sovereign theoretically controlled the value of the currency, in a real sense, the currency “belonged” to the whole community. Thus, by abusing his power, the sovereign prevented orderly commerce from taking place, and caused harm to his subjects. In other words, he was derelict in his duties. It was an early case of the money interest attempting to assert its control over sovereign governments; a problem which continues to this day.

A second solution was to avoid coins altogether and use the older, more “primitive” technology of tally sticks instead.

Even in the heyday of coins, they were hardly the only form of money. For one thing, most everyday transactions were conducted using debt—what we would call trade credit, although it was used by consumers as well as businesses—because the smallest coin was simply too big to pay a day’s wages, let alone buy a beer, at least in England.

For another, as early as the 14th century, carved sticks of wood known as tallies were circulating as money. Tallies began as records of taxes collected, then became receipts the crown gave to tax collectors for advances of coin (the idea being that, at tax time, the collector could show the tally and say, “I already paid”), and finally evolved into tokens that the government used to pay its suppliers (who could then cash them with tax collectors, who would use them at tax time). In most of the 15th century, a majority of tax receipts came in the form of tallies rather than cash. Again, if the government is willing to take something in payment of taxes, it becomes money.

Mysteries of Money (The Baseline Scenario)

“Issuing a tally” became another critical way for medieval sovereigns to raise needed revenue, especially when silver was scarce.

Kings learned to ‘anticipate’ tax revenues by issuing tallies in payment (‘raising a tally’). Holders of the tally stocks were then entitled to collect tax revenue, turning over the stocks to those who paid taxes. These would then be returned to the King as evidence that taxes had been paid.

Both sovereign and private tallies began to circulate widely in Europe during the later middle ages, taking on the characteristics of negotiable and discountable financial instruments, and were increasingly used as the primary means of financing sovereign spending. [17]

The fact that wooden tally sticks have by-and-large not survived to the present day and coins have colors our understanding of money to this day. Clearly people were not exchanging tally sticks for the value of the wood in them.

The other way they got around the problems with sovereign money was to use trade credit instead. What merchants and bankers did was to conduct their business using sophisticated paper instruments called bills of exchange. These bills of exchange, mediated through the great trading houses of Europe, would allow international business to be conducted in this fractured monetary landscape. While they could be converted into the local government currencies, they were denominated in a totally different monetary unit established by the banks themselves called the ecú de marc.

…there was, by definition, no sovereign authority to regulate commerce between countries, and no sovereign money with which to transact. So it was here, in the international sphere, that banking’s potential to accelerate the commercial revolution was first fully realised. The central innovation was the perfection, by the mid-sixteenth century, of the system of “exchange by bills”: a procedure for financing international trade using monetary credit issued by the clique of pan-European merchant bankers, denominated in their own abstract unit of account, recorded in bills of exchange, and cleared at the quarterly fair of Lyons. [18]

The bill of exchange was invented in the Arabic world and probably introduced into Europe by the Knights Templar, making them Europe’s first exchange bankers. The Templars, a religious/military order, also acted as moneylenders and pawn brokers. The true “secret” of the Templars may be how they managed to accomplish this in an era long before mass communication, and the Templar “treasure” may have been the vast hoards of wealth they managed to accumulate through their international banking operations.

The Templars dedicated themselves to the defence of Christian pilgrims to Jerusalem. The city had been captured by the first crusade in 1099 and pilgrims began to stream in, travelling thousands of miles across Europe. Those pilgrims needed to somehow fund months of food and transport and accommodation, yet avoid carrying huge sums of cash around, because that would have made them a target for robbers.

Fortunately, the Templars had that covered. A pilgrim could leave his cash at Temple Church in London, and withdraw it in Jerusalem. Instead of carrying money, he would carry a letter of credit. The Knights Templar were the Western Union of the crusades. We don’t actually know how the Templars made this system work and protected themselves against fraud. Was there a secret code verifying the document and the traveller’s identity?

The Templars were not the first organisation in the world to provide such a service. Several centuries earlier, Tang dynasty China used “feiquan” – flying money – a two-part document allowing merchants to deposit profits in a regional office, and reclaim their cash back in the capital. But that system was operated by the government. Templars were much closer to a private bank – albeit one owned by the Pope, allied to kings and princes across Europe, and run by a partnership of monks sworn to poverty.

The Knights Templar did much more than transferring money across long distances…they provided a range of recognisably modern financial services. If you wanted to buy a nice island off the west coast of France – as King Henry III of England did in the 1200s with the island of Oleron, north-west of Bordeaux – the Templars could broker the deal. Henry III paid £200 a year for five years to the Temple in London, then when his men took possession of the island, the Templars made sure that the seller got paid. And in the 1200s, the Crown Jewels were kept at the Temple as security on a loan, the Templars operating as a very high-end pawn broker.

The warrior monks who invented banking (BBC)

The Templars were violently disbanded (on Friday the thirteenth, 1307), bringing their banking operations to a halt. In their place, “Lombard Banking” originating in Italian city-states like Venice, Florence and Genoa developed the bills of exchange into a private international currency system that existed alongside the coins and tallies issued by local governments. In the process, they became the world’s first modern banks.

The effects this had were profound. What it did was introduce a parallel international currency system which functioned alongside the coins issued by states, but remained outside of any government’s control. It’s this system we’ll take a look at next time.

[1] Wray: State and Credit Theories of Money, p. 189

[2] Wray: State and Credit Theories of Money, p. 191

[3] Felix Martin: Money, the Unauthorized Biography, p. 87

[4] Wray: State and Credit Theories of Money, p. 29

[5] Felix Martin: Money, the Unauthorized Biography, pp.87-88

[6] Felix Martin: Money, the Unauthorized Biography, pp. 88-89

[7] Wray: State and Credit Theories of Money, pp. 28-29

[8] Wray: State and Credit Theories of Money, p. 28

[9] Niall Ferguson: The Ascent of Money, pp. 24-25

[10] Wray: State and Credit Theories of Money, p. 220

[11] Wray: State and Credit Theories of Money, p. 42

[12] Wray: State and Credit Theories of Money, p. 30

[13] Felix Martin: Money, the Unauthorized Biography, p. 89

[14] Felix Martin: Money, the Unauthorized Biography, pp. 88-89

[15] Wray: State and Credit Theories of Money, p. 43

[16] Wray: State and Credit Theories of Money, p. 63

[17] Wray: State and Credit Theories of Money, p. 3

[18] Felix Martin: Money, the Unauthorized Biography, pp. 105-106

The Origin of Money 6 – The Roman World

Ancient Rome’s Wall Street as it looks today.

The Roman Empire is a Hellenistic Civilization brutally manhandled by a State apparatus of Italian origin.
–Paul Veyne, A History of Private Life

The Roman Empire expanded the military-coinage-slavery complex to encompass much of the civilized world as David Graeber explains:

In fact, the entire Roman empire, at its height, could be understood as a vast machine for the extraction of precious metals and their coining and distribution to the military-combined with taxation policies designed to encourage conquered populations to adopt coins in their everyday transactions. Even so, for most of its history, use of coins was heavily concentrated in two regions: in Italy and a few major cities, and on the frontiers, where the legions were actually stationed. In areas where there were neither mines nor military operations, older credit systems presumably continued to operate. [1]

The topic of the Roman economy is vast, and too complex for our survey of money. However, some important points can be made.

Ancient Rome was a market economy

One is that the Roman economy was probably the most market-oriented economy at least until the economies of the Age of Exploration in the North Atlantic, and possibly even until the Industrial Revolution in the nineteenth century. Money relationships, especially at the height of the empire, were extensive, and products were moved and traded over long distances, especially over water (land transport would continue to be difficult and expensive until the advent of the railroad). Keith Roberts writes: “Some fifty million people throughout the empire enjoyed a largely peaceful and orderly state, with common languages, currencies, laws, and customs, where a money-based market economy prevailed. Not until the European Union in 1992 did Europe possess a common market of comparable geographic size. [2]”

It is useful to review once again the distinctions between different types of economies made in our study of primitive money: marketless (reciprocity and redistribution prevail); peripheral markets only (markets play only a tangential role with surplus commodities), market-dominated (i.e. peasant) economies (where large amounts of goods are for sale and many people make their living from market sales); and fully-integrated market economies, where all production factors are coordinated by markets and produced for profit.

Peter Temin has argued that the Roman empire should be properly classified as a market economy:

I argue first that many individual actions and interactions are seen best as market transactions. I…argue that there were enough market transactions to constitute a market economy, that is, an economy where many resources are allocated by prices that are free to move in response to changes in underlying conditions. More technically I argue that markets in the early Roman Empire typically were equilibrated by means of prices. P.6

There is no formal test to decide which kind of economy we are observing…for an economy about which we have fewer preconceptions we will need to ask several questions. Do the most important commodities, like food and lodging, have prices that move? Are there many transactions in which price appears to play a large part? Do prices move to clear markets? These questions will be answered affirmatively in the succeeding chapters… P.9

Going from markets to a market economy adds another level of complexity to the discussion. When Hopkins described Rome as a slave society, he did not mean that everybody was a slave. Similarly, not every resource in a market economy is allocated through the market. In both cases, the terms indicate that slaves and markets were important, even dominant, institutions. In twentieth-century America—arguably the purest market economy in history—economists have estimated that one-third of economic activity in the United States takes place within households, that is, in householding. The proportion was even higher in the ancient world, but I argue that the economy of the early Roman Empire was a market economy because of the importance and prevalence of market activity. P. 11 [3]

At one point, even the right to be emperor was auctioned off to the highest bidder:

As the bidding went on, the soldiers reported to each of the two competitors, the one within the fortifications, the other outside the rampart, the sum offered by his rival. Eventually Sulpicianus promised 20,000 sesterces to every soldier; Julianus, fearing that Sulpicianus would gain the throne, then offered 25,000. The guards immediately closed with the offer of Julianus, threw open the gates, saluted him by the name of Caesar, and proclaimed him emperor. Threatened by the military, the senate declared him emperor.

Early Coins

Coinage most likely arrived in the Italian peninsula through the influence of Phoenician and Greek traders and merchants. There is evidence that the Romans used iron and other metals as currency. Rather than circulate as lumps, however, the metals were used in much the same manner as the tally sticks we covered back in part two. That is, they were “struck” from a larger piece to signify debts, and the pieces were matched up to satisfy the debt. Alfred Mitchell-Innes describes the method:

In the treasure hoards of Italy there have been found many pieces of copper generally heavily alloyed with iron. The earliest of these, which date from between 1000 and 2000 years B. C., a thousand years before the introduction of coins, are called aes rude and are either shapeless ingots or are cast into circular discs or oblong cakes.

The later pieces, called aes signdtum, are all cast into cakes or tablets and bear various devices. These pieces of metal are known to have been used as money, and their use was continued some considerable time after the introduction of coins. The characteristic thing about the aes rude and the ags signatum is that, with rare exceptions, all of the pieces have been purposely broken at the time of manufacture while the metal was still hot and brittle or “short,” as it is technically called. A chisel was placed on the metal, and struck a light blow. The chisel was then removed and the metal was easily broken through with a hammer blow, one piece being usually much smaller than the other. There can be no reasonable doubt but that these were ancient tallies, the broken metal affording the debtor the same protection as did the split hazel stick in later days.

The condition of the early Roman coinage shows that the practice of breaking off a piece of the coins – thus amply proving their token character – was common down to the time when the casting of the coins was superseded by the more perfect method of striking them.

In Taranto, the ancient Greek colony of Tarentum, a hoard has lately been found in which were a number of cakes of silver (whether pure or base metal is not stated), stamped with a mark similar to that found on early Greek coins. All of them have a piece purposely broken off. There were also found thin discs with pieces cut or torn off so as to leave an irregularly serrated edge. [4]

Just as with the Greek coins, there seems to have been no consistent metallic standard:

The ancient coins of Rome, unlike these of Greece, had their distinctive marks of value, and the most striking thing about them is the extreme irregularity of their weight. The oldest coins are the As and its fractions, and there has always been a tradition that the As, which was divided into 12 ounces, was originally a pound-weight of copper. But the Roman pound weighed about 327 1/2 grammes and Mommsen, the great historian of the Roman mint, pointed out that not only did none of the extant coins (and there were very many) approach this weight, but that they were besides heavily alloyed with lead; so that even the heaviest of them, which were also the earliest, did not contain more than two-thirds of a pound of copper, while the fractional coins were based on an As still lighter. As early as the third century B.C. the As had fallen to not more than four ounces and by the end of the second century B.C. it weighed no more than half an ounce or less…

An important thing to remember in reference to Roman money is that, while the debased coins were undoubtedly tokens, there is no question of their representing a certain weight of gold or silver. The public had no right to obtain gold or silver in exchange for the coins. They were all equally legal tender, and it was an offense to refuse them; and there is good historical evidence to show that though the government endeavored to fix an official value for gold, it was only obtainable at a premium.

The coins of ancient Gaul and Britain are very various both in types and in composition, and as they were modelled on the coins in circulation in Greece, Sicily and Spain, it may be presumed that they we reissued by foreign, probably Jewish, merchants, though some appear to have been issued by tribal chieftains. Anyhow, there was no metallic standard and though many of the coins are classed by collectors as gold or silver, owing to their being imitated from foreign gold or silver coins, the so-called gold coins more often than not, contain but a small proportion of gold, and the silver coins but little silver. Gold, silver, lead and tin all enter into their composition. None of them bear any mark of value, so that their classification is pure guess-work, and there can be no reasonable doubt but that they were tokens. [5]

Silver mining.

Just as with Athens and its slave-worked mines at Laurium, it was the discovery of vast deposits of silver that allowed Rome to expand its military-coinage-slavery complex. These mines were located in Spain and became part of the empire when Rome defeated Carthage in the Punic Wars and incorporated their territories. The scale of operations at the Rio Tinto mine were vast, so vast, in fact, that nothing like it was seen until comparatively modern times:

…ice-core analysis showed that during the period 366 B.C. to at least A.D. 36, a period when the Roman Empire was at its peak, 70 percent of the global atmospheric lead pollution came from the Roman-operated Rio Tinto mines in what is now southwestern Spain.

The Rio Tinto mining region is known to archeologists as one of the richest sources of silver in the ancient world. Some 6.6 million tons of slag were left by Roman smelting operations there.

The global demand for silver increased dramatically after coinage was introduced in Greece around 650 B.C. But silver was only one of the treasures extracted from its ore. The sulfide ore smelted by the Romans also yielded an enormous harvest of lead.

Because it is easily shaped, melted and molded, lead was widely used by the Romans for plumbing, stapling masonry together, casting statues and manufacturing many kinds of utensils. All these uses presumably contributed to the chronic poisoning of Rome’s peoples.

Adding to the toxic hazard, Romans used lead vessels to boil and concentrate fruit juices and preserves. Fruits contain acetic acid, which reacts with metallic lead to form lead acetate, a compound once known as ”sugar of lead.” Lead acetate adds a pleasant sweet taste to food but causes lead poisoning — an ailment that is often fatal and, even in mild cases, causes debilitation and loss of cognitive ability.

Judging from the Greenland ice core, the smelting of lead-bearing ore declined sharply after the fall of the Roman Empire but gradually increased during the Renaissance. By 1523, the last year for which Dr. Rosman’s group conducted its Greenland ice analysis, atmospheric lead pollution had reached nearly the same level recorded for the year 79 B.C., at the peak of Roman mining pollution.

Ice Cap Shows Ancient Mines Polluted the Globe (NYTimes)

Banking in Ancient Rome

Ancient Rome had a fairly sophisticated banking apparatus. In the city of Rome itself, banking was centered in the Forum, along the Via Sacra (further cementing the link between temples, money and religion). The first “banks” were most likely pawn shops, where items were held as collateral for credit. This was the case in ancient China, for example.

In ancient Rome were two basic forms of banking. One we might compare to the basic moneylending, or “payday loan” stores. This was run by the argentarii, or “silver-men.” These were typically plebeians, or sometimes former slaves. They made short-term loans and money advances with varying rates of interest. They also changed money, and took deposits for safe-keeping. Their behaviors were subject to regulations.

Run-of-the-mill banking was regulated in ancient Rome, and argentarii needed to maintain accounts of their transactions. For Latin jurists, “what characterized a bank [argentaria] was the twofold service that it provided: receiving deposits and advancing credit”. Some deposits were just for safekeeping and yielded no interest (vacua pecunia), while others did earn interest (creditum). The latter could be invested, but not the former. However, most of the loans advanced by the argentarii were apparently short term and local. In essence, the argentarii were your neighborhood bank—that is, banking for the average Joe (or the average Caius).

How Do You Say Wall Street in Latin? (Liberty Street)

High finance was a different story. This was something closer to our modern banking system. Here one could transfer large sums of money to far-flung provinces, or arrange payments and contracts, and even engage in speculation. This was run by members of the upper-class, especially the equites (knight) class. These people already had wealth and estates, but still sought out activities in order to increase their wealth in the market economy.

Aristocratic finance—the faeneratores—was quite a different business, a sort of proto-“shadow banking system.” Elite financiers weren’t subject to any special regulations. They would invest in far-flung places, especially the provinces, and would have intermediaries (societas danistaria) making sure their loans produced a good return. Sometimes they would act as private wealth managers (procuratores) for other patricians who didn’t want or didn’t know how to invest their money (unlike in the Middle Ages, lending with interest was not taboo in Rome, but spending all the time in the Forum was not considered very classy for a senator). Elite financiers had political power and, throughout Roman history, they would exercise it.

The First Financial Crisis – 33 A.D.

We tend to have images of people in ancient times primarily making purchases of vegetables in farmer’s markets with gold and silver coins, yet even by the time of Christ fairly complicated and interlinked banking systems were already commonplace. Money was already virtual, and capital moved long distances with the stroke of a stylus on a wax tablet, or the movements of beads in an abacus.

Looking back, it was easy to see that the crash was coming. There had been too much cheap money. Debt had exploded. Speculation was rife. The gap between rich and poor had widened. Welfare spending had risen. The financial system was so stretched that even a modest tightening of policy was enough to make it impossible for over-borrowed debtors to service their debts.

The US in 2007? No, this was imperial Rome during the reign of Tiberius in AD33. It was not the first documented financial crisis; that dubious accolade goes to the states of the Delian League in ancient Greece, which defaulted on their debts following a naval blockade by Sparta.

But a time traveller would see remarkable similarities between the unfolding of the Roman crisis of almost two millennia ago and the 2007-09 crash. The calling in of loans led to a credit crunch. Debtors went to the wall. Prices fell. The emperor arranged for the most heavily indebted to get interest-free loans for three years. A “bad bank” was set up. Tiberius financed his own version of quantitative easing, not by selling imperial bonds but by confiscating wealthy Romans’ assets.

Banks fiddled while Rome burned: how to predict the next global financial crisis (The Guardian)

Even back in these times, The crisis appears to have been a case of financial contagion.

“The important firm of Seuthes and Son, of Alexandria, was facing difficulties because of the loss of three richly laden ships in a Red Sea storm, followed by a fall in the value of ostrich feather and ivory. About the same time the great house of Malchus and Co. of Tyre with branches at Antioch and Ephesus, suddenly became bankrupt as a result of a strike among their Phoenician workmen and the embezzlements of a freedman manager. These failures affected the Roman banking house, Quintus Maximus and Lucious Vibo…These two firms looked to other bankers for aid, as is done today. Unfortunately, rebellion had occurred among the semi civilized people of North Gaul, where a great deal of Roman capital had been invested, and a moratorium had been declared by the governments on account of the distributed conditions. Other bankers, fearing the suspended conditions, refused to aid the first two houses and this augmented the crisis.”

When Publius Spencer, a wealthy noblemen, requested 30 million sesterces from his banker Balbus Ollius, the firm was unable to fulfill his request and closed its doors. Over the next few days, prominent banks in Corinth, Carthage, Lyons and Byzantium announced they had to “rearrange their accounts,” i.e. they had failed. This led to a bank panic and the closure of several banks along the Via Sacra in Rome. The confluence of these seemingly unrelated events led to a financial panic.

To protect themselves, banks began calling in some of their loans. When debtors could not meet the demands of their creditors, they were forced to sell their homes and possessions, and with money unavailable even at the legal limit of 12%, prices of real estate and other goods collapsed since there were so few buyers. A full scale panic followed. The panic occurred not only in Rome, but throughout the Empire…

Once again, we see that the system of money is really not coins or precious metals, but an underlying system of debits and credits.

The response to this contagion by the Roman state has been compared to the “quantitative easing” done by the Federal Reserve after 2008, except with the Roman state bailing out the banks by expanding the money supply:

100 million sesterces were to be taken from the imperial treasury and distributed among reliable bankers, to be loaned to the neediest debtors. A loaf of bread sold for half a sestertius and soldiers earned around 1000 sesterces annually. So this was about an equivalent of around $2 billion in modern terms considering the lower population at that time. The loans were to be interest free. No interest was to be collected for three years. Security was to be offered at double value in real property. This enabled many people to avoid selling their estates at distress prices, arresting the contraction in prices and ensuring that the lack of liquidity would be addressed. Many banks just never survived.

Financial Panic of 33AD (Armstrong Economics)

This ought to put to rest the idea that there was ever a “pure” market economy that could function indefinitely without any sort of government involvement or “interference” whatsoever, as libertarians claim. If such a thing could not be accomplished in the “primitive” pre-industrial conditions of the ancient Roman economy, how can we be so delusional as to think it would be possible in the fully-integrated international market economies of the Space Age, where money moves around the world at the speed of light and all production factors are coordinated by anarchic markets?

Offshore Banking and Tax Havens

The Classical world developed offshore banking centers similar to modern-day entrepots like the Cayman Islands, Panama and Singapore. These trading areas were “neutral zones” outside of the control of any formal states, and as a result, social protections did not exist. As a result such places developed into places where wealth was traded and hidden beyond the control of governments. Michael Hudson describes the most famous of these havens—the island of Delos.

[Delos’] commercial role was catalyzed in 146 BC when Rome destroyed Corinth and Carthage, and by the general breakdown of authority in the Aegean resulting from the fact that in destroying Rhodian naval power, Rome removed the single major check to piracy. Delos did not take its place in keeping Aegean commerce free from pirates. Indeed, it became their major market!

Matters were greatly aggravated after 142 BC when an ambitious military officer, Diodotus Tryphon, led a revolt to break Cilicia (in what is now southern Turkey) and neighboring Syria away from their Seleucid rulers. He organized the Cilicians into pirate fleets, and his freebooters managed to take over such government as there was in the region.

The pirates quickly monopolized the most lucrative trade of the period — that in slaves. As Strabo described matters: “Prisoners were an easy catch, and the island of Delos provided a large and wealthy market not far away, which was capable of receiving and exporting ten thousand slaves a day . . . The pirates seeing the easy gains to be made, blossomed forth in large numbers, acting simultaneously as pirates and slave traders.” They sold spoils and captives from Asia Minor, Syria and Egypt to the burgeoning southern Italian market to work as slaves on the large agricultural plantations, in handicraft workshops, or simply as household servants.

The temple of Apollo, sun-god of justice, supporting rather than curtailing the activities of the influx of pirates, merchants and usurers, provided a protective screen for the basest commercial speculations. The historian Mikhail Rostovtzeff has described how “the free port of Delos [was] left completely in the hands of bankers, merchants and traders . . . While in the early days of Delos the city was an annex to the temple, now the temple became a kind of appendix to the community, bankers with the corresponding amount of labor, mostly servile.” Each of the island’s ethnic and professional groupings formed its own cult association to represent its mercantile, shipping and banking interests. From southern Italy, for instance, came the cults of Mercury and Maia, Apollo and Poseidon. A Phoenician cult was centered in a temple replete with porticoes to display its members’ merchandise.

Yves Garlan refers to pirate-controlled Cilicia and its emporium on Delos as “counterstates,” and Rostovtzeff calls them “a new phenomenon among the city-states of Greece.” Tarn calls Delos’s relationship with the Cilician pirates an “unholy alliance . . . Delos became the greatest slave-market yet known, and as the eastern governments began to grow weaker their subjects were drained away; Bithynia is said to have been half depopulated.” He concurs that Delos represented “a unique kind of form . . . the foreign business associations became ‘settlers,’ and in their totality constituted ‘Delos,’ seemingly without any city forms at all, but under an Athenian governor; that is, political precedents were subordinated to the requirements of trade.”

The last thing the Delian merchant class wanted was a public authority to regulate its entrepot trade in captured cargoes, slaves or, for that matter, honest goods. “It is evident that the residents of Delos were not very much interested either in the temple or in the city,” concludes Rostovtzeff. “Delos was for them not their home but their business residence. What they cared for most was not the city or the temple but the harbors, the famous sacred harbor, and especially the three adjoining so-called basins with their large and spacious storehouses. It is striking that while these storehouses are open to the sea there is almost no access to them from the city. This shows that very few goods stored in them ever went as far as even the marketplaces of the city. Many of them came to the harbor, spent time in the storehouses, and moved on, leaving considerable sums in the hands of the Delian brokers. In fact in the Athenian period the city of Delos was but an appendix to the harbor. So soon as the activity of the harbor stopped, the city became a heap of ruins and it was again the temple which towered over these in splendid isolation.”

The anti-Roman leader Mithradates of Pontus received support from the Cilician pirates, and in turn gave his support to Delos. An uprising against Rome resulted in the massacre of Italian merchants and creditors throughout Asia Minor and Greece in 88 BC. Some 20,000 Romans and their retinues reportedly were killed on Delos and the neighboring islands. The pirates later turned on Delos and looted it. Rome retaliated, and the accession of Augustus a half-century later finally cleared the Mediterranean of piracy and restored peace. This dried up the sources of the Delian trade in slaves and pirate contraband.

From Sacred Enclave to Temple City (Michael Hudson)

‘Debasing’ the Currency

The causes of Rome’s collapse is a heavily politicized subject. Every political viewpoint has their own pet theory about “the” reason why Rome fell, which they project onto the past. Environmentalists might cite environmental destruction. Conservatives like to point to some sort of “moral rot”. The Alt-right points to the welfare state and breeding rates of the “inferior” poor people, i.e. dysgenics. More leftist political activists might point to extreme inequality and out-of-control military spending.

Advocates of anti-government libertarianism such as Ron Paul and Zero Hedge tirelessly argue for a return to the gold standard and argue that debasing the currency and government spending is what caused Rome to fall. In their telling, wasteful government spending was “out of control” causing the Romans to issue coins with less and less precious metal, thereby causing a loss of faith in the currency and the “free market” economy to fall apart. If only Rome had pursued “sound money” policies, they argue, we would still be building aqueducts and speaking Latin today.

However, there is another explanation for the inflation which plagued the Roman Empire, as Tim Johnson explains, citing the work of Geoffrey Ingham:

Monetarists have long argued that the fall of the Roman Empire was facilitated by an economic collapse caused by a dilution of the currency resulting in inflation. The Monetarist explanation is that the Emperors’ needed more coins to pay their armies and since they had a fixed amount of gold bullion to make coins, the coins had to be debased. Since the ‘gold price’ of goods was fixed, the ‘money (coin) price’ had to rise, because with debasement more coins were needed to deliver a fixed quantity of gold.

Advocate of fiat money theories counter argue that the Emperors raised taxes in the core provinces of Gaul, Spain and the Middle-East, and spent these taxes in Rome (public entertainment) and the frontier provinces (on the army). The core provinces obtained coins, tokens that enabled them to pay taxes, by selling goods to Rome. As long as this circulation was maintained all was well. However a combination of factors, over-reach by the Empire, natural famine and a decline in the supply of slaves — the main means of production— began to disrupt the circulation. Since the state still had to pay the army, coin flowed into the system, but taxes did not drain it out again and more money chased fewer goods, resulting in the inflation.
Fiat money is representative money but not necessarily credit money. In the Roman Empire banks did not exist, and the state could not fund its activity by borrowing from the market, as states started to do in the medieval period. There was a credit-debt type relation in the Roman economy, the state was buying goods with IOUs, in the form of the coin, which it redeemed through the tax system. If you were living on the Danube and felt the presence of the Goths more keenly than the Legions, you might well not bother to trade your produce for Roman tokens, causing scaricty at the centre and disrupting the circulation of currency.

Lady Credit (Magic Maths and Money)


One notable aspect of the Roman Empire is how much of it was built not through the activities of the state, but through private efforts oriented towards profit. Keith Roberts writes, “Yet another Roman difference was the public sector’s heavy use of private business. In the ancient Middle East, the rulers had largely operated the production and distribution of goods and services, leaving private business a marginal role. In Greek and Hellenistic cities, by contrast, the state left virtually all production and distribution to private entities [4]”

Rome pioneered the use of the publicly traded business corporation, where shares were tradeable and fungible, and production was undertaken for profit. Military supply and requisition was done by publican societies, which were essentially private contractors. Rome’s private contractors behaved exactly as the private contractors supplying America’s vast military machine do today: by profiteering and price-gouging to the maximum extent possible. The result was the same: funneling the state’s wealth to a small circle of corrupt and wealthy insiders who use their money to keep the gravy train going. It also undermined the professionalism and competence required to keep Rome’s far-flung military operations viable:

During the [Punic] war, the Roman army, which had previously provided its own food and clothing, needed others to provision, arm, and supply it. Since there were few public employees, the Senate turned to private businesses. The need for public contractors became even greater after the war, when Rome required managers, accountants, and tax collectors to operate its captured mines, quarries, forests, grazing meadows, and fisheries. The army, keeping order, had little capacity to manage these new resources. Its forces consisted only of militias raised for particular expeditions. The governors, who served only a year or so, rarely cared enough to build managerial staffs. Their eyes remained firmly fixed on a future in Rome.

The contracts for managing state resources, ultimately extended to providing public supplies and services, including the collection of customs dues and other levies, were auctioned off around the Ides of March, when an official would solicit bids in the Roman Forum. The bidder, known as the manceps, had to provide guarantees of performance, secured with pledged property. A guarantor’s liability passed to his heirs, and title to the pledged property was held under seal in the temple of Mercury.

Many of these contracts were too large, risky, long lasting, and complex for individuals. Nor could individuals or partnerships risk the open-ended financial liabilities that the contracts could entail. Partnerships, which dissolved when any partner died, were also too unreliable. Roman lawyers instead found and adapted an ancient entity, the societas publicani. Publican societies became the first business corporations in Western history. As public contractors, publican societies could hire employees; own necessary assets like cash, land, buildings, and slaves; and make contracts.

Limited liability and perpetual life allowed them to attract the large investments they needed. They profited not only from contracts, but also seized every business opportunity that their large staff and financial power could turn to profit. They supplied and traded with the Roman legions and their soldiers and often dominated local commerce as well [6]

Perhaps the major task of the publican societies was tax collection for the state. Tax collection in the provinces was “outsourced” to tax farmers, who agreed to deliver a set amount of money to the central government. Anything over and above that amount was pure profit, incentivizing them to squeeze as much profit as they could from the provinces. This tended to cause tax revolts, which needed to put down by the state (with the tax farmers keeping the profits, of course):

Their most valuable public contracts were for tax farming: private tax collection. Roman taxes took many forms. Property taxes were the most important, although the Senate, whose members owned a great deal of Italian land, used the spoils of victory over Macedonia to eliminate property taxes in Italy–an exemption they enjoyed for several centuries. There were also border tolls, customs duties, and sales taxes on slaves. Augustus created the inheritance tax for Roman citizens in 6 C.E. Caligula taxed food, lawsuits, porters’ wages, and prostitutes, and his successor Vespasian added -vegetables and public toilets…

Publican societies became so profitable that virtually the entire Roman elite, including senators who were theoretically prohibited from commerce, avidly invested in them. Shares of ownership, called particuiae (“little parts”), were traded in the Forum, making it perhaps the world’s first stock exchange. Equestrians, who faced no bar to active involvement even if they belonged to senatorial families, often sponsored the societies and managed operations…

The government’s relationship to publicans evolved over time in a way that strikingly resembles the evolution of international business by modern corporations. Initially, the government sold territories to the publicans, who like independent distributors ran their own operations and took a large share of the revenues. These deals were often corrupt and costly to the treasury. Later, when a large imperial staff allowed closer supervision, the publicans merely earned a commission on the revenues collected. By the third century C.E. the imperial staff had taken over collections completely and publican societies disappeared. [7]

The combination of private organizations and the desire for riches and loot from the provinces, were the prime drivers for imperial expansion. But as Rome expanded, conquering new territories brought increasingly diminishing returns. The people at the top of the hierarchy, whether businessmen, equestrians, senators, or generals, got rich. But for the average Roman, however, including the “middle class” in the provinces who bore the brunt of taxation, as well as the troops, these developments only led to more poverty, corruption, and violence:

While generating huge profits the publican societies were causing the military considerable grief in the provinces. Publicans aimed to maximize revenues, and the short term of their five-year contracts made exploitation rather than cultivation the method of choice. With revenue a simple measure of success, their agents had to be ruthless or lose their jobs, whatever their personal sympathies. The managers and financiers back in Rome lived far away, like the upper management of multinationals today, and could easily ignore the hardships they imposed. The result was that the publicans “were often dishonest and probably always cruel. In Spain, where powerful tribes remained hostile to Rome, the publicans provoked such frequent rebellions that the Romans called it the horrida et bellicosa provincia (“horrible and warlike province”).

Uprisings were of little concern to publican management so long as the army suppressed them. Normally, then, publicans reaped the benefits of their ruthlessness while largely escaping its costs. The soldiers, on the other hand, were endangered. They also suffered personally from dishonest publican suppliers.

In one horrible instance, when Rome was on the brink of destruction by Hannibal it hired publicans to gather and deliver urgently needed provisions for Scipio’s army in Spain where it was desperately trying to cut Hannibal’s supply route. Instead, the patriots bought and sank rotting old ships to simulate a natural loss, sold the provisions on the black market, and claimed compensation for the alleged loss.

Governors had difficulty controlling publicans. Short terms and minuscule staffs made supervision difficult. Moreover, they or their families were often investors. Governors also depended on publican societies. Publican couriers carried their mail, and the societies often provided branch funding governors abroad and collecting reimbursement in Rome…many governors … joined the publicans in exploiting the provinces for themselves. So despite enormous military antagonism, the publicans usually had a free hand. [8]

In his book Are We Rome?, Cullen Murphy indicts creeping privatization–the substitution of private interests seeking gain in place of the public good–as a critical factor in the fall of the Rome:

Serious challenges to any society can come from outside forces-environmental catastrophe, foreign invasion. Privatization is fundamentally an internal factor, though it has an impact on the ability to face external threats. [Ramsay MacMullen in his important study Corruption and the Decline of Rome]…asked this question–How does power become powerless–out of dissatisfaction with the many theories put forward to explain Rome’s gradual decline in the West. His answer is privatization–the deflection of public purpose by private interest.

Such deflection of purpose occurs in any number of ways. It occurs whenever official positions are bought and sold. It occurs when people must pay before officials will act, and it occurs if payment also determines how they will act. And it can occur anytime public tasks (the collecting of taxes, the quartering of troops, the management of projects) are lodged in private hands, no matter how honest the intention or efficient the arrangement, because private and public interests tend to diverge over time. Privatization, whether legal or corrupt. is how the gears of government come to break. In Rome. the consequences were felt in every area of society… [9]

Roman Agribusiness

The existence of well-developed and lucrative export markets spurred the development of what we might today call agribusinesses. These were centered around plantations called latifundia which were staffed by gangs of slaves under the supervision of a foreman. These were owned by absentee owners instead of owner-operators and were focused on export commodities. While most other ancient societies attempted to preserve self-sufficiency for their citizens on the land, the Roman world removed systems of self-support for many people, turning them into dependents and eviscerating the agrarian “middle class.” This gave rise to the “bread and circuses” which were designed to pacify the restless urban proletariat.

Roman agribusiness…began with the Second Carthaginian War. As in Greece and Pergamum, war’s slaughter of peasants made it possible. Italian deaths numbered in the hundreds of thousands and even survivors were often absent for seven years or more while Hannibal’s armies ravaged their families and farms. Many peasants lost their land or sold it at distressed prices, and others fared worse, as noted by Sallust: “While the generals and the cliques seized the spoils of war, their soldiers’ parents and children were driven from house and home if they had stronger neigbbors.

Just as this calamity for peasants was allowing those who profited from the war-patricians whose estates supplied the city and the army, officers enriched with Carthage’s booty, and sundry war profiteers–to acquire land at fire-sale prices, the market system that had replaced subsistence farming around Rome was making it feasible to generate profits by raising crops for sale. The value of supplying that market would only increase during the republic’s remaining centuries as more and more Romans got their provisions from it: 60-90 percent of Rome’s residents by the end of the republic in 31 B.C.

Patrician eagerness for profit helped drive this commercialization. Rome enjoyed an explosion of wealth as publican societies won huge new contracts to operate the mines, forests, fisheries, and other facilities captured from the Carthaginians in Spain. Newly prosperous landowners, publican shareholders, and military officers flush with Carthaginian booty financed increasingly extravagant displays of luxury. An intense new interest in money took hold while conservatives like the historian Sallust complained that avarice was “the root of all evil. Greed undermined loyalty, honesty and the other virtues. In their place it taught arrogance, cruelty, disregard for the gods and the view that everything was for sale.

After the war with Hannibal, patricians with access to markets were therefore keen to make farming pay…The greatest innovation…was to use enslaved farm labor. This became feasible where land acquired in the wake of the war came largely free of peasants, clearing the way to use slaves. Slaves were more productive than peasants. Peasants came with hungry families, set their own work schedules, and produced no more than they had to. They participated only marginally in the cash economy, consuming roughly 60 percent of what they produced, using 20 percent for seed, and paying rent and taxes before they could make the occasional purchase. They stoutly resisted change, and as citizens they could not be easily coerced.

Slaves, on the other hand, did what they were told. They were normally single men fed five pounds of mostly cheap gruel per day. It has been estimated that twenty slaves could be fed on what eight peasants and their families consumed. Moreover, in the decades after the war little or nothing was spent to clothe or house field slaves, who were branded in the face, slept in chicken coops, and normally went chained and naked under the overseer’s whips. Although they quickly died, replacements were cheap. In Italy, the use of slaves even cut the one tax landowners had to pay, a head tax on peasants. According to most historians, the Italian slave population, most of them on farms 86 rapidly grew to what contemporaries estimated at two million by the late republic and remained at that level for centuries afterward.[10]


The guild system appears to have been the major way of organizing skilled labor from its beginnings up through the Industrial revolution (outside of household methods of production, that is). While the guild system is associated by most people with the Medieval period, it turns out that guild systems existed as far back as ancient Babylon, and guilds were plentiful in Ancient Roman times. Guilds had a monopoly on the service they provided. At its heart, the guild system provided the following:

  • A way of ensuring high quality standards of workmanship and consistency or goods and services.
  • A way of passing down essential craft skills to future generations (apprenticeship), and a way of ensuring the competence of practitioners (mastery).
  • A way of pooling resources among the guild members for mutual support. Guilds pooled their resources to pay for insurance.

The prime agents of this industrial freedom were the craft guilds: independent self-governing bodies, established typically in equally self-governing cities, which provided for the education, the discipline, and the sustenance of their members, from youth to old age, in sickness and health, and cared for the widows and orphans of their brothers in need. Not least, the guilds set for themselves standards of qualitative performance: quantity production, as such, did not play a part except where the guild system itself had broken down. [11]

Guilds functioned as the ancient world’s licensing bodies, lobbying groups, regulatory standards bodies, and unions, all in one. When they were smashed, many of these functions had to be taken over by the state out of necessity, including the provision of social insurance, which was formerly provided by the guilds.

As the number of crafts and the number of craftsmen…multiplied, the practitioners of the various skills tended to collect in certain quarters of the city or on certain streets for the convenience of customers and suppliers. This congregation of specialists led to one of the most far-reaching and long-lasting socioeconomic innovations of the ancient world: the craft corporation or guild.

In its beginnings the craft association was evidently religious-social in character. Each association had its patron god or goddess, and its members held their own communal religious services, while a mutual-aid function similar to that of modern trade unions included funds for sickness and burial- but in time the guilds came to undertake the regulation of production and fixing of standards. In the Roman Empire the government gave its sanction and reinforcement to the guild movement, out of an interest in assuring continuation of craft production and in regulating it for the benefit of the state. Ultimately the Roman corporations became so closely controlled that they functioned virtually as a part of the state apparatus.

Related to the historical development of craft guilds was the tendency toward occupational heredity, a trend best documented, like the guild movement, in Rome. The naturalness of occupational heredity-a father teaching his son his trade-is evident enough, but in the later Roman Empire it received the powerful sanction of law. The reason lay in the general economic decay that affected various occupations unevenly-rendering some ill paid or debt ridden. Practitioners of these crafts naturally sought to escape into more lucrative or easier work.

Consequently, among the “reforms” of Diocletian were laws compelling sons to follow in their fathers’ footsteps lest trades essential to the state wither. Among these essential occupations were those of the millers and bakers who supplied Rome with bread, the carpenters and masons w ho built and maintained the public buildings, the armorers and ironworkers who equipped the legions, and the transport workers on land and sea. Eventually” as the catastrophic economic decline of Rome continued, the reactionary and harmful system was extended to nearly all crafts and professions, There is little doubt that Diocletian’s laws received support from popular attitudes, which favored people’s staying in “their place” and frowned on upward mobility. [12]

Guilds are depicted by the modern economic priesthood as enemies of progress because they resisted the techniques of mechanized mass production. However, the guild members were independent and self-sufficient, and not property-less workers dependent on wages to survive.


Roman “business” and politics was conducted through the patronage system, which was at the heart of the Roman social relationships. Patronage was a relationship between a patron and one or more clients. Similar to the feudal system, the patronage system entailed duties and obligations between people, mediated by status (as opposed to contractus–legal contracts).

The patronage system has been compared to the honor bonds between members of the Sicilian Mafia, or the Japanese concept of giri. Giri undergirds Japanese business in a way that is alien to those of in the Western World where business is impersonal, and relationships are just conveniences mediated by cash transactions alone. Keith Roberts writes, “Another Roman innovation was its patronage system, a binding norm of relationships that regulated social and organizational life. This loyalty-based type of relationship so effectively inspired trust that it allowed Roman businesses to transcend the family-based model of earlier times, while ensuring a far more meritocratic and free-flowing distribution of credit.” [13] The patronage system, rather than impersonal legal contracts, is how stuff got done:

By modem standards there were not a great many officials or bureaucrats in Rome until late in the empire; the administration and well-being of the capital and all the other cities and towns depended on the talents and the largesse of the upper classes, and on the patronage networks they controlled.

In the system’s idealized form, the elites and their clients constituted an interlocking force for cohesion. A memorable passage in Jerome Carcopino’s Daily Life in Ancient Rome describes what happened every morning soon after Romans woke up, when all around the city clients visited their patrons, and each was alert to the other’s needs. …Carcopino writes:

“From the parasite do-nothing up to the great aristocrat there was no man in Rome who did not feel himself bound to someone more powerful above him by the same obligations of respect, or, to use the technical term, the same obsequium, that bound the ex-slave to the master who had manumitted him. The patronus, for his part, was in honour bound to welcome his client to his house, to invite him from time to time to his table, to come to his assistance, and to make him gifts.”

The patron-client relationship was so pervasive that it helps illuminate not only Rome’s social architecture but also, quently, its way of conducting foreign affairs. The term “client state” came into being for a reason… Patronage spilled over into communal adornment; it was in fact inseparable from it. The Roman magnates competed with one another to endow the capital with improvements…

The expectation in Rome, maintained over many centuries, was that affluent citizens, as individuals rather than as taxpayers, should provide for community needs. Did the city require another aqueduct? An emergency supply of wheat? A fountain? New roads? Baths? A stadium? A temple? Repairs to the walls? Some magnate would surely provide it-in return, implicitly, for a measure of public power, and of course for ample public recognition. Inscriptions on countless marble fragments attest to such generosity ….. an early version of “brought to you by . .’ You can’t sit drinking an espresso in front of the Pantheon without noticing that you have M. Agrippa (the name rendered in very big letters) to thank for the original building…[14]

Ancient Rome as Creditor Oligarchy

According to Michael Hudson, Rome eventually developed into what he calls a “creditor oligarchy.” Money relationships allowed a small portion of the population to enslave the majority in debt.

[10:00] What people think is the start of Western civilization was the falling apart of [the] Near Eastern origins of civilization; of this economy that had been put together in a very well-organized [way]. All of a sudden, instead of the public institutions, you had local chieftains occurring, and in Rome, very soon you had the aristocratic families overthrow the kings and the functions that were in the public sector in the Near East all of a sudden were taken over by private families. Let’s call them the mafia, because that’s basically what the Roman oligarchy was.

And there was a complete change in policy from the Near Eastern Bronze Age to Classical Antiquity. When a new ruler would come to the throne in Mesopotamia, the first thing they would do on their first full year on the throne was to proclaim a clean slate, and that’s because a lot of the debts that were denominated in barley couldn’t be paid…there was a general understanding that debts tended to grow faster than the ability to pay…

…What happened by the time of 133 BC was, in Rome, you had basically a Milton Friedman philosophy of free markets by the oligarchy. And what they realized in Rome was exactly what Richard Nixon and Henry Kissinger realized in Chile. You can’t have a free market for creditors if you don’t murder everyone who disagrees with you. If you don’t kill everyone who wants to cancel the debts, if you don’t kill everyone who knows history, if you don’t kill the labor leaders, you can’t have a free market oligarchy-style.

So they murdered the Gracchi. They murdered the supporters of the debt cancellation. Essentially there was a hundred-year social war in Rome. And the result was by the time the empire got going, one quarter of the Roman population was in debt bondage or outright slavery.

Michael Hudson: Money & Debt (YouTube)

It is thought that this extreme inequality was a fundamental factor in Rome’s collapse. An impoverished and demoralized population has no investment in the continuance of a society which offers them little but exploitation and immiseration.

Economic Growth

This link gives a good summary of the rise and fall of the Roman economy based on the work of Dr. Phillip Kay: Economic Growth in Ancient Rome (Capitalism’s Cradle)

The Fall

The dispersal of the public good into private hands led to a disintegration of the state. Eventually, there simply was no state anymore; the government’s orders went unheeded and people lost faith in the ability to declare and enforce laws. Private power, often exercised by local chieftains and warlords, filled the void, resulting in in a political fragmentation.

IN THE END, Rome was heading toward something the Romans couldn’t, by definition, have a term for. But we do: it’s the Middle Ages. The precise definition of “feudalism” is one of those things on which medievalists can’t quite agree-the field is divided into warring fiefdoms- but the historian F. L. Ganshof discerned in feudal society one basic quality: a dispersal of political authority amongst a hierarchy of persons who exercise in their own interest powers normally attributed to the state. Public interest had become private.

This isn’t the place for an extended excursion across a thousand years of Western history. In brief, for many centuries power was wielded in Europe by monarchs and vassals as if it were a form of private property. ‘The levying of taxes, the raising of armies. the meting out of justice-these things were done in the name of the ruler, and the fruits of his administration were enjoyed by those who acknowledged the ruler’s personal lordship. The eventual path away from the Middle Ages was marked by the halting emergence of governments defined by communal interest rather than private prerogative…

Whatever the root cause, the result was undisputable: a dissolution of centralized authority, relocalization of the economy, simplification of society, flight from cities and cancelling of debts. Many economies returned to subsistence. Nomadic Tribes settled in many parts of the empire, and traditional tribal arrangements prevailed. Money and markets, for the most part, went away. [15]

Money and markets make a comeback in the Middle Ages, beginning with the great recoinage under Charlemagne. However, while the Roman coins were introduced into a unified monetary space, the new coins would be introduced into a fragmented political landscape. This had profound ramifications that we’ll consider next time.

[1] David Graeber; Debt: The First 5000 Years, pp. 230-231

[2] Keith Roberts; The Origin of Business, Money and Markets, p. 133

[3] Peter Temin; The Roman Market Economy

[4] Wray, Credit and State Theories of Money: The Contributions of Alfred Mitchell-Innes, p.38

[5] Wray, Credit and State Theories of Money: The Contributions of Alfred Mitchell-Innes, p.25

[6] Keith Roberts; The Origin of Business, Money and Markets, p. 149

[7] Keith Roberts; The Origin of Business, Money and Markets, p. 149-151

[8] Keith Roberts; The Origin of Business, Money and Markets, p. 160

[9] Cullen Murphy; Are We Rome?, pp. 97-99

[10] Keith Roberts; The Origin of Business, Money and Markets

[11] Lewis Mumford; The Myth of the Machine, Vol. 1, pp. 133-13

[12] Melvin Kranzberg and Joseph Geis, By the Sweat of Thy Brow: Work in the Western World, pp. 41-41

[13] Keith Roberts; The Origin of Business, Money and Markets, p. 133

[14] Cullen Murphy; Are We Rome? pp. 97-99

[15] Cullen Murphy; Are We Rome? pp. 97-99

Note: some of this materials was cited in my summary of Privatization in the Ancient World. I have removed it from there and placed it here.

The Origin of Money – 5: Money and the Classical World

Depiction of ritual sacrifice from the Parthenon

The First Global Economy

During the Bronze Age trade expanded across the eastern Mediterranean to such an extent that that some historians refer to this as “The first age of globalization.” The ancient palace civilizations achieved maturity—Egyptians, Babylonians, Assyrians, Hittites, Mycenaeans, Persians, Canaanites, and many others developed vast and complex trade and exchange networks with neighboring cultures large and small. Cargo ships plied the seas, rivers and canals, transporting goods from as far afield as India and the British isles. Yet this was still accomplished not through monetary exchange networks or banks, but rather through gift exchange carried out primarily by ruling elites. Rulers attempted to cultivate artificial family ties with other rulers, or sometimes literal ones through intermarriage (the exception being Egypt, which never intermarried), as Eric Cline explains in 1177BC: The Year Civilization Collapsed:

[The Amarna letters]…provide us with insights into trading and international connections in the time of Amenhotep III and Akhenaten during the mid fourteenth century B.C. It is apparent that much of the contract involved “gift giving” conducted at the very highest levels–from one king to another.…Another royal letter, from Akhenaten to Burna-Buriash II, the Kassite king of Babylon, includes a detailed list of the gifts that he has sent…Similar detailed letters with comparable long lists of objects, sometimes sent as part of a dowry accompanying a daughter and sometimes just sent as gifts, come from other kings…We should also note that the “messengers” referred to in these, and other, letters were often ministers, essentially sent as ambassadors, but were frequently also merchants, apparently serving double duty for both themselves and the king.

In these letters, the kings involved often referred to each other was relatives, calling one another “brother” or “father/son,” even though they were usually not actually related, thereby creating “trade partnerships. ” Anthropologists have noted that such efforts to create imaginary family relationships happen most frequently in preindustrial societies, specifically to solve the problem of trading when there are no kinship ties or state-supervised markets. It is not always clear what relationship merits the use of the term “brother,” as opposed to “father’ and ‘son,” but it usually seems to indicate equality in status or in age, with “father/son” being reserved to show respect..[1]

This “global sphere of trading” fell apart during the twelfth and thirteenth centuries B.C., during a period referred to by historians as the “Bronze Age Collapse” Societies all around the Mediterranean region became less complex and decentralized. Many different factors contributed to the collapse; so many that historians tend not to refer to a single cause, but rather a “perfect storm” of events which precipitated the collapse. Among them are:

-Climate change
-Environmental destruction
-Resource depletion (e.g. topsoil, timber)
-Volcanic eruptions
-Disease epidemics
-Military invasions of the so-called “Sea Peoples”

The Palace Economies of the Minoans and Mycenaeans faltered and disappeared. In their place, landed estates, often controlling large herds of livestock, became the new centers of power. The Dorian invaders came down from the north and colonized Greece, ushering in a tribal society ruled by an aristocratic warrior elite. This was an early regime of privatization as Michael Hudson describes:

From 1200 BC to about 750 BC in the Mediterranean you have a Dark Age. Apparently you had not only very bad weather around 1200 BC – maybe a small Ice Age and drought – but the weather and crop failures led to mass migrations and invasions. The palaces of Mycenaean Greece were burned and syllabic writing disappeared for nearly 500 years.

Then, when you have alphabetic writing emerging, the person whose title originally meant “local branch manager” of the palace workshop suddenly appears as the basileus, the ruler. But mostly you have landholding aristocracies holding the population in debt serfdom (like the Athenian hektimoroi, “sixth parters” liberated by Solon in 594 BC). It was much like the post-Soviet kleptocrats when Red Managers gave themselves control of their companies. When central power falls apart, local headmen take over. The dissolution of royal power led to privatization – including the privatization of credit, taking it and its rules out of royal hands. So Clean Slates stopped.[2]

Dark Age Greece

This is the culture that is depicted in the foundational tales of Western Literature—the Iliad and the Odyssey. The Greek warrior aristocracy was based around certain key principles:

1.) Absolute loyalty to one’s chief/ruler/king.
3.) Reciprocal gift exchange among aristocrats, especially upon parting.
1.) The sharing out of booty to warriors after the successful sack of a city or the defeat of one’s enemies.
2.) Ritual sacrifice to the gods, especially of oxen, and the partitioning out of roast meat to all adult male members of the tribe.

Greek oligarchs would commonly exchange “prestige goods” such as sacrificial tripods in a form of ceremonial gift exchange. The would also often exchange brides. Bride exchange, reciprocal gift giving among chieftains and distribution of booty to warriors in raids formed the basis for economic life in Dark-Age Greece. In these institutions, we see the same basic mechanisms at work in tribal societies studied by anthropologists today:

These three simple mechanisms for organising society in the absence of money-the interlocking institutions of booty distribution, reciprocal gift-exchange, and the distribution of the sacrifice-are far from unique to Dark Age Greece. Rather, modern research in anthropology and comparative history has shown them to be cypical of the practices of small-scale, tribal societies.

Of course, such pre-monetary social institutions have assumed many forms, reflecting the peculiar circumstances and beliefs of the peoples in question. But the anthropologists Maurice Bloch and Jonathan Parry have identified a widespread twofold classification. Comparative studies a similar pattern of two related but separate transactional orders: on the one hand, transactions concerned with the reproduction of the long-term social or cosmic order; on the other, a sphere’ of short-term transactions concerned with the arena of individual competition. The premonetary institutions of the Homeric world conform to the scheme.

On the one hand, there was the primeval institution of the sacrifice and the egalitarian distribution and communal consumption of its roast meat-a ritual expression of tribal solidarity before deity probably inherited from the most distant Indo-European past. This was the institution that governed the long-term transactional order. The other, there were the conventions of reciprocal gift-exchange and of booty distribution. These were the rules that governed the “short-term transactional order,” concerned not with cosmic order and harmony between the classes but with the more mundane matter of ensuring that the everyday business of primitive society-drinking and hunting when at peace; rape and pillage when at war-did not dissolve into chaos.[3]

The ritual sacrificial meal was particularly notable. Unlike the more hierarchical societies of the Near East, the sacrificial meal enforced a more egalitarian social order in which every individual member of the community had value in relation to their status. There was also the notion of debt to the gods and redistributive justice. Such rituals were under the control of the warrior aristocracy and were conducted in their estates, which also functioned as early temples. Meat was distributed on metal spits, called obols, and ownership of the spit was to affirm one’s status as an adult male member of the tribe:

…the most important redistributive activity was…a highly ritualized communal sacrificial meal. Conducted in honor of a commonly-worshiped divinity, the tradition consisted of a public killing, roasting, and eating of sacrificial animals. The objective of the ritual was to establish solidarity and social cohesion among the members of the community.

Perhaps the most prominent feature of the communal sacrificial model was its egalitarian emphasis, manifest in “just” and “equal” distribution of roasted bull’s meat among the ritual participants…While the ritual employed the principles of collective participation (koinōnia) and “equal distribution to all”, one’s equal share corresponded to one’s social status…The just shares allocated to ritual participants differed not only in quantity, but in quality as well. The more honored parts of the sacrificial animal, such as the limbs, were customarily allotted to religious officials…

…Purporting to allocate just and equal shares to the members of the not-so-equal community, the all-inclusive rituals of communal sacrificial meals aimed to create an appearance of harmonious and consensual social relations, thus concealing the underlying reality of social hierarchies and economic inequalities…

To service the ritual, sacrificial offerings were made, mostly in oxen, whereby religious officials stipulated the precise quality, type and quantity of cattle to be contributed, thereby establishing the first standardized unit of account guaranteed by the authorities… [4]

This “ox-unit standard” resembled the silver standard used in Mesopotamia insofar as the religious authorities determined the “standard of value” by which everything else was measured. This was the origin of pricing systems – ranking values of disparate things against each other, as David Graeber points out:

Why were cattle so often used as money? The German historian Bernard Laum long ago pointed out that in Homer, when people measure the value of a ship or suit of armor, they always measure it in oxen-even though when they actually exchange things, they never pay for anything in oxen. It is hard to escape the conclusion that this was because an ox was what one of­fered the gods in sacrifice. Hence they represented absolute value. From Sumer to Classical Greece, silver and gold were dedicated as offerings in temples. Everywhere, money seems to have emerged from the thing most appropriate for giving to the gods. [5]

Meat-sharing is an ancient concept which goes back to the hunter-gatherer origins of humanity (and earlier). The offering of specially-selected parts of the sacrificial animal to elites is reminiscent of the “thigh-eating chiefs” of the Kachin hill tribes in Burma studied by Edmund Leach, and the role meat distribution played in their society. Such rituals both reaffirmed the tribe’s debts to their ancestral spirits, and reinforced the status hierarchy in the material world. In these cases, the sacrifice indicated a debt was owed to the spiritual world of the gods and ancestors:

The animal sacrifices of the Kachin, called nat galaw, or “spirit making,” were built on the age-old principle of reciprocal gift-giving. One sacrificed to a nat (a nature spirit) to put him in one’s debt, expecting him to return the favor. The nat took only the nsa, “breath or essence,” from the sacrificial animal, leaving the meat to be shared by humans at a feast…When the Kachin were in rank mode, the ritual required an additional step: one hind leg from each animal sacrificed was given to the hereditary chief. This was a form of tribute, justified by the chief’s genealogical relationship to Madai (a highly-ranked nat). The high nat partook of the essence of the animal, while the chief’s family ate the meat. As some Kachin expressed it, they were ruled by “thigh-eating chiefs.” [6]

It’s worth pointing out once again that distinction between religion and the state which is common in our own modern cultures was nonexistent in past societies. Societies were bound by concepts like kinship, tribal affiliation, geographical origin, language, custom, and religion. The impersonal nation-state which binds strangers together through bureaucracy and the rule of law is an imaginary concept which was yet unknown.

Due to the fact that possession of the sacrificial spits–the oboloi–affirmed one’s membership in the tribe, they acquired a certain value as currency. They were commonly placed in tombs and acquired a symbolic value in exchange apart from their metal content:

In contrast to most ancient near-eastern societies, the Greek polis had retained sacrificial ritual that embodied the principle of communal egalitarian distribution. The fact that the Greek word for this distribution (moira) came to mean ‘fate’ indicates the importance of the distributional imperative. Citizenship was marked by participation in communal sacrifice, which also provided a model for the egalitarian distribution of metallic wealth in standardised pieces.

Probably the spits were distributed with meat on them. They were dedicated in sanctuaries and placed in tombs, because they had communal prestige deriving from their role in the communally central ritual of sacrificial distribution. It was because they had this communal prestige that they could work as proto-money. Greek money (in contrast to say Babylonian silver) was not just a generally exchangeable commodity: rather, it had a conventional value that depended on communal confidence (and in that sense was a kind of IOU), and so prefigured modern money, which is merely transferable credit. [7]

From the spits by which sacrificial meat was distributed, it appears that bronze, copper and iron ingots determined by weights were utilized as a form of proto-currency as early as 1100 BC in Greek culture. Sparta maintained its currency in the form of metal ingots and never made the transition to coinage in order to preserve the hierarchical non-monetarized relations of its society: “Plutarch states the Spartans had an iron obol of four coppers. They retained the cumbersome and impractical bars rather than proper coins to discourage the pursuit of wealth.”[8] The use of money would have engendered unacceptable levels of inequality and undermined the esprit d’corps required for Sparta’s distinctive warrior society to function.

The Rise of the Greek Polis

As the Dark Ages waned and the Classical World dawned, a new form of social order emerged: the Greek polis, a self-governing community of landholders centered on a city-state. Victor Davis-Hanson, in his book,The Other Greeks, attributes this development primarily to Greek farming practices.

The Greeks had developed a highly efficient method of mixed farming centered around the cultivation of barley, grapes, and olives, supplemented with gardening and animal husbandry (especially of sheep and goats). Grapes and olives were well-suited to the rocky soil of Greece, and allowed farmers to produce a consistent surplus. While large landowners grew cereals (mainly barley) on level, fertile land using many slaves, the hillsides were terraced and intensively cultivated and irrigated by small landowners in order to grow grapes and olives in small plots of 10 to 20 acres using 1 or 2 slaves.

Over time, this marginal land became highly productive, and the independent small landowners became the center of the political life rather than aristocrats with large estates. This led to a much more egalitarian social structure. Small farms fed by rainfall meant that key resources could not be put under the centralized control of a bureaucratic elite, unlike the irrigation agriculture systems of the Near East. The power of the old warrior aristocracies, with their large herds, landed estates, raiding parties, gift exchange, and ancestral temples, gave way to a different social order–the polis. The relative equality in wealth led these middling yeoman farmers (the ‘Other Greeks’) to create a political structure which protected their common interests–i.e. democracy, where leaders were chosen from among the general (male) population, and key decisions were made by citizens. Rather than justice being meted out by a semi-divine king, justice would be dispensed by an assembly of the people, with fines assessed according to the unit of account and paid with the common currency of the polis:

How would the polis affirm the equal worth of its members? It took the idea of sacrificial meat distribution and extended it, distributing standardized lumps of metal in place of the spits with roast meat on them. These metallic pieces could be used in exchange, much as the handfuls of spits were. As with the spits, the value would derive from the communal confidence of members of the polis, and would circulate as token money with values determined by the civic body.

At first, the pieces of metal distributed were the iron spits utilized for the roasting of the sacrificial animals. The production of such spits began on a large scale during the late eighth century BC (or around 700 BC) leading to their mass production during the entire seventh century BC. The roasting spits continued to circulate, though in smaller quantities, until the first half of the sixth century BC. During this period, the roasting spits (which were destined for communal distribution) came to be standardized in size, reflecting the old sacrificial tradition of “equal portions to all”.

Gradually then, the distribution of roasting spits came to be replaced by the allotment of coinage, which likewise came to be standardized. It is no wonder, then, that obolos, a sixth century BC silver Greek coin, derived its name from obelos meaning an iron spit. Another sixth century BC Greek coin of a larger denomination, drachma, originally meant a handful of six spits…the earliest Greek and Lydian coins did not begin as media of exchange in commerce, but functioned “in the same fashion as the portion of food distributed at the sacred meal”…coinage was distributed by the polis to its male citizens. It has also been established that some of the earliest monetary “transactions” were carried out among unequal social partners, and included sexual “exchange” between men and women…the use of coinage in payment for goods evolved out of its use in payment for personal services.

The administration of distributive justice is…key to understanding the origins and functions of early Greek money and coinage…The unequal distribution of wealth prompted a “decline of faith in the reliability of divine justice”, thereby creating a new social problem of instituting “a political means of payment controlled by humans so that they would not have to rely on the uncertain rewards of the gods”

…Introduced by the city-state as a unit of account for expressing the worth of its male citizens, the purpose of coinage was to resolve the crisis of distributive justice…Rather than facilitate trade, whether foreign or domestic, the initial purpose of coinage was to “(re)establish social justice within the polis”. In contrast to the uncertainty associated with divine justice, coinage could compensate virtue “immediately and precisely”, and payment in “stamped tokens” came to be associated with “just recompense”. Possession of coinage came to signify the acceptance of the civic authority of the polis.

In establishing its own model of distributive justice, the emerging authority of the polis adopted the idealized model of communal egalitarian distribution, but substituted durable metal objects for perishable pieces of meat…The emerging authority of the polis, then, attempted to dismantle the aristocratic model of power by distributing metal pieces to those who accepted the political authority of the polis instead. The distribution of metal pieces into the hands of the citizens would subvert the aristocracy’s monopoly over the use of (precious) metal in the closed sphere of aristocratic gift-giving.[10]

The first coins were issued by civic temples, which functioned as the first treasuries. The public temple usurped the role of the landholder’s private estate and ancestral temple and created a radically new egalitarian social structure which facilitated the use of money. They also reaffirm the link between money and the sacred:

…the temple-state was at the center of the polis and its priests mediated the relationship between subjects and deities. Deities were owed sacrifices and the temples who received these goods and services as sacrifices eventually came to replace the cooked flesh of bulls–which was originally given as a gift for contributing to the temple–with coins made of electrum (a natural gold and silver alloy). Coins essentially represented a receipt that subjects had contributed to the temple…Thus…the origins of money can be found in religious sacrifice and recompense mediated by priestly authorities.[11]

Indeed, contributions to religious societies have been offered as another source of the origins of money, going back to the work of Bernard Laum in the 1920’s:

Bernard Laum…traced money back to the contributions of food and other commodities to guild organisations of a religious character. In his view, their root is to be found in the communal sacrifice. Members of temple brotherhoods were obliged to make ceremonial contributions or kindred payments to the temples or other redistributive households. Laum interpreted these payments as early food money, for whose value the monetary metals later were substituted. But although food contributions bore an administered price in the sense of being standardized in amount, it would be a quantum leap to deem them ‘money.’ Along with injury fines these formalities represent personal liabilities, mainly for restitution or, in time, tax assessment, but not yet the freely negotiated market exchange of commodities.

The media for tax payments would seem to be the bridge concept. The German word for money, Geld, derives from Gothic gild, ‘tax,’ but an early connection to paying fines is indicated by Old Icelandic gjald, ‘recompense, punishment, payment’, and Old English gield, ‘substitute, indemnity, sacrifice’. The idea combines the ethic of mutual aid with the idea of a standardized equality of contributions.

In the first instance religious institutions would have sanctified these contributions and given them the connotation of fixed obligatory payments. Such payments to the community’s corporate bodies appear to have been transformed into tributary taxation when cities were conquered by imperial overlords and turned these institutions into collection agents. This inverted the traditional relationship of voluntary gift givers or sacrificers gaining status by their contributions reflecting openhandedness and wealth. As taxes were coercive levies, their payers lost status by submitting to a tributary position. [12]

The issuance of an official currency stamped with the government’s “seal of approval” (e.g. Lydian lion, Athenian owl, Corinthian horse) was an activity that affirmed the identity and independence of the city. As historians Austin and Vidal-Naquet put it, “In the history of Greek cities coinage was always first and foremost a civic emblem. To strike coins with the badge of the city was to proclaim one’s political independence.”

These coins came to acquire value throughout the Greek world, facilitating trading and markets. Their value derived from the faith placed in the polis, the community of equals. In turn, the issuance of money and the rise of markets came to influence the political development of Greek society:

Besides its egalitarian effects, coined money also promoted individual autonomy, which would tend to dissolve the vertical lines of patronage (based on reciprocity) that we find for instance in Homer (e.g. Odysseus and Eumaios). This was, I suspect, a precondition for democracy, which at Athens arrived a mere generation or so after coinage.

Moreover, control of the central supply of money was (in contrast to now) visible and simple. It was usurped first in various cities by the ‘tyrants’ and then, at Athens, by the people (demos), and remained essential to democracy. Many of the numerous city-states minted their own coinage, and so had this potential for democracy. But Athens was a special case, not least because (almost uniquely) it had its own supplies of silver, and then came in the fifth century to control the money supply of most of the Aegean Sea.

Coinage arrived in Attica later than in the cities of the eastern Aegean, where philosophy originated in the early sixth century BCE. Athens was culturally insignificant until the late sixth century BCE, by which time it finally had coinage en masse and moreover had begun to extract much silver from the mines at Laurium in south-east Attica. In a newly monetised world this silver (together with gold and silver from Thrace) was crucial for the development of festivals and of temples, for the origin and splendour of drama, for the building of a fleet, and eventually for Athens as a cultural center to which (as we see in the dialogues of Plato) philosophers were attracted from various parts of the Greek world.[13]

This strongly affirms the idea that money is a creation of the state, or whatever we wish to term the collective entity to which everyone owes a social obligation which exists in every society over band level (often referred to as the ‘sovereign’ by monetary theorists). Monetary theorists point out, for example, that the prime way for a fledgling political entity such as the Islamic State (IS) to define itself as a “legitimate” government is to issue its own “official” currency which is legal tender in the areas under its control. It then assesses taxes in this unit of account. The unit of account must be established by a supra-market entity before monetization of the economy and internal trading can take place.

Coinage and Metals

It is well-known that the first “official” stamped coins (in the West) were minted in Lydia and Ionia on the coast of present-day Turkey. Metal deposits of electrum, an alloy of gold and silver, were under the control of the royal household. This substance was issued in lumps by the government with stamps certifying the government’s authority. It was illegal for any other entity to issue these stamped coins.

It is often stated that what gave the coins their value was the certification by the state of their metal content. Because they were issued by an “official” government mint, it is claimed, a trader or merchant could be assured that he or she was getting the “correct” amount of metal in the coin without the costly and time-consuming process of weighing the coins. He could be assured by the “seal of approval” that coins did indeed contain the quantity of metal that they desired. In this view, issuing standardized “official” lumps of metal greased the wheels of commerce which had existed long before then, but were encumbered by uncertainty. Put another way, “coins were simply the form in which precious metal traveled.”

This fits with the “metallist” doctrine that markets are spontaneous and self-regulating, and that issuing currency is merely a ‘convenience’ on the part of governments. Even without such issuance, the argument goes, “free” markets would muddle along just fine, just with the added inconvenience of having to weigh out the gold and silver everyone is exchanging goods for. Furthermore, changing the “official” metal content in any way is “debasing” the currency, and should never, ever be done, because the amount of metal in the coin is fixed for all time, and it is this metal which gives the coin its value. Furthermore, paper money is just a promise to redeem a certain amount of precious metal in some form.

The problem with this is that throughout history, there has been no consistent metallic standard for coins. While later Lydian coins eventually became standardized in weight and composition, this was more for convenience of manufacture rather than adherence to some sort of standard (defined by whom?). The early coins were amalgams of gold and silver, with no way of determining the proportion of each:

Evidently, the value of the earliest coins could not derive from their metal component: the earliest Lydian coins were made of electrum, a natural alloy of gold and silver, the internal composition of which is highly variable by nature. This means that a coin’s weight, purity and fineness could not be standardized…the final choice of silver as the minting metal for coinage was a political decision and had little to do with the intrinsic properties of the metal…

Given the association of gold with the old aristocracy, and the crisis of redistribution as manifest by unequal distribution of metallic wealth (most importantly, gold and gold artifacts), the polis chose silver as the minting metal, and silver coinage aimed to represent “the community of citizens” who were all equal as they were made of “the same noble substance”.

Rather, it appears that the nominal exchange value of metal coins was set by governments, and always has been. This value was assessed according to the prevailing unit of account. Coins circulated at a value higher than their commodity value, otherwise they would simply have been melted down. In fact, this has happened throughout history when the commodity value of the coin has risen above its nominal value. The commodity value of the metal functions as a “floor” underneath the value of a coin–a level beneath which it will not fall, encouraging its use.

The reason we tend to think that precious metal is what gave the coins value is because coins are what have survived. They are what sit in museums and what are found by the thousands at archaeological sites. Meanwhile, the systems of credit clearing, taxation, and establishment of monetary value by state authorities have long since vanished. So we mistakenly assume that people were exchanging coins for their metal content, despite the fact coins have a dizzying array of metal quantities and standards throughout history, often even in the same time period and geographic location, as Alfred Mitchell-Innes writes:

…throughout the whole range of history, not only is there no evidence of the existence of a metallic standard of value to which the commercial monetary denomination, the “money of account” as it is usually called, corresponds, but there is overwhelming evidence that there never was a monetary unit which depended on the value of coin or on a weight of metal; that there never was, until quite modern days, any fixed relationship between the monetary unit and any metal; that, in fact, there never was such a thing as a metallic standard of value…

The earliest known coins of the western world are those of ancient Greece, the oldest of which, belonging to the settlements on the coast of Asia Minor, date from the sixth or seventh centuries B. C. Some are of gold, some of silver, others are of bronze, while the oldest of all are of an alloy of the gold and silver, known as electrum. So numerous are the variations in size and weight of these coins that hardly any two are alike, and none bear any indication of value. Many learned writers…have essayed to classify these coins so as to discover the standard of value of the different Greek States; but the system adopted by each is different; the weights given by them are merely the mean weight calculated from a number of coins, the weights of which more or less approximate to that mean; and there are many coins which cannot be made to fit into any of the systems, while the weights of the supposed fractional coins do not correspond to those of the units in the system to which they are held to belong.

As to the electrum coins, which are the oldest coins known to us, their composition varies in the most extraordinary way. While some contain more than 60 per cent of gold, others known to be of the same origin contain more than 60 per cent of silver, and between these extremes, there is every degree of alloy, so that they could not possibly have a fixed intrinsic value. All writers are agreed that the bronze coins of ancient Greece are tokens, the value of which does not depend on their weight. All that is definitely known is that, while the various Greek States used the same money denominations, stater, drachma, etc., the value of these units differed greatly in different States, and their relative value was not constant—in modern parlance the exchange between the different States varied at different periods. There is, in fact, no historical evidence in ancient Greece on which a theory of a metallic standard can be based…[15]

Coinage and Mercenaries

It is thought that minting coins eventually evolved into a way for the “state” (i.e. the  sovereign) to procure the resources it needed, and as a way to transfer private goods and services to itself as required.

One of the biggest requirements was paying for professional soldiers in place of the landholding citizen-soldier to facilitate external military conquest. These soldiers were transient, so a form of portable, anonymous wealth was needed. It furthermore appears that sex was one of the first services on offer using coins—women would work in brothels of Sardis to earn money for their dowry– with other services soon following in its wake (mercenaries and prostitutes may tie as the world’s oldest professions). The earliest “free” markets to spring up in coin appear to be for the slaves produced by such conquest.

The way it worked was this: The ruling class required mercenaries, and since they controlled the metal deposits, they issued lumps of metal stamped with the ruler’s insignia, signifying their “official” capacity. They then demanded these coins back from producers, and the only way to get their hands on them was to sell something to soldiers, allowing the soldiers buy the things they wanted and needed from the conquered population. Tim Johnson writes:

Around 4,000 years ago, people started making ornaments out of electrum (an alloy of gold and silver), copper and gold, metals found naturally (i.e. without processing) in nature. Metals have an almost unique, natural, physical property; they reflect light. The only other material that stone-age humans would have come across that reflected light would have been water, so to these people gold would appear to combine the essence of both water and the sun, the basis of life.

Imagine the awe that humans would have felt the first time they spotted a nugget of gold sparkling in a river bed, here was an object that seemed to captured and store life-giving sunlight, the ‘tears of the Sun’ as the Incas said. In the medieval period, European alchemists believed that metals were produced by some mechanism involving rays from different ‘planets’: gold from the Sun, silver from the Moon, mercury from Mercury, copper from Venus, iron from Mars, tin from Jupiter and lead from Saturn.

In ancient Babylon, Egypt and Greece, temples became associated with stores of metals, gold for the Greeks, silver for the Babylonians and copper for the Egyptians. It seems that these metals had developed a religious significance and become important as temple offerings. Consequently followers of the religion would look to acquire the metal, to enable them to make an offering, and so the metal became the commodity in the most universal demand. Athens treasury was in the Temple of Athena, and Jesus cast the money-lenders, exchanging worldly Roman money for divine shekels, out of the Temple.

The earliest tokens used as ‘money’ were not specific weights of a certain metal but roughly cut pieces of metal with an official stamp on them – monopoly money as it were. The emergence of money, in the sense of coins, in Greece coincides with the emergence of mercenary troops, the term ‘soldier’ is derived from the word for a Roman gold coin, solidus. A simple economic model developed, states paid soldiers in gold, who then spent it in the community. The government then recovered the gold by taxing the merchants and innkeepers that the soldiers had paid for food and lodgings.

This model would survive and drive colonialism until the modern age. A power, such as Alexander’s Greece, Imperial Rome, Napoleonic France or Industrial Britain, would take control of a region through force of arms. They would then demand tax from the conquered nation, which would have to be paid in currency specified by the coloniser. The conquered nation could only obtain the currency by exchanging their produce for the specified currency…

Why magic? ⇔ Why gold? (Magic, Maths and Money)

David Graeber describes this as a “military-coinage-slavery” complex, and sees this as a defining feature of the Axial Age. With coinage, slavery becomes a much greater factor in the economy of the Classical world than it ever was in the ancient Near East (inverting the “conventional” view of history as a contest between the “freedom” of the Classical World versus “Oriental Despotism”).

This strongly fits with the idea that supplanting the traditional relations of reciprocity, redistribution and householding with impersonal markets mediated by money was not a spontaneous development based on human instincts to “truck, barter and exchange,” but a top-down project facilitated by ruling elites. All of this is tied to the emergence of inequality and class-based society rather than freedom and egalitarianism. Markets did not emerge out of simple barter. Rather barter occurs after organic social relations have been dismantled and monetized, and the quantity of money becomes curtailed, such as by economic collapse.

The use of coinage was spread by Greek mercenaries throughout the Mediterranean world and beyond. Although coinage spread east to the Persian empire, it appears that older credit/debit systems and householding continued to prevail as the dominant economic paradigm. That changed with the conquest of the Persian Empire by Alexander the Great. Alexander melted down Persian gold and silver and used them to pay his troops. This spread both Hellenic culture and markets throughout the East. Greek silver and coins would find their way as far east as China:

Although silver, by becoming a medium of exchange, must have acquired a value higher than its intrinsic value as a not very useful commodity, the Babylonians did not invent anything like modern coinage, which has…a value in exchange even further above its intrinsic value as metal. Even after the people of Asia Minor had invented coins and they had been adopted by the Greek world, the Babylonians still preferred to measure silver by weight, under the illusion no doubt that that mattered! It was not until Alexander the Great conquered the region that coins were commonly used. It seems quite likely that in the area which was the heartland of the great Persian Empire, documentary credits were used in preference to physical silver.

Was the silver merely stored as a reserve, just as in the modern era gold has been accumulated in the Bank of England and in Fort Knox in the USA? Alexander certainly found vast hoards of gold and silver in the palaces and temples of Persia, and the Greeks thought it was odd it had just been stored…The Greeks probably did not realise that the Babylonians had found a convenient way of monetising precious metals, and had minimised the expensive and risky movement of precious metals by the use of an accounting system.

But with the conquest came no doubt the breakdown of the legal system, together with its religious backing, on which the documentary credits were founded. Alexander coined (monetised) the gold and silver he found, no doubt to pay his soldiers who would have had little use for documentary credits issued by foreign merchants or strange temples. It appears that trade increased dramatically between the nations in the eastern part of Alexander’s empire after the monetisation by coining of the precious metals he found. This and other experience suggests that coins which contain a high proportion of the precious metals did facilitate foreign trade, even though they are unnecessary in a more parochial society. Modern communication systems have made it possible to use documentary credits worldwide, and the case for coins made of precious metals hardly now exists.[16]

This is the “state theory” of money creation. Jack Goody argued that the state made war and war made the state. But we can update that to say that the state made money, and money made markets, and markets are what allowed for the bureaucratic state to form. The state, by issuing currency, could transfer “private” resources to itself via taxation. It could also hire expertise, at first in war, and later in technocratic management. Issuing currency money gave the state the power to transfer resources to itself and pay for armies. This paper describes the process in more detail:

A stylised story based upon the use of stamped metal might go as follows; a ruler might decide what she or he desired, for example, palaces, amphitheatres and an army of conquest. She or he could utilise their monopoly power over the monetary system to obtain what they desired.

They would first define the unit of account and then decide upon the money things acceptable in payment of debts denominated in this unit, say, stamped metal discs clearly marked with her or his head. The disc may contain precious metal. This precious metal content (if any) would be decided upon by the state (the mint standard). The use of precious metal may help prevent counterfeiting and raise the prestige of the issuer but the intrinsic value of the coins provided only a floor value for the currency. The nominal value would be higher and determined by decree.

She or he then imposed a tax on her or his subjects denominated in its chosen standard, payable by the surrender of the stamped discs. The ruler decided the nominal value of the coins and how many each person must pay to satisfy their tax bill. This process gave the coins value. They were tokens showing the holder had a credit on the state. They were really ‘tax credits’.

The ruler could now spend these tokens on whatever she or he wished as long as it was available in her or his own domain –or ‘monetary space.’ The private sector suppliers of goods accepted the tokens, not because they were made of precious metal but rather because the population needed them to pay taxes. The rulers then paid their soldiers with the stamped metal discs and the soldiers, in turn, were able to go to the villages and buy whatever they wished, provided of course it was available! The populace sold the soldiers real goods to obtain the discs to meet tax liabilities. Clearly, the empress or emperor had to spend before she or he could collect. A private agent minting discs with the ruler’s head on without her or his permission would soon be put to the sword. It may appear that the ruler needed to tax before spending but this is an illusion![17]

Money needs to be spent before it can be collected. It is not something “out there” that the government needs to procure from the “private” sector. Rather, it is a social technology which is issued by the government, and given value by collective confidence in the ruling body ,and its ability to make payments, redistribute, and collect taxes and fines. It is then transferred hand-to-hand, facilitating trading among unrelated strangers. How much of this was ‘planned’ and how much accidental is a matter of speculation.

The Emergence of Markets

As Greek society became increasingly monetized, traditional social obligations were transformed into money relationships. The public spaces of the Greek polis, where debate was conducted, started to double as the place where monetary exchanges took place: the market, such as the famous Agora in Athens. Over time, every Greek polis would come to possess its own market along with its own mint. David Graeber describes the transformation:

The world of the Homeric epics is one dominated by heroic warriors who are disdainful of trade. Money existed, but it was not used to buy anything; important men lived their lives in pursuit of honor, which took material form in followers and treasure. Treasures were given as gifts, awarded as prizes, carried off as loot.

All this was to change dramatically when commercial markets began to develop two hundred years later. Greek coinage seem to have been first used mainly to pay soldiers, as well as to pay fines and fees and payments made to and by the government, but by about 6oo BC, just about every Greek city-state was producing its own coins as a mark of civic independence. It did not take long, though, before coins were in common use in everyday transactions. By the fifth century, in Greek cities, the agora, the place of public debate and communal assembly, also doubled as a marketplace.[18]

As city-states minted money, the traditional social obligations of tribal society were now transformed into very different social obligations mediated by the new invention of money:

Everywhere, traditional social obligations were transformed into financial relationships. In Athens, traditional agricultural sharecroppers were converted into contractual tenants paying money rents. The so-called “liturgies”-the ancient, civic obligations of the thousand wealthiest inhabitants of the city to provide public services ranging from choruses for the theatre to ships for the navy-were now assessed in financial terms. By the last quarter of the fifth century BC, not only military stipends, public and private wages, rents and commodity prices, but also social payments such as dowries, regularly appear as sums of cash. The city states of classical Greece had become the first monetary societies. p. 62

Several characteristics of Greek society helped foster the development of money and markets.

As we’ve seen earlier, Greek diversified farming practices ensured that small farmers were relatively equal during the Dark Ages. The mainland of Greece is rocky and mountainous, preventing the large-scale plantations so common in later Roman Italy and North Africa. This is in contrast to the Near Eastern cultures where all land was owned by the gods/potentates, and administered by palaces and temple bureaucracies. Unrelated people had to deal with one another on more-or-less equal terms.

As we saw last time, in Greek culture, writing and numeracy were democratized. The alphabet, transmitted through the Phoenicians, allowed reading and writing to be easily learned and done by the average person, rather than an priesthood which kept such administrative skills to themselves and transmitted them only through esoteric channels. The departure from exclusively oral communication meant that myths gave way to recorded history, causing a questioning of old social forms.

The Greeks were geographically separated, yet there was a shared conception of what it meant to be Greek. The Greek peoples were scattered across hundreds of islands in the Aegean Sea, the Grecian mainland, the coast of Asia minor, and numerous colonies throughout the Mediterranean (“like frogs around a pond,” in Plato’s famous phrase). This alone would require trading. Greek culture was intimately tied with the ability to cultivate olives, and the ability to speak the Greek language (others’ tongues were just gibberish–“bar-bar-bar,” i.e. barbarians).

So we have decentralization, egalitarianism, individualism, and yet shared cultural notions and concepts. This created a need for trade, but without the necessity of mediation by a centralized governing bureaucracy as seen in Near Eastern redistributive economies. Several other distinct aspects of Greek culture and thought also contributed to the development of abstract, impersonal money and markets.

The first was the concept of a universal standard of value derived from the sacrificial feast, as Felix Martin describes:

…the idea of the equal worth of every member of the tribe was a social constant: a standard against which social value could be measured. At the heart of Greek society, in other words, was nothing other than a nascent concept of universal value and a standard against which to measure it, pret-a-porter.

Here was an answer to the question begged by the new perspective on society and the economy. Where the new understanding of physical reality had man, the observer of an objective universe, the new understanding of the social reality had the idea of the self, separate from society, an objective entity consisting of relationships measurable in a standard unit on the universal scale of economic value. It was a critical conceptual development-the missing link, on the intellectual level, in the invention of money. p. 59

Mesopotamia had for millennia possessed one of the three components of money-a system of accounting, based upon its discoveries of writing and numeracy. But the immense sophistiction of Mesopotamia’s bureaucratic, command economy had no need of any universal concept of economic value. It required and had perfected a variety of limited-purpose concepts of value, each with its respective standard. It therefore did not develop the first component of money: a unit of abstract, universally applicable, economic value.

Dark Age Greece, on the other hand, had a primitive concept of universal value and a standard by which to measure it. But the Greek Dark Ages knew neither literacy nor mimeracy, let alone a system of accounting. They had, in nascent form, the first component of money, but lacked the second. Neither civilisation had all the ingredients for money on its own.

But when the ultra-modem technologies of the East-literacy, numeracy, and accounting-were combined with the idea of a universal scale of value incubated in the barbaric West, the conceptual preconditions for money were at last in place…

This spread of money’s first two components-the idea of a universally applicable unit of value and the practice of keeping accounts in it-reinforced the development of the third: the principle of decentralised negotiability. The new idea of universal economic value made possible the offsetting of obligations without reference to a centralised authority. And the new idea of an objective economic space created the confidence that this possibility would exist indefinitely.

Markets require people to be able to negotiate a sale or agree a wage on their own, instead of feeding their preferences into a central authority in order to receive back a directive on how to act. But successful negotiation requires a common language-a shared idea of what words mean. For markets to function there needs to be a shared concept of value and standardised units in which to measure it. Not a shared idea of what particular goods or services are worth-that is where the haggling comes in-but a shared unit of economic value so that the haggling can take place at all. Without general agreement on what a dollar is, we could no more haggle in the marketplace over prices in dollars than we can talk to the birds and the bees. pp. 61-62


Other ideas that were unique to Greek society included the idea that the abstract was more important than the real, derived from philosophy, and the absolute isolation of the individual from one’s close kin, as seen in Greek tragedies such as Oedipus.

There is also evidence that the adoption of money was critical to the development Greek ideas about democratic political governance and scientific thought, as Tim Johnson explains in this excellent blog post (emphasis mine):

Greek culture that emerged around 600 BCE became known for being distinctive in its attitudes to politics and science. Greek science developed a non-mythical cosmology. The central idea emerged in Miletus, in Anatolia, and was apeiron (‘without limit’), something boundless, homogenous, eternal and abstract yet it held and motivated all things. Simultaneously, across the Aegean in Athens, Greek ideas of democracy were codified.

The standard explanations used to argue that the non-mythical cosmology originated in the polis where citizens were equal and ruled by an impersonal law: democracy generates science. This account did not acknowledge the temporal simultaneity of the origins of the ideas but there geographical separation. There needed to be something that preceded democracy and science common to both Athens and Miletus.

A more empirical explanation for origin of the distinctive nature of Greek politics and science lies in the Greek adoption of money in everyday use. Money can be seen as a prototype for the apeiron. Money is ‘fungible’, meaning one money-token is indistinguishable from any other, it is an empty signifier, like a word used in everyday language. The impersonality of money means that it is universal and makes no distinctions; it is used by rich and poor uniting opposites. There is a discrepancy between the value of money and its commodity value because money an abstract concept signified by a concrete token. Because it is abstracted, unlike any substance, money is unlimited. It has the power to transform objects, being able to turn wheat into wine in the market. Together, these properties enable money to perform multiple functions simultaneously. It is used to meet social obligations, such as tribute, legal compensation, and is the dominant means of conducting exchange; it stores value and is the unit of account. Money’s myriad uses means that it becomes a universal aim of all members of the community using it.

Money centralised social power in a single, abstract and impersonal entity. In monetised, Greek, economies personal power arose from the possession of impersonal and non-substantial money. The impersonality of Greek money nurtured the concept of equality, which is the foundation of democracy. The Greek word nomos, associated with ‘law’, is the root of the Greek word for money, nomisma. When combined with ‘auto’ – self – it gives autonomy, the idea that people can govern themselves and out of it, the concept of the individual emerges.

The foundations of Athenian democracy where laid by Solon (c. 638‒558) when he instituted several legal reforms. These sought to address instability created by conflicts in society caused by growing inequality created by the financialisation of society. Solon’s reforms solved the problems by substituting judicial violence with fines, something that was only possible because money was widely used. In the process, justice was depersonalised so that hostility between people was replaced by an impersonal quantification between an injury and its compensation. While money was disruptive of society it was also integral to Solon’s reforms that created a political system in which all citizens were equal.

Greek’s [sic] highlighted how their culture was distinctive from that of their neighbours, notably those in the civilised East…The essential difference was that Greek society was monetised and operated through inter-personal exchange where as that of the neighbouring societies were re-distributive.

In re-distributive societies, power originated in the gods. Priests (or a king, the distinction was often blurred) were the direct servants of the gods who mediated between the population and the divine. All that the community produced was owned, exclusively, by the gods and managed by a hierarchy of priests/kings. Produce was delivered to the temple (or palace) and the priests, from behind closed doors, would re-distribute the aggregate production per their own rules, taking a cut for their own use. In return, the priest/kings were expected to provide material and social security: food stores, walls, law and order. These societies maintained themselves so long as the priest/kings prevented famine and ensured peace and justice. It was passed through the priests/kings into the community through a clear hierarchy. The transference of power was often done through seals (amulets, talisman) that magically carried the power of the god.

Greek religious practice diverged from this standard model. The Greek gods lived on ambrosia and nectar, not on mortal food. When Homeric Greeks, in around 800 BCE, performed an animal sacrifice the smoke ‘honoured’ the gods, who were not located in their icons but ‘somewhere else’, alienated from the people. The sacrificial meat was then shared out amongst the community. The fairness of this sharing was fundamental to Greek culture, with both the Iliad and the Odyssey resting on problems resulting from unfair distribution. Consequently, the wealth of the Greek temples was owned and managed, inclusively, by the community in an egalitarian manner, in contrast to the wealth of temples in re-distributive societies.

There is a relationship between these Greek religious practices and the emergence of money in Greek society. The lowest value Greek coin was the obolos that took its name from the cooking spits (obelos) that were used to distribute sacrificial food and it is almost certain that the word drachma comes from obeliskon drachmai ‒ handfuls of spits.

A Financial Approach to the ‘Clash of Cultures’ (Magic, Maths and Money)

One deleterious result of the money economy was people falling into debt and relinquishing their freedom. This led to steep class divisions, as those who defaulted sold themselves into slavery (debt serfdom). Debt serfdom several times threatened the security of the polis, as debt serfs were unable to maintain military training to help defend the city-state (one reason why Sparta steadfastly refused to use coins). Rather than regular Clean Slates as in the Near East, periodic debt cancellations were legislated under rulers like Solon. The debt serfs would then be shipped off to found colonies across the Mediterranean. This dynamic drove Greek expansion and colonization, as David Graeber explains:

One of the first effects of the arrival of a commercial economy was a series of debt crises, of the sort long familiar from Mesopotamia and Israel. Revolutionary factions emerged, demanding amnesties, and most Greek cities were at least for a while taken over by populist strongmen swept into power partly by the demand for radical debt relief. The solution most cities ultimately found, however, was quite different than it had been in the Near East.

Rather than institutionalize periodic amnesties, Greek cities tended to adopt legislation limiting or abolishing debt peonage altogether, and then, to forestall future crises, they would turn to a policy of expansion, shipping off the children of the poor to found military colonies overseas.
Before long, the entire coast from Crimea to Marseille was dotted with Greek cities, which served, in turn, as conduits for a lively trade in slaves. The sudden abundance of chattel slaves, in turn, completely transformed the nature of Greek society.

First and most famously, it allowed even citizens of modest means to take part in the political and cultural life of the city and have a genuine sense of citizenship. But this, in turn, drove the old aristocratic classes to develop more and more elaborate means of setting themselves off from what they considered the tawdriness and moral corruption of the new democratic state…[20]

The decentralization of economic life and establishment of self-rule had dramatic effects. According to Josiah Ober, at the bottom point of Iron Age circa 1000 B.C., the Greek world was sparsely populated and living near the subsistence level. Almost 700 years later, in the age of Aristotle, the population of the Greek world had increased twentyfold and per capita consumption had doubled, achieving growth rates comparable to those of England or Holland in Early Modern Europe. Ober attributes this growth to low levels of inequality (which Davis-Hanson attributes to farming practices), which led to investments in human capital, economic and political stability, non-authoritarian political structures, and high levels of social trust:

In the 12th century BCE, the palace-centered civilization of Bronze Age Greece collapsed, utterly destroying political and social hierarchies. Surviving Greeks lived in tiny communities, where no one was rich or very powerful.

As Greece slowly recovered, some communities rejected attempts by local elites to install themselves as rulers. Instead, ordinary men established fair rules (fair, that is, for themselves) and governed themselves collectively, as political equals. Women and slaves were, of course, a very different story. But because these emerging citizen-centered states often out-competed elite-dominated rivals, militarily and economically, citizenship proved to be adaptive. Because participatory citizenship was not scalable, Greek states stayed small as they became increasingly democratic. Under conditions of increasingly fair rules, individuals and states rationally invested in human capital, leading to increased specialization and exchange.

The spread of fair rules and a shared culture across an expanding Greek world of independent city-states drove down transaction costs. Meanwhile competition encouraged continuous institutional and technological innovation. The result was 700+ years of world-class efflorescence, marked by exceptional demographic and per capita growth, and by immensely influential ideas, literature, art, and science. But, unlike the more familiar story of ancient empires, no one was in running the show: Greece remained a decentralized ecology of small states. [21]

Greek colonization spreads ideas of democracy, science, religion, money, markets, slavery and debt to other cultures, including the militarized cultures of the Italian peninsula. Eventually, these ideas gave rise to two great powers who fought over control of the Mediterranean: the Latin empire centered in Rome, and the Phoenician-derived colony of Carthage. With the victory of Rome, the entire Mediterranean becomes a giant free-trade zone, and the coinage-mercenary-slave complex expands to an unprecedented degree. We’ll take a brief look at that next time.

[1] Ernest Cline; 1177 B.C.: The Year Civilization Collapsed


[3]Felix Martin; Money: THe Unauthorized Biograhy, p. 38

[4] Semenova and Wray; The Rise of Money and Class Society: The Contributions of John F. Henry. Levy Economics Institute Working papaer no. 832

[5] David Graeber; Debt: The First 5000 Years.

[6] Kent Flannery and Joyce Marcus; The Creation of Inequality, pp. 193-195

[7] Radical Anthropology; Interview with Richard Seaford:

[8] Semenova and Wray; The Rise of Money and Class Society: The Contributions of John F. Henry. Levy Economics Institute Working papaer no. 832

[9] Not Used


[11] Tim Di Muzio, Richard H. Robbins; An Anthropology of Money: A Critical Introduction, p. 48

[12] Wray et. al.; The Credit and State Theories of Money, pp. 96-97

[13] Radical Anthropology; Interview with Richard Seaford:

[14] Semenova and Wray; The Rise of Money and Class Society: The Contributions of John F. Henry. Levy Economics Institute Working papaer no. 832

[15] Wray et. al.; The Credit and State Theories of Money, pp. 96-97

[16] hWray et. al.; The Credit and State Theories of Money, p. 138,

[17] Phil Armstrong; Heterodox Views of Money and Modern Monetary Theory (MMT)

[18] David Graeber; Debt: The First 5000 Years.

[19] Felix Martin; Money: The Unauthorized Biography, p. 60

[20] David Graeber; Debt: The First 5000 Years.


The Origin of Money – 4

2. The First IT Revolution

In order for something like the general-purpose universally-applicable money that we know to form, two critical innovations were needed: numeracy/literacy and standardized measurement.

In order to manage the redistributive economy of ancient Mesopotamia, increasingly sophisticated “information-processing” technologies were invented. We might call this the “First IT Revolution,” and it eventually ushered in writing and mathematics. It is now known that these originally developed in the service of keeping track of goods and labor for this economy– accounting, in other words:

This prehistoric communication revolution began some 9000 Years ago among the early agricultural communities of northern Mesopotamia and Syria. Like the invention of the computer, it involved the creation of an ingenious device which served both to transmit information and to record it for future reference.

In Neolithic Mesopotamia this new device served also to identify property and to ensure its security, and in that sense to signal to us not only that society was becoming more differentiated (that is, that there were those with goods to protect or secure) but that man could no longer trust his fellow man…

…the earliest stage of recording numeracy utilized the geometric token, followed by the use of the complex token and bulla, and still later, with an increasing complexity of communication needs, the cylinder seal was used for securing and identifying property; and finally, the seminal tool of bureaucratic administration, the inscribed tablet.

A theoretical account of this process was developed by Denise Schmandt-Besserat beginning in the 1970’s. She realized that the earliest shapes in cuneiform writing were based on the shapes of tokens found on archaeological sites. This led her to formulating the following sequence describing the development of writing:

1. Small clay tokens about 1-3 centimeters in length shaped into simple geometric forms are found scattered throughout Mesopotamian archaeological sites after about 9000 BC. The tokens represented various primary commodities –grain, jars of olive oil, sheep, beer, etc. They came in a variety of sizes and shapes–cones cylinders, spheres, ovoids, disks and tetrahedrons (three dimensional triangles), often covered with various dots and markings.

Simple tokens represented basic items such as grain and cattle, whereas more incised and perforated tokens represented services and manufactured items. One might think of game pieces (which at one point they were believed to be), or animal crackers. This allowed for a much greater control over varied items than just simple notches on tally sticks. The tokens could be matched one-to-one with the various standardized goods and services.

Number was represented by a phenomenon called correspondence (one-to-one) counting. Five ovoids meant five jars of olive oil, three tokens meant three jars, and so on; there was no abstract notion of “fiveness” apart from the thing being counted. The tokens were “non-lingual,” that is, no matter what language you spoke, both parties could understand that that five ovoid tokens meant five jars of olive oil:

The direct antecedent of the Mesopotamian script was a recording device consisting of clay tokens of multiple shapes. The artifacts, mostly of geometric forms such as cones, spheres, disks, cylinders and ovoids, are recovered in archaeological sites dating 8000–3000 BC.

The tokens, used as counters to keep track of goods, were the earliest code—a system of signs for transmitting information. Each token shape was semantic, referring to a particular unit of merchandise. For example, a cone and a sphere stood respectively for a small and a large measure of grain, and ovoids represented jars of oil.

The repertory of some three hundred types of counters made it feasible to manipulate and store information on multiple categories of goods…The token system showed the number of units of merchandize [sic] in one-to-one correspondence, in other words, the number of tokens matched the number of units counted: x jars of oil were represented by x ovoids. Repeating ‘jar of oil’ x times in order to express plurality is unlike spoken language. [1]

2. The economy expanded and became more complex as urbanization proceeded. The clay tokens also began to get more numerous and more elaborate, tracking the various “secondary commodities” of the Mesopotamian economy –wool, clothing, metals, honey, bread, oil, beer, textiles, garments, rope, mats, carpets, furniture, jewelry, tools, hides, perfume, and so on.

The tokens represented the various items stored in the “holy storehouse” of the temple. Standardized tokens could be used for keeping track of inventory, or recording tax payments, and even for establishing future transactions–essentially forming the first economic contracts. Tokens could represent anticipated tax payments, deferred payments, or a provide a record of previous payments. They could also provide for secure transmission of goods between stewards.

In order for this to work, some method needed to be developed to keep the transaction secure, that is, safe from tampering after the fact. Two methods were devised to do this. One was using tokens with perforations in them and stringing them together with a cord like a bracelet or necklace, and binding the ends of the cord with a lump of clay called a bulla. This prevented tokens from being added or removed to the string without breaking the clay “seal.”

The other involved sealing them inside a hollow clay “envelope” about 3-5 cm in diameter also called a bulla. The tokens were placed inside and the opening was pinched shut, and then the envelope was then fired. After it was fired, tokens could not be added or removed without breaking open the bulla.

Officials marked the bullae with clay seals testifying to the authenticity of the transaction. There were two types of seals-stamp seals and cylinder seals, which made impressions by being rolled across the wet clay. The seals were unique to the steward and usually depicted some type of religious imagery. The outer surface of the clay envelopes were often covered with seals, probably to make sure that a hole could not be made to add or remove items from the bulla without an official knowing. If any dispute arose about the contents of the bulla, both parties to the contract could break open the clay envelope and verify what was inside.

For some unknown reason, plain tokens were secured by envelopes, while more complex ones were secured with a cord. Both the seals and the tokens are found in burials, indicating that certain designated individuals were in charge of managing the surplus—a sure sign of burgeoning class inequality. Seals found buried with children indicate the transmission of intergenerational status.

3. Because it was unknown exactly what was inside the clay envelopes once they were fired, scribes made impressions in the outer surface of the wet clay to indicate what was inside. These markings are the first definite signs of writing in the sense of using abstract shapes impressed in clay to represent specific items and quantities. Number was still indicated by correspondence counting rather than abstract numerals.

After four millennia, the token system led to writing. The transition from counters to script took place simultaneously in Sumer and Elam, present-day western Iran when, around 3500 BC, Elam was under Sumerian domination. It occurred when tokens, probably representing a debt, were stored in envelopes until payment. These envelopes made of clay in the shape of a hollow ball had the disadvantage of hiding the tokens held inside. Some accountants, therefore, impressed the tokens on the surface of the envelope before enclosing them inside, so that the shape and number of counters held inside could be verified at all times. These markings were the first signs of writing. [1]

4. By the middle of the fourth millennium, instead of just being recorded on the bullae, impressions of tokens are recorded on flat clay tablets and fired. By 3200 BC, puffy clay tablet “receipts” are found recording various disbursements and transactions in temple archives. The tablets simply list numbers of quantities of items without purpose or context. The level of detail recorded by the tablets varied according to administrative level—more detail was recorded by scribes at higher administrative levels.

About 3200 BC, once the system of impressed signs was understood, clay tablets—solid cushion-shaped clay artifacts bearing the impressions of tokens—replaced the envelopes filled with tokens. The impression of a cone and a sphere token, representing measures of grain, resulted respectively in a wedge and a circular marking which bore the same meaning as the tokens they signified. They were ideograms—signs representing one concept. The impressed tablets continued to be used exclusively to record quantities of goods received or disbursed. They still expressed plurality in one-to-one correspondence. [1]

Eventually the clay tablets alone served to record transactions, taking the place of bullae. The tablets become the primary means of recording past and future transactions, even though both “technologies” continued to be used side-by-side for millennia. For unknown reasons, the clay tablet method was extensively adopted in southern Mesopotamia, whereas tokens continued to be the main method used in northern Mesopotamia. Clay tablet records were stored in temple archives, managing payments, contracts, receipts, loans, debts, and so on.

5. Eventually, when the quantities under consideration become too big for correspondence counting to work, symbols were established to separate quantity from the thing being counted – a symbol for “five” and “sheep” are combined together instead of repeating “sheep” five times. These numerals impressed in clay were derived from the shape of the token itself.

Early numerals were not abstract, but derived their value from association with the items they counted. The Sumerians used 60 different number signs grouped in a dozen or so metrological systems. For example, one system counted discrete objects like sheep, while other systems measured areas or volumes.

At the same time, the clay markings evolved into abstract symbols (pictographs) made with a wedge-shaped stylus rather than impressions of tokens. The wedge-shaped pictographs derived from the object they described:

Pictographs—signs representing tokens traced with a stylus rather than impressed—appeared about 3100 BC. These pictographs referring to goods mark an important step in the evolution of writing because they were never repeated in one-to-one correspondence to express numerosity.

Besides them, numerals—signs representing plurality—indicated the quantity of units recorded. For example, ‘33 jars of oil’ were shown by the incised pictographic sign ‘jar of oil’, preceded by three impressed circles and three wedges, the numerals standing respectively for ‘10’ and ‘1’.

The symbols for numerals were not new. They were the impressions of cones and spheres formerly representing measures of grain, which then had acquired a second, abstract, numerical meaning. The invention of numerals meant a considerable economy of signs since 33 jars of oil could be written with 7 rather then [sic] 33 markings. [1]

Sometime around the end of the third millennium BC during the Ur III period, a sexigecimal (base 60) place value notation system was devised. Each place represents a multiple of sixty (just as in our system, each place represents a multiple of ten. Sixty is the first number that 1,2,3,4,5, and 6 all factor into. It’s thought that counting was done by marking the phalanges of outstretched fingers in each hand with the thumb (three phalanges times four outstretched fingers). This could be repeated five times, using the fingers of the other hand to keep track (5 x 12 = 60). Base-60 actually has quite a few advantages. 60 is highly composite and easily divisible by 12 numbers simplifying fractional/decimal notation.

…the origin of the base 12 and of the related base 60 is an often-recurring question, even to non-mathematicians. The usual arithmetic (based on the divisors of 12) and or astronomical explanations (based on the number of moon-months) both are a posterior…

….a counting technique that considers parts of the fingers to represent the numbers from 1 to 12, is still in use in Egypt, Syria, Turkey, Iraq, Iran and Afghanistan, Pakistan, Indochina, India. The thumb of a hand counts the bones in the fingers of the same hand. Four fingers, with each three little bones, evidently yield 12 as a counting unit. The thumb itself is the counting tool, and its bones are not considered. Also, each dozen is counted by the fingers of the other hand, including the thumb, and the multiple 5 x 12 = 60 provides an additional indication of the often simultaneous occurrence of the duodecimal and sexagesimal base…

This physiological explanation for the duodecimal base is only a hypothesis, but number words as present day tribes in Africa use them, provide further evidence. N. W. Thomas [Tho] reported on such number words in his study of the West-African tribes in the region of the actual Nigeria. Between the rivers Benue and Gurara, which flow into the river Niger more westwards, live the Yasgua, the Koro and the Ham.

This explanation is not posterior like the arithmetical or the astronomical ones. This duodecimal base was indeed a practical one for what these early civilisations wanted to count or to represent. In the matriarchal societies, they could associate the number 1 to the woman, the number 3 to the man, and 4 to the union of woman and man. Or, in after some rather general evolution, they designated the male genitals by the number 3, and the genital symbol of women by 4, making 7 the symbol of their union. The number 4 seems to have been the most widespread of the mystical numbers. It was established by associations with colours, with social organisation, and with various customs among numerous tribes. The use of six as a mystical or sacred number was less extensively distributed through history and throughout the world than the four-cult, but sometimes a mythology past from quarters cult to a six cult. For example, the four cardinal points (such as North, South, East, West) are simply augmented by the addition of two other points (such as the zenith, above and nadir, below). On the other hand, the counting skills they obtained in this way, allowed them to note that there are 13 (moon)-months in one (solar) year, and not 12. [2]

The Babylonian cuneiform was not a true sexagesimal system as in there were not 60 different symbols. They basically represented numbers in a hybrid base-60 of a base-10. For example, thirty was made by repeating the symbol for 10 three times, forty was 10 repeated four times, and so on. Base sixty was likely chosen for ease of time/value calculations based on the length of the Mesopotamian year (a 360-day ‘fiscal year” with 5-and-change days set aside for festivals and debt forgiveness). Our divisions of a circle (degrees) and hours/minutes are also derived from this Mesopotamian base sixty, and are still in use.

…the sexagecimal number system of Mesopotamia in the historical period must have arisen from a fusion of a decimal system and a duodecimal system, and possible of a third element based on twenty. The widespread evidence for the very early duodecimal system, especially in the diffusion of the practice of dividing into twelve parts the wide band of fixed stars through which the sun passes its annual revolution (the zodiac), and the association of this feature with painted pottery gardening would indicate that the duodecimal system was characteristic of the Highland Zone Neolithic peasant cultures. The decimal usage probably came from the Semite peoples within the Fertile Crescent. If a vigecimal system also entered the mixture, it might have come from the south or southeast, for there seem to be, in the substrata of Mesopotamian culture, elements of tropical forest origin from this direction. [3]

We continue to use this counting method for time, which may make it somewhat clearer. Think of the value holders like this: (Hours) : (Minutes) : (seconds).

01:00 = 60
01:01 = 61
02:00 = 120
It takes the 60th count to turn the next value holder 1. So,

Interestingly, there is some evidence that the markings on the Ishango bone are based on a base-12 number system.

A good account of this process is given in this BBC article: How the world’s first accountants counted on cuneiform

6. Eventually, the need for recording proper names in contracts gave rise to the establishment of phonetic alphabets where symbols represented not words, but spoken sounds, typically syllables. This was done by using the word attached to a symbol to represent sounds.

For example, when Coca-Cola first arrived in China, shopkeepers needed a way to represent this new product. There was no pre-existing ideogram for “Coca Cola” in Chinese. They used a combination of Chinese characters which phonetically spelled out the sounds “Ko-ka-ko-la.” Many of these signs used the character pronounced “la” meaning “wax.” This led to all sorts of nonsensical phrases when it was read out loud, such as “female horse fastened with wax,” “wax-flattened mare,” and, most famously, “bite the wax tadpole” (eventually the company provided an ‘official’ transcription meaning, roughly, “to allow the mouth to be able to rejoice”). Nonetheless, clearly phonetic sounds were separated from what the ideograms represented. In such a way one could begin to separate the sound of the word from the pictographic image of what it represented.

In a similar fashion, when the system became adopted by the Akkadian culture, and Akkadian became the lingua franca of commerce during the Bronze Age, the need to transcribe proper names in written contracts led to ideograms being used to represent sounds rather than concepts. Transactions could be described in writing rather than just items and numbers, making them more meaningful:

With state formation, new regulations required that the names of the individuals who generated or received registered merchandise were entered on the tablets.

The personal names were transcribed by the mean of logograms—signs representing a word in a particular tongue. Logograms were easily drawn pictures of words with a sound close to that desired (for example in English the name Neil could be written with a sign showing bent knees ‘kneel’).

Because Sumerian was mostly a monosyllabic language, the logograms had a syllabic value. A syllable is a unit of spoken language consisting of one or more vowel sounds, alone, or with one or more consonants. When a name required several phonetic units, they were assembled in a rebus fashion. A typical Sumerian name ‘An Gives Life’ combined a star, the logogram for An, god of heaven, and an arrow, because the words for ‘arrow’ and ‘life’ were homonyms. The verb was not transcribed, but inferred, which was easy because the name was common. Phonetic signs allowed writing to break away from accounting…

After 2600–2500 BC, the Sumerian script became a complex system of ideograms mixed more and more frequently with phonetic signs. The resulting syllabary—system of phonetic signs expressing syllables—further modeled writing on to spoken language. With a repertory of about 400 signs, the script could express any topic of human endeavor. Some of the earliest syllabic texts were royal inscriptions, and religious, magic and literary texts. [1]

Far away in Egypt, totemic symbols were adapted to represent these sounds, resulting in the creation of hieroglyphic script. Proper names were recorded, and eventually the sounds of Egyptian speech were written down to transcribe the entire spoken language. Hieroglyphs are found on buildings such as tombs and temples. Early transactions were recorded on pottery shards. Later, the invention of papyrus from sedges growing along the Nile lead to the first written paper scripts.

Phonetic signs to transcribe personal names…created an avenue for writing to spread outside of Mesopotamia…The first Egyptian inscriptions…consisted of ivory labels and ceremonial artifacts such as maces and palettes bearing personal names, written phonetically as a rebus, visibly imitating Sumer…This explains why the Egyptian script was instantaneously phonetic. It also explains why the Egyptians never borrowed Sumerian signs. Their repertory consisted of hieroglyphs representing items familiar in the Egyptian culture that evoked sounds in their own tongue.

The phonetic transcription of personal names also played an important role in the dissemination of writing to the Indus Valley where, during a period of increased contact with Mesopotamia, c. 2500 BC, writing appears on seals featuring individuals’ names and titles. In turn, the Sumerian cuneiform syllabic script was adopted by many Near Eastern cultures who adapted it to their different linguistic families and in particular, Semitic (Akkadians and Eblaites); Indo-European (Mitanni, Hittites, and Persians); Caucasian (Hurriansand Urartians); and finally, Elamite and Kassite. It is likely that Linear A and B, the phonetic scripts of Crete and mainland Greece, c. 1400–1200 BC, were also influenced by the Near East. [1]

7. This system transformed from syllables to the letters as we know them today and spread via the activities of Semitic merchants and traders operating in the eastern Mediterranean. These traders would been familiar with the accounting techniques of the Near East, and their business was conducted with strangers. Since these were strangers, you needed contracts, and so you needed ways to write names and forms of speech. This allowed writing and numbers to grow beyond their original roots in managing centralized economies.

Semitic traders simplified the system into easily written “scratches” to represent distinct consonant sounds. A small repeating number of these “letters” could represent any language the Phoenician traders encountered.

Most vowels were not written in this system, a tradition which persists to this day in the Semitic alphabets of Hebrew and Arabic (although vowel marks are sometimes added). This may seem odd, but it works: I bt y cn rd ths sntnc evn wtht vwls.

The invention of the alphabet about 1500 BC ushered in the third phase in the evolution of writing in the ancient Near East. The first, so-called Proto-Sinaitic or Proto-Canaanite alphabet, which originated in the region of present-day Lebanon, took advantage of the fact that the sounds of any language are few. It consisted of a set of 22 letters, each standing for a single sound of voice, which, combined in countless ways, allowed for an unprecedented flexibility for transcribing speech.

This earliest alphabet was a complete departure from the previous syllabaries. First, the system was based on acrophony—signs to represent the first letter of the word they stood for—for example an ox head (alpu) was ‘a,’ a house (betu) was b. Second, it was consonantal—it dealt only with speech sounds characterized by constriction or closure at one or more points in the breath channel, like b, d, l, m, n, p, etc. Third, it streamlined the system to 22 signs, instead of several hundred. [1]

In the decentralized world after the Bronze Age collapse, this new system took the place of the Linear A and B recording systems of the earlier palace economies.

Alphabets appear to have arisen in only a few places and diffused from there, as this Reddit comment points out:

The cuneiform alphabets of the Middle East were ledgers first, then evolved into words. Egyptian hieroglyphs were totemic first, then evolved numbers and words. Chinese Han characters started as divination marks on turtle shells and ox bones. The Mayans started recording calendar days, and that evolved into a syllabic alphabet. My guess is that recording abstract information is a natural product of structured civilisation, which grows around cereal-based agriculture. That’s the common theme between all of them. Simple writing systems and totemic pictographs are a common theme all round the world. Where they really come into their own is in a trade-based central civilisation.

The “democratization” of script was to have a profound influence on Greek culture. Rather than just remaining in the hands of temple scribes and priests, many more people could use letters and numbers up and down the social ladder. They were not under the exclusive control of one particular social class. Due to the democratization of words and numbers, economic planning passed out of the hands of temple scribes and priests and engendered a radically decentralized approach to economic life. This eventually lead to markets and metallic coinage similar to our own system, as we’ll see.

2. Systems of Measurement

The other crucial innovation of accounting was metrology: partitioning items into discrete units that are divisible by one another. Although we take such measurement for granted today, the creation of standardized weights and measures continued until well into the nineteenth century with the establishment of the system international (SI) units of meter (distance), second (time), kilogram (mass), kelvin (temperature), pascal (pressure), and others. Standard weights and measures are as critical to bureaucracy as are writing and numerals.

Standardization is a fundamental aspect of state formation that is often overlooked. In this review of James C. Scott’s book, Seeing Like a State, Scott Alexander quotes Scott describing the difficulties faced by regional tax collectors in medieval Europe:

A hypothetical case of customary land tenure practices may help demonstrate how difficult it is to assimilate such practices to the barebones scheme of a modern cadastral map [land survey suitable for tax assessment][…]

Let us imagine a community in which families have usufruct rights to parcels of cropland during the main growing season. Only certain crops, however, may be planted, and every seven years the usufruct land is distributed among resident families according to each family’s size and its number of able-bodied adults. After the harvest of the main-season crop, all cropland reverts to common land where any family may glean, graze their fowl and livestock, and even plant quickly maturing, dry-season crops. Rights to graze fowl and livestock on pasture-land held in common by the village is extended to all local families, but the number of animals that can be grazed is restricted according to family size, especially in dry years when forage is scarce. Families not using their grazing rights can give them to other villagers but not to outsiders. Everyone has the right to gather firewood for normal family needs, and the village blacksmith and baker are given larger allotments. No commercial sale from village woodlands is permitted.

Trees that have been planted and any fruit they may bear are the property of the family who planted them, no matter where they are now growing. Fruit fallen from such tree, however, is the property of anyone who gathers it. When a family fells one of its trees or a tree is felled by a storm, the trunk belongs to the family, the branches to the immediate neighbors, and the “tops” (leaves and twigs) to any poorer villager who carries them off. Land is set aside for use or leasing out by widows with children and dependents of conscripted males. Usufruct rights to land and trees may be let to anyone in the village; the only time they may be let to someone outside the village is if no one in the community wishes to claim them. After a crop failure leading to a food shortage, many of these arrangements are readjusted.

Book Review: Seeing Like a State (Slate Star Codex)

Scott’s book reminds us just how much measurement and taxation are the harbingers of the coming of the state, even though these early states were not the impersonal professional bureaucracies that we associate with states today (China appears to have been the first to develop this). The creation of money and markets is what allowed for the state’s ability to channel resources to itself  to pay for soldiers and bureaucratic expertise, as we’ll see.

By the Babylonian period, complex time and material calculations were undertaken in the temples by officials in order to allow for mass production on a much larger scale than cottage industries. These activities, centered in the temples, were the first intentional surplus-generating activities to be undertaken by society. Such activities are not commonplace in traditional societies: production is mainly undertaken for subsistence and hoarding is explicitly discouraged.

Some tablets from the later Old Sumerian period detail bread baking, where a specific amount of bread is listed against the specification of its cereal ingredients, depending on quality as reflected in a production rate for a given type of bread. Other tablets included entries for bread and beer rations and the ingredients required to make them.

These tablets began by listing the names of individuals with the largest rations followed by those with smaller rations. At the end of the tablet, the amounts of bread and beer are totalled by type and the grand total for the flour and barley used was also recorded. The tablets were dated daily, and the scribes showed how the amount of flour corresponded exactly to the amount actually used in baking the bread, and the same applied to barley and beer…

…this checking of actual against theoretical amounts was “Perhaps the most important accounting operation introduced during the third millennium B.C.”…Deficits in one year, arising from shortage of actual amounts compared to theoretical amounts, were carried forward to the following year and were liable to later reimbursement…

…the entries record labour performance, along with theoretical credits and duties. The balancing of expected and actual labour performance was recorded at regular intervals for the foremen of the state-controlled labour force, using an accounting period of a 12-month-year, with each month being 30 days long, a time conception that corresponds exactly to that of ancient Egypt. Balances were carried forward to next periods; most frequently the balances were deficits (overdrawn) as the expected performances seem to have been “fixed as the maximum of what a foreman could reasonably demand of his workers”. Such balancing periodic entries were underpinned by some measure of standardisation of performance and a value equivalence system…[4]

In fact, the entire concept of leadership in these ancient societies appears to have been centered around concepts of fair and accurate standards of measurement, as Michael Hudson describes:

With writing and account-keeping came weights, measures, and standardizarion…Politically, the ideology of Mesopotamian cities was to create an evenly measured and “straight” cosmology of economic and social relations. Sumerian and Babylonian iconography represents rulers characteristically holding the measuring stick and coiled measuring rope to layout temple precincts. This defining royal task is illustrated on Gudea’s statues F and B in Lagash at the end of the third millennium. Such orientation aimed at grounding cities and their rule symbolically in the eternal regularities of natural order, as reflected in the celestial movements of the heavens.[5]

This “natural order” extended to the levies which were collected by the temples. This likely grew out of their role in coordinating the labor required to maintain the canal system which agriculture depended on. Their ability to accurately measure and plan future activities was a logical extension of their ability to scan the heavens and predict future floods and eclipses. From astronomy came the rest of their abilities.

These institutions were not dependent upon “taxpayer funds” unlike governments today; rather they were self-supporting enterprises, with prebends and dependent staff who were paid stipends (salaries) for their work. Because of their pro-social nature (they regularly aided widows and orphans), religious justification, and role in expanding the economy (they regularly produced goods for export), they were allowed to undertake activities such as charging rent and interest–the first written examples of this behavior. We might consider them to be the first antecedents of the modern business corporation (see future chapter).

What gave the ancient Sumerians the idea of charging one another interest? Linguistic evidence provides a clue. In the Sumerian language, the word for interest, mash, was also the term for calves. In ancient Greek, the word for interest, tokos, also refers to the offspring of cattle. The Latin term tecus, or flock, is the root of our word “pecuniary.” The Egyptian word for interest, like the Sumerian word, is ms, and means “to give birth.” All these terms point to the derivation of interest rates from the natural multiplication of livestock. If you lend someone a herd of thirty cattle for one year, you expect to be repaid with more than thirty cattle. The herd multiplies-the herder’s wealth has a natural rate of increase equal to the rate of reproduction of the livestock. If cattle were the standard currency, then loans in all comparable commodities would be expected to “give birth” as well. The idea of interest seems to be a natural one for an agricultural or pastoral society, but not so for hunter-gatherers. [6]

Just as with the scribes and viziers of ancient Egypt, a method had to be devised to standardize various tax, tithe, tribute, fines, and other payments owed to the central institutions from various entities. They also needed a way to evaluate how much was needed for time and material calculations. The way they accomplished this was to create a measurement unit, and to then use that unit to standardize the various goods and services produced by the diversifying Sumerian economy. In other words, a “unit of account.”

The earliest unit of account appears to have been a standard weight of a basket of barley, barley being the staple crop of the Sumerian economy. However, a more stable method was developed based on various weights of silver. This seems to have been related to silver’s role as a sacred substance whose storage and trade was controlled and manipulated by centralized institutions, that is, the temples and their high priests (what anthologists might call ‘prestige goods’):

…At about the same time as cities began to appear people started making ornaments out of electrum (an alloy of gold and silver), copper and gold, metals found naturally in nature. Metals have an almost unique, natural, physical property; they reflect light. The only other material that stone-age humans would have come across that reflected light would have been water, which along with sunlight is the basis of life. The first time a human spotted a nugget of gold sparkling in a river bed they must have experienced a sense of awe, here was an object that seemed to capture life-giving sunlight and water.

Religiously significant metals became important as temple offerings and temples began accumulate large reserves. Followers of the religion would look to acquire the metal, to enable them to make an offering to the gods, and so the metal became the commodity in the most demand.

The Ancient Egyptians, who had easy access to gold, used Cypriot copper for their religious offerings while the Cypriots used Egyptian gold. In Mesopotamia, the metal of choice was silver. When ‘Currency Cranks’ or ‘Bullionists’ argue that the economy would be improved by reverting to a Gold Standard because gold has an ‘inherent value’ they need to explain where is the value in gold, apart from its inherent symbolic, representative, value.

We don’t know much about economics in the ancient cities apart from for Mesopotamia, which has left hordes of clay tablets describing financial transactions. The economy was dominated by the temples who received rents and tribute, provided religious services and loans. The cuneiform tablets recorded the debits and credits associated with these activities. The transactions were denominated in shekels, crude bars of silver. Coins, metal tokens, rarely, if ever, actually changed hands.

Lady Credit (Magic, Maths and Money)

Another theory behind the use of silver bullion is derived from the fact that Mesopotamian city-states were not self-sufficient and needed to trade with each other on a regular basis. Silver was a universal standard of value, since the same religious ideas predominated across the Tigris/Euphrates valley, and this is what allowed is what allowed inter-city trading to take place. The value of silver percolated down through the rest of the society in “private” economic transactions by osmosis from temple activities (debt collection, tithes, trade, etc.)

In either case, money is a creation of the state through writing and measurement; it is not a spontaneous development arising out of countless market transactions. Silver derived from its ability to be accepted as payment to centralized institutions, and not from any intrinsic value. Impersonal economic transactions, to the extent that they existed, used this standard of value long before the emergence of coins or markets. As G.F. Knapp put it, “Within a state the validity of the kinds of money is not a trade phenomenon but rests on authority.”

Michael Hudson summarizes the creation of money in ancient Mesopotamia:

The kind of general-purpose money our civilisation has come to use commercially was developed by the temples and palaces of Sumer (southern Mesopotamia) in the third millennium BC…Their large scale and specialisation of economic functions required an integrated system of weights, measures and price equivalencies to track the crops, wool and other raw materials distributed to their dependent labour force, and to schedule and calculate the flow of rents, debts and interest owed to them. The most important such debts were those owed for consigning handicrafts to merchants for long-distance trade, and land, workshops, ale houses and professional tools of trade to ‘entrepreneurs’ acting as subcontractors.

Accounting prices were assigned to the resources of these large institutions, expressed in silver weight-equivalency, as were public fees and obligations. Setting the value of a unit of silver as equal to the monthly barley ration and land-unit crop yield enabled it to become the standard measure of value and means of payment…Under normal conditions these official proportions were reflected in transactions with the rest of the economy.

…The use of silver in their transactions was economized by the system functioning largely on the basis of debts mounting up as unpaid balances due. For small retail sales…the common practice for consumers was not to pay on the spot but to ‘run up a tab,’ much as is done in bars today[114]…such balances typically were cleared at harvest time, the New Year, the seasonal return of commercial voyages or similar periodic occasions. The most important debts were owed to the chiefs in tribal communities or to the public institutions in redistributive economies…[102]… and their official ‘collectors.’ …it also was through the commercial role of these institutions in long-distance trade that the monetary metals were imported and put into circulation.

The major way most families obtained silver evidently was to sell surplus crops produced on their own land or land leased from these institutions on a sharecropping basis. The palace also may have distributed silver to fighters after military victories, or perhaps on the occasion of the New Year or royal coronation…[115]

Silver’s use in exchange derived from its role as a unit of account. This is what gave it a general character beyond that of just another commodity… these public institutions were the ultimate guarantors of the value of silver, by accepting it in payment of obligations owed to them…

The units of measurement–the shekel in Babylonia and the deben in Egypt, and their various partitions– were the standard by which value was measured in these ancient societies. Yet all the evidence indicates that these standardized units were established and used thousands of years before “free” markets and profits played any significant role in daily economic life. While individual transactions in silver are recorded, it appears that most “commercial” transactions were written contracts – credit/debit relations. There were no coins. Daily transactions were likely undertaken through the traditional methods of redistribution, reciprocity and householding, as well as credit. As Henry summarizes in the case of Egypt:

…goods were…valued in terms of the deben (and labour services in the pyramid cities determined by the deben value of consumption goods), but no debens ever changed hands…In other words, money does not originate as a medium of exchange but as a unit of account (and something of a store of value with regard to the king’s treasury), where the measure of value is arbitrarily specified by decree, and goods and services of various qualities and quantities can then be assigned a monetary value to allow a reasonable form of bookkeeping to keep track of tax obligations and payments and to maintain the separate accounts of the king. It should also be noted that the deben did not serve as means of payment (as with modern money), but did function as the means (or measure) through which payment was made.

He quotes Alfred Mitchell-Innes, who came to the same conclusion from his survey of economic history in his pathbreaking article for the Banking Law Journal:

The theory of an abstract standard is not so extraordinary as it at first appears…All our measures are the same. No one has ever seen an ounce or a foot or an hour .. . We divide, as it were, infinite distance or space into arbitrary parts, and devise more or less accurate implements for measuring such parts when applied to things having a corporeal existence …

Credit and debt are abstract ideas, and we could not, if we would, measure them by the standard of any tangible thing. We divide, as it were, infinite credit and debt into arbitrary parts called a dollar or a pound, and long habit makes us think of these measures as something fixed and accurate; whereas, as a matter of fact, they are peculiarly liable to fluctuations (Innes, 1914, p. 155).

Essentially, the privileging of the “medium of exchange” aspect of money is not rooted in historical fact, but is based on economists’ desire to set up “free markets” and “private enterprise” as primordial and all state activity as an unnecessary and parasitical appendage. They need this in order to make their philosophical assumptions valid. In other words, this ahistorical view stems from the libertarian bias of modern economic “science” and not from true historical reality.

It is important to note that in Egypt (and this would accord with Mesopotamia and other areas) money was developed in a non-market, non-exchange economy. While some economic historians and anthropologists of a neoclassical persuasion diligently speculate that the Egyptian economy must have paralleled that with which we are now familiar, there is no evidence for exchange in the Old Kingdom. The Egyptians had no vocabulary for buying, selling, or even money; there was no conception of trading at a profit. It is very clear that there was no market in grains. A market economy (of a sort) and the monetization of the economy, including the production of coins, had to wait until Greek domination…

When these concepts become imported into Greek culture by Middle-Eastern traders after the Bronze Age collapse, they will become transmogrified into something closer to the kind of money and markets we know of today. This is the next crucial step in the evolution of money. We’ll consider that history next time.


[2] Vladimir Pletser: Does the Ishango Bone Indicate Knowledge of the base 12? An Interpretation of a Prehistoric Discovery.

[3] Carroll Quigley: The Evolution of Civilizations, pp. 213-214

[4] Carmona and Ezzamel: Accounting and Forms of Accountability in Ancient Civilizations: Mesopotamia and Ancient Egypt. IE Working Paper WP05-21

[5] Urbanization and land ownership summary review

[6] William Goetzmann: Money Changes Everything: How Finance Made Civilization Possible.

[7] Wray, et. al.: Credit and State Theories of Money: The Contributions of Alfred Mitchell-Innes

The Origin of Money 3 – Two Paths to Money

1. Class and Religion

As the very first proto-states began to form in the great alluvial river valleys of the world some time around 8000 years ago, social relations were profoundly transformed. The switch from shifting cultivation to permanent holdings must have called for some sort of land distribution method. The resulting increase in population density created the need for some sort of authority which could allocate resources which were now becoming scarce—things like land and water. New and specialized tasks were called for, from creating bricks, timber and plaster for now-permanent dwellings, to creating storage vessels for grain (granaries, pottery), to digging drainage ditches, irrigation channels and water wells for cereal cultivation (as well as the need to manage all these activities).

Evidence indicates that at this time, class stratification emerged. Increasingly elaborate burials signify that some individuals had gained a measure of control over surplus resources. It is this development which is key to the development of money, not market transactions.

Egyptologist John Henry argues that the origin of money is intrinsically bound up with the transformation from egalitarian tribal societies to class-based societies. It is the ability of one class to impose non-reciprocal obligations on another, he argues, that is the basis of money, not voluntary self-interested transactions among equals. In other words, “…the rise of class society and inequality took place alongside the emergence of money, whereby money played a key role in establishing, maintaining and exacerbating inequality and class division in societies” [1]

Henry points out that traditional societies are egalitarian and have no need for money. They practice the “rule of hospitality” such that everyone is assured access to basic subsistence. Critical resources are owned and managed collectively. Everyone must contribute to the survival of the collective, but such obligations are reciprocal and not top-down. As the tribes made political decisions on a consensus basis, there was no way for one group to impose its will on the majority and gain control over all the surplus resources.

He argues that the uneven nature of creditor-debtor relationships would have precluded money from emerging under such conditions, since money presupposes a credit/debt relationship, and debtors are under one-way obligations to creditors (although this is not entirely correct–as we have seen, feasting is often used to create such unequal arrangements, albeit without formalized “money”).

In this society, there could be no debt. For every debtor there must be a creditor, and such a relationship is one of inequality with creditors having economic power over debtors. Such an arrangement runs counter to the rule of hospitality, violating the right of some – debtors – to subsistence. True, tribal members were placed under various obligations – they must contribute to production, provide for the well-being of their members, etc. – and debt is an obligation. But, such obligations were internal to the collective itself and of a reciprocal nature: all had obligations to all. There was no arrangement in which some would owe obligations to others in a non-egalitarian relationship [2]

Evidence indicates increasing cultural unification among villages along the Nile during the Naqada (pre-dynastic) period. Cereal farming practices spread southward from the delta during Naqada IA-IIB, and southern pottery depicts images of paddled boats which likely unified north and south. During Naqada IIC-D, we see a “cultural unification of Egypt” as funerary practices spread as well. More elaborate burial goods and segregated cemeteries indicate the presence of hierarchy at this time. During Naqada IIIA-B, it is thought that rule by hereditary kings was established (Dynasty 0), and by Naqada IIIC the first dynasty was founded, ushering in “official” Egyptian history. As Henry sums up: “Up to about 4400 BC, the evidence is that Egyptian populations lived in egalitarian, tribal arrangements. By the period 3200-3000, tribal society had been transformed into class society, and over the next 500 years the class structures became solidified around a semi-divine kingship.”

As class stratification emerged, reciprocal tribal obligations would have gradually been transformed into non-reciprocal obligations levied on the majority by a minority–a managerial class who controlled and managed surplus economic production. But how could a small subgroup gain control over the resources produced by the whole tribe? Such a transformation would not have been simply acquiesced to by the majority. As Henry states, “A segment of an egalitarian society cannot (and would not) simply set itself up as a separate and unequal class de novathe practice of inequality…would have to develop as a consequence of historical accident rather than conscious plan…

Henry’s hypothesizes that taxes began when reciprocal tribal levies became concentrated in the hands of administrator elites operating out of the Pharaoh’s household who were tasked with creation and maintenance of the hydraulic system. Through their role as managers of the Nile river, the hydraulic engineers would come to play an increasingly important role in the expansion of the Egyptian economy.

The need for material support for their efforts gave rise to levies to support these activities. While all members of society would benefit from such efforts, the hydraulic engineers would benefit more. Even a small degree of wealth differential would add up over time. At the same time, the engineers would have also garnered control over the trade in the goods moving up and down the Nile. Henry writes:

Given the traditional arrangements of tribal society, it is probable that members of a particular clan (or kinship group) were designated as hydraulic engineers. Such a group would organize the labour which was rotated out of other clans to construct the dykes, levees, and canals. They would also be in charge of the distribution of food, clothing, tools, etc. produced in the tribal villages and regularly sent to wherever the hydraulic system was being worked. And, they would gradually organize the increasingly regularized trade relations that the expansion of the hydraulic system required as the engineers would have the requisite knowledge of those requirements. This would also place them in the position of organizing the goods that served as exportables. In other words, these full-time engineers learned administrative skills beyond those required in the small communities of which tribal society consisted.

…As full-time specialists, they would develop skills and, in particular, knowledge that was not shared by all members of the community. And, as these populations became increasingly dependent on agriculture, they also become increasingly dependent on the specialized knowledge of the engineers…They were now full-time specialists who controlled a significant flow of goods and labour and upon whom the majority of the population were dependent. The old collective rights and obligations of tribal society were being abridged and one group – the majority – was increasingly obligated to another. Inequality was growing and now becoming marked…

As this process unfolded, the appearance of tribal society remained intact, while the substance was transformed.This prevented rival institutions from forming.

Egyptian society was traditionally organized on the basis of phyles. It is thought that these originated in prehistoric times as “totemic clans.” Members of various clans would rotate in and out of service in the king’s household. Increasingly, the king’s administrators usurped the roles formerly played by clan leaders:

The temple staff was organized into groups for which the conventional modern term is phyle (a Greek term meaning company, tribe). This was the common form of temple organization, with five phyles in the Old Kingdom, each one subdivided into two divisions, which apparently worked at different times. Each subdivision, of around twenty men, served for only one month in ten.

Presumably for the extended leave periods they reverted to agricultural or other work in their villages, so that the undoubted benefits of temple service—payments as well as prestige—were widely spread. Whatever ancient reasoning lay behind the system, the practical consequence was a sharing out of jobs by the state. The number of employees required was multiplied by many times, hugely increasing the numbers of people receiving partial support from the state.

Thus, it was a transformation of existing structures, rather than the creation of new ones, that ushered in class society. The same process took place roughly at the same time in Mesopotamia, where the household model remained intact while becoming “institutionalized:”

Johannes Renger (1995) succinctly states: “The records, both written and archaeological, indicate that large institutional households decisively determined the social and economic reality in southern Mesopotamia, i.e., Babylonia, at least since the latter part of the fourth and the beginning of the third millennium.” Kinship was neither marginalized nor replaced by a meritocracy of individualism, rather, an increasing managerial bureaucracy emerged that was controlled by kin-related individuals. Written records and archaeology provide evidence for the existence of large institutional households (oikoi) by the end of the fourth millennium. These institutional households were self-sustaining and autarchic economic units. The household (oikos) constituted the center of the productive economic activities we now handle through the market…[4]

The interdependence of villages up and down the river (and across the canal system in Mesopotamia) would have called for the engineers to apply their skills in a broader context than that of a single village. They would have formed a supra-regional authority to manage the entire watershed, since the agricultural activities one village affected all the others downstream. This would have expanded their reach beyond that of a single village, and far beyond that of the simple territorial clan leaders:

During years of low inundation, one village taking too much of the available water would endanger the production process of villages downstream. During periods of high inundation, failure to attend to needed repairs to the levees in one region would obviously affect not only that area but the whole valley beyond the breach. We also know that in this period, there was a significant shift in the ecology of this region resulting in greater aridity, thus a reduced water flow. Such a development would promote the need for control superseding any particular tribe’s needs or abilities.

Thus, the engineer-administrators, originally based in one tribal organization and practising egalitarian relations with other members of their tribe, would now be called upon to use their knowledge and skills to administer an extended physical area that would include any number of tribes. That is, the engineers increasingly saw themselves as independent of any particular tribe and were now responsible for the well-being of a large population, independent of tribal status…

To keep resources flowing in their direction, the old reciprocal back-and-forth tribal obligations had to be transformed into one-way, non-reciprocal ones. Henry speculates that this was accomplished by religious ideology. The hydraulic engineers became a full-time priesthood. “The older tribal obligations to provide the resources to construct and maintain the hydraulic system were now converted – in part – to maintain a privileged section of the population that no longer functioned, except in a ceremonial fashion, as specialized labour in the production process.”

Tribal societies practice totemic magic; where communication with long-deceased ancestors by the living is used to gain control over the invisible world underlying complex natural phenomena, such as the change of seasons and movements of stars, which were not understood by pre-scientific populations.

Totemism became supplanted by a specialized priesthood practicing “magic” which could intercede with the gods on behalf of humanity. The old tribal totems were converted to a pantheon of animal-headed gods(Horus, Thoth, Anubis, The pharaoh became a divine entity who could intercede with the gods on behalf of humanity. An elaborate funerary architecture and death cult was established to justify these practices. Cosmological symbolism, reaching back to the herding origin of Egyptian culture, was appropriated to create a rich and complex mythology centered around the afterlife. The temples played an increasing role in both the spiritual and also the material management of Egyptian culture. But then again, magic has always really been about manipulating people’s psychology rather than any so-called invisible forces:

“The king had been chosen and approved by the gods and after his death he retired into their company. Contact with the gods, achieved through ritual, was his prerogative, although for practical purposes the more mundane elements were delegated to priests. For the people of Egypt, their king was a guarantor of the continued orderly running of their world: the regular change of seasons, the return of the annual inundation of the Nile, and the predictable movements of the heavenly bodies, but also safety from the threatening forces of nature as well as enemies outside Egypt’s borders.”


Essentially, the spirit world was converted to one of gods, and the control of nature, previously seen as a generally sympathetic force, was now in the hands of the priests. Nature itself became hostile and its forces, controlled by gods, required pacification through offerings. The king -the ‘one true priest’ – and the priests placed themselves as the central unifying force around which continued economic success depended. In so doing, they could maintain the flow of resources that provided their enormously high levels of conspicuous consumption and wasteful expenditures that certified their status as envoys to the natural world.

This encoding of celestial movements in the very earliest monoliths indicates that studying the movements of the stars, planets, sun and moon was associated with management of mass labor and religious concepts from the start. This association can be seen encoded in the form of the earliest cities. Every major priesthood in both the Old world and the New was obsessed with observing the heavens. The bones found with calendrical markings indicate that this probably dated back to the Ice Age with certain “sky chiefs” or shamans.

This ability to mark time and track the movements of the heavens was probably just as responsible for the establishment of the priesthood as was hydraulic engineering, as Carroll Quigley  observes:

…we might infer that, at some remote date, some unsung genius or, better, some observant family, saw a connection between the advent of the flood and the movements of the sun–two events that had not previously seemed connected. This individual or family noted that the rising sun appeared at a slightly different point on the horizon each morning, finally reaching a limit where it hesitated for a few days before it began to return…Thus was born a rudimentary idea of the solar year, the full duration of the sun’s movement back to its starting point. With this information the observer was able to estimate roughly the day on which the flood would arrive each year. This calculation the discoverers kept secret, for their own profit, using the knowledge to work on the fears and superstitions of their neighbors, trying to convince others that they possessed magical powers enabling them to foretell the arrival of the flood, or even the power to make it arrive.

The original discoverers of this information could hardly have told the arrival of the flood within a span of time much less than ten days. However, the fear engendered by the flood was so great, increased by the realization that the crops would fail if it did not arrive, that some, at least, accepted the discoverers’ claims and yielded to their demands for tribute. The discoverers probably offered to reveal the time of the flood in advance to those who would contribute a share of their crops, or perhaps they even threatened to bring the flood or to keep it away if they failed to obtain promises of tithes from the crops of their neighbors. However skeptical these neighbors might be of such claims the first year, no more than one lucky forecast was needed for most of them to become willing givers…The ignorance of the majority made it easy for the possessors of this specialized knowledge to use it as proof that they had supernatural powers.

Moreover, it was not necessary to convince a majority or even many of their neighbors. If any small number contributed, a surplus would accumulate which could be used, in the form of flood protection embankments or irrigation ditches, to provide very concrete evidence that it was worthwhile to belong to the new organization. Thus came into existence the central institution of ancient Mesopotamia–the Sumerian priesthood.

This priesthood became a closed group, able to control enormous wealth and incomes, and concentrated very largely within the study of solar and astronomical periodicities on which their influence was originally based. With the surplus thus created, the priesthood was able to command human labor in large amounts and to direct this labor from the simple tillage of the peasant peoples to the diversified and specialized activities that constitute civilized living. Above all, this centralized direction provided the system of flood control and irrigation on which all subsequent progress was founded. Similarly, these priest-controlled surpluses provided the capital for the many inventions of the age of expansion of Mesopotamian civilization. [5]

Mass labor was channeled to building the elaborate funerary architecture and temples of the Egyptian state religion. In the days before mass media, the prevailing cultural ideology had to be encoded and reinforced by brick and stone. This labor was also organized by phyle. The priestly caste, rather than the tribal leaders, were now perforce the ruling class:

Under the new social organization, tribal obligations were converted into levies (or taxes, if one views this term broadly enough). The economic unit taxed was not the individual but the village. As well, the king and priests did not arbitrarily assign a tax level on the village, but tax assessors and collectors (scribes) met with the village chief who would assemble the village council to negotiate the tax. This appears to have been done on a biennial basis known as ‘counting of cattle’, a census that also served as the dating for the various reigns of the king. Should a village renege on its obligation (default), the chief responsible for the collection of taxes could be flogged by the scribes.

Note that such a punishment makes the chief responsible to the priests rather than to the clan, further eroding the substance of tribal relations. Supervising all the local or regional scribes, and assuring both competence and honesty in this process, was a vizier who exercised central authority in the name of the king.

The central authority used their control over society’s resources to establish a redistributive economy, run through pharaoh’s household. The redistributive economy reinforced the need for levies-cum-taxes from the general population, which were channeled through the Pharaoh’s household and back through all strata of the Egyptian economy:

Tribal reciprocity, though not totally abrogated, was no longer the universal standard among the Egyptian populations, and was replaced by an economy of limited redistribution...while the substance of tribal society was increasingly gutted, the emerging class had to maintain the forms of that organization. This was necessary in order to present the veneer that nothing fundamental had changed when, in fact, everything of substance had been altered…

The economic surplus collected in the form of taxes was directed toward the priests who then redistributed some portion through the various levels of the bureaucracy, the temple artisans, and the workers who laboured on the various religious and hydraulic projects. Hence, Egyptian society (along with others of this type) can be labelled an economy based on ‘redistribution’.

However, it is important not to misunderstand the nature of this term. Such economies did not engage in full redistribution as it would defeat the whole purpose of such an economy if all production were to be first directed to the centre, then flow back through all segments of society in some elaborate redistribution system. Not only would such a system be markedly inefficient, but what would be the point?

Rather, only a portion of the economic surplus, produced by the majority of the population, would flow to the centre, and this share of output would then be apportioned among the minority segments of society as stated above. The priests, of course, would claim the lion’s share.

Simple redistribution would not be enough to secure coercive power, however. In that case, you would be just an intermediary, collecting everything and giving it away. Instead, many of the resources thus collected would be channeled into image building activities: construction projects, hiring specialized craftsmen, acquiring a retinue of retainers and advisors, engaging in overseas trading missions, infrastructure improvements, military campaigns, religious rituals, and other such activities. It is through these activities that redistributive economies, made possible through taxation, became centralized institutions of power cemented in the hands of a hereditary elite.

As long as a chief merely returns everything he has been handed, he gains nothing in wealth or power. Only when he begins to keep a large part of it, sharing it with his retainers and supporters but not beyond that, does power begin to augment…the power of a chief to appropriate and retain food does not flow automatically from his right to collect and redistribute it. Villagers freely allow a chief to equalize each family’s share of meat or crops through redistribution because they benefit from it. But they will not willingly suffer the same chief to keep the lion’s share of food for himself. Before doing this, he must acquire additional power, and that power must come from another source.

The word “redistribution” is often used very loosely. Whenever the word is applied in describing the activity of a chief we should ask two questions (1) “What percentage of the food or goods taken in by the chief is actually redistributed?” (2) “To what percentage of the population are they redistributed?” For chiefly disbursement to be genuine redistribution, both percentages should be high. If the percentages are small, what we have is not real redistribution at all, but something more akin to taxation. And it is in taxation that the sinews of government really lie. When a chief can compel the population to turn food and goods over to him, which he can then apply at will, he is at last manifesting power.

By the selective distribution of food, goods, booty, women and the like the chief rewards those who have rendered him service. Thus he builds up a core of officials, warriors, henchmen, retainers, and the like who will be personally loyal to him and through whom he can issue orders and be obeyed. In short, it is through shrewd and self-interested disbursement of taxes that the administrative machinery of the chiefdom (and the state) is built up. However, the chief who does this is no longer a redistributor, he is an appropriator and a concentrator… Summarizing his findings for chiefdoms generally, Steponaitis noted: “What formally appears to be a redistribution in complex chiefdoms is functionally more akin to the collection of tribute than the institutionalized sharing of surplus.” [6]

This process probably came about through military conquest.

By the fourth millennium BC, three proto-states emerged along the Nile River: This, Naqada, and Heirakonopolis, each centered on a capital city. These shared a common culture, but competed politically. These polities came to be dominated by Heirakonoplis (Nekhen), which went on to unify Upper (southern) Egypt. Upper Egypt conquered the chiefdoms of Lower Egypt (the Nile Delta), creating the Egyptian state and the first dynasty, as depicted on the Narmer Palette. Depictions of martial conquest remained in royal iconography through Egyptian history.

A military needs supplies–food, weapons, and so forth, to wage war. In cases of attack by outsiders, everyone is expected to contribute to common defense. Military operations would also have required levies from the general population. Armies need to be provisioned and fed, and this can only be done with forward planning and large storehouses. But it’s not fair to just requisition supplies from producers who make things directly related to military use. It would have violated egalitarian norms of shared sacrifice in wartime. The answer for this situation was to raise a general levy across the population to support military efforts, even from who produced items not directly related to military use like coppersmiths and chariot-makers.

These contributions would have been paid to those who could organize the surplus in collective defense of the territory, mobilize labor in the form of troops, and engage in successful territorial expansion. The resources of the conquered territories would then flow into the same bureaucratic structure. This process continued apace, as the villages along the Nile became assimilated into a single culture under the reign of a single ruler.

No state is known to have arisen directly from the fusion of autonomous villages. all seem to have been formed through the coalescing of groups already aggregated into supravillage units. Such units were, by my definition, chiefdoms. Moreover, because the aggregation of villages occurs only through war, or the threat of it, any theory of the origin of chiefdoms that foregoes this mechanism is severely handicapped…Once chiefdoms begin to form in a region, the process proceeds rapidly. The military advantage that size alone confers on a society means that even a minimal chiefdom will have a significant edge over its neighbors if they are still independent villages. as a result, it will not be long before autonomous villages as such will cease to exist. Either they will be defeated by and incorporated into one of the existing chiefdoms or they will join forces with other such villages in a defensive alliance, which will itself tend to become a chiefdom. [7]

Eventually, foreigners would become subjugated as well. When populations were overrun, they became subject populations where wealth was regularly extracted from them in the form of tribute. Tribute is essentially an extortion payment from a militarily weak population to a stronger one in order to leave them alone. To collect this tribute, a top-down political apparatus was established which funneled resources from the periphery to a core.

In addition to the portion of the surplus collected now as taxes, the king also collected royal gifts as a form of tribute from foreign populations. As the goods that formed this income could be in the same form as the income that flowed from the internal population, but was the property of the king proper, it had to be kept apart from the internally generated income…

The later Haxamanishya-Akhaemenid-dynasty Persian emperors of 550 to 330 BC, who ended up controlling much of the Near East, perfected this technique. Rather than killing or enslaving defeated populations, they kept them alive and allowed them to live in peace under the rule and laws of the imperial power. In exchange, they set up a tax system which funneled a portion of their economic output into the imperial treasuries. They became, in essence, farmers who kept peasants instead of livestock. This goes to prove Stanley Diamond’s observation that “Civilization originates in conquest abroad and repression at home.” [8]

The necessity of managing these diverse resource flows called for the creation of a bureaucratic structure. Taxes and tribute were assessed in a unit of account, usually a reference to a certain set measure of weight. It was this standard, that is the origin of money, not some sort of intermediate good chosen to reduce barter costs. On this point, the evidence is unambiguous:

At some early point in the Old Kingdom, the growing complexities of the new economic arrangements required the introduction of a unit of account in which taxes and their payment could be reckoned and the various accounts in the treasury could be kept separate and maintained. This unit was the deben (and its fractional denomination, the shdt- 1/12 of a deben)…The fact that the deben bore no relation to any specific object, but referred to an arbitrary unit of weight only, is a certain indication that Egyptian money was decidedly not based on some ‘intrinsic value.’…In other words, money does not originate as a medium of exchange but as a unit of account (and something of a store of value with regard to the king’s treasury), where the measure of value is arbitrarily specified by decree, and goods and services of various qualities and quantities can then be assigned a monetary value to allow a reasonable form of bookkeeping to keep track of tax obligations and payments and to maintain the separate accounts of the king.

It should also be noted that the deben did not serve as means of payment (as with modern money), but did function as the means (or measure) through which payment was made….money as simply a non-tangible abstract unit in which obligations are created and discharged, while it may appear obtuse to a modern economist, should not be all that difficult to comprehend….

2. Tribal obligations and Weregild

A second route to money stems from ancient penal systems set up by tribal societies.

In tribal societies, when a crime is committed, the transgressor is required to make restitution payments to the victim and/or the victim’s family/clan/tribe. The transgressor is considered to be “indebted” or “liable” to the victim(s) until such payment is made. In many languages, the word for “debt” is analogous to the words designating “sin” or “transgression.” Also, the verb “to pay” has its roots in words meaning “to pacify, “to appease” or “to satisfy.” This indebtedness continues until such time as restitution is paid to the victim and balance is restored.

Many Indo-European cultures practice the notion of “blood-wealth,” or Weregild. The term derives from wair meaning man, and gildan meaning “to pay” or “to render.” These were fines assessed by tribal councils and public assemblies and paid directly to the victims or their families in order to prevent blood feuds from escalating out of control. “A long list fines for each possible transgression was developed, and a designated “rememberer” would be responsible for passing it down to the next generation. Note that each fine was levied in terms of a particular good that was both useful to the victim and more-or-less easily obtained by the perpetrator.”

Often, violations were associated with a specific fine based on the severity of the offense. The Code of Hammurabi and the Salic law both specified very specific compensation payments for various offenses (such as gouging out an eye, or cutting off a nose, or manslaughter—must have been fun times back then!). In tribal societies, these could be assessed in terms of cattle, grain, goats, chickens, and even (in ancient Ireland, for example) slave girls!

These payments were originally assessed on a case-by-case basis rather than a regular unit of account. However, over time the idea of weregild gave rise to the idea of general monetary debts owed to authorities, including fees, tithes, taxes, and tribute. “The key innovation, then, lay in the transformation of what had been the transgressor’s debt to the victim to a universal “debt” or tax obligation imposed by and payable to the authority.”

It is almost certain that weregild fines were gradually converted to payments made to an authority. This could not occur in an egalitarian tribal society, but had to await the rise of some sort of ruling class. As Henry argues for the case of Egypt, the earliest ruling classes were probably religious officials, who demanded tithes (ostensibly, to keep the gods happy). Alternatively, conquerors require payments of tribute by a subject population. Tithes and tribute thus came to replace weregild fines, and fines for “transgressions against society”, paid to the rightful ruler, could be levied for almost any conceivable activity. Eventually, taxes would replace most fees, fines and tribute.

Once debts are paid to a central authority, it is unwieldy to juggle all the various types of objects that can be paid. “When all payments are made to the single authority…this wergild sort of system becomes cumbersome. Unless well-developed markets exist, those with liabilities denominated in specific goods or services could find it difficult to make such payments. Or, the authority could find itself blessed with an overabundance of one type of good while short of others.” [9]

For example, tribal payments in ancient Ireland were made in slave girls called kumals. But over time, this became cumbersome, and kumals became simply an abstract unit of account:

Probably the second century a.d. saw the kumal transformed into an abstract unit of account. The laws under King Fegus, king of Uldah, required a blood money payment of “seven kumals of silver” and “seven kumals of land” for the murder of anyone under the king’s protection. These laws clearly show that land and silver were mediums of exchange, and kumals were only a unit of account. These laws were set forth in two legal texts, the Senchus Mor and the Book of Aicill, both of which contained a table legally sanctioning the kumal standard. According to this table:

8 wheat-grains = 1 pinginn of silver
3 pinginns = 1 screpall
3 screpalls = 1 sheep
4 sheep = 1 heifer
6 heifers = 1 cow
3 cows = 1 kumal

The example of slave-girl money in Ireland brings to the forefront four separate functions of money. Money serves as a medium of exchange, a store of wealth, a unit of account or measure of value, and a standard of deferred payment. The slave-girl money evolved into a unit of account only, while the other roles of money were filled by various commodities, land, and precious metals.

Slave Currency of Ancient Ireland (Encyclopedia of Money)

Once again, money arises out of the ability to extinguish a debt, in this case one’s “debt to society”:

According to this view, money is essentially an instrument that denominates and extinguishes social debt obligation. It first quantifies debt obligation between individuals. For example, Joshua has conducted wrongdoing to Henry; hence the public authority determines that Joshua owes to Henry one cattle. In this case, that cattle is the “money” that effectively extinguishes Joshua’s liability/debt to Henry. …Money of account might be a cattle between Joshua and Henry, and then ten watermelons between Helen and Linda, etc.

However, when there emerges the need to denominate debt obligation between individuals and the “society”/central authority in various forms (such as fines, fees, taxes, etc.), a standard unit of account for money was needed to serve as the standard measure of value. By choosing a unit of account as the only means for individuals to extinguish his/her liabilities to themselves, the central authorities “write the dictionary” (Keynes, 1930). Hence, the power of the central authority (state, temple, tribe, etc.) to impose a debt liability (fines, fees, taxes, etc.) on its population gives the former the unique right to choose a particular unit of account as the only means of payment to the central authority.

3. Conclusion

Although these paths to money differ, they are fundamentally similar and provide a historically supported and logically consistent account of the transformation from primitive money to more modern forms.

In both of these scenarios, payments are made to some sort of institutional authority tasked with social maintenance, whether adjudication of disputes, execution of justice, military operations, communal redistribution and welfare, or maintenance of critical infrastructure. As Wray states, “The unit of account is the numeraire in which credits and debts are measured.” Only when this “unit of account” is established can markets form. Thus, both money and markets are creations of the state and are rooted in social hierarchy and inequality.

Two further critical inventions are required to create such a numeraire: accounting and measurement. We’ll discuss how those innovations came about next time.

[1] Semenova and Wray. The Rise of Money and Class Society: The Contributions of John F. Henry (WP 832) (2)

[2] John Henry: The Social Origins of Money: The Case of Egypt. In Credit and State Theories of Money: The Contributions of Alfred Mitchell-Innes. Randall Wray and Edward Elgar, editors. Subsequent passages from Henry are also taken from this work unless noted otherwise.

[3] Barry Kemp: Egypt: Anatomy of a Civilization, pp. 166-168

[4] C.C. Lamberg-Karlovsky: Households, Land tenure, and Communication Systems in the 6th-4th Millennia of Greater Mesopotamia. In Urbanization and Land Ownership in the Ancient Near East. Michael Hudson and Baruch Levine, editors.

[5] Carroll Quigley: The Evolution of Civilizations, pp. 211-213

[6] The Transition to Statehood in the New World. edited by Grant D. Jones, Robert R. Kautz, Cambridge University Press

[7] ibid.

[8] Stanley Diamond: In Search of the Primitive: A Critique of Civilization

[9] L. Randall Wray: The Credit Money and State Money Approaches (Working Paper 32)

The Origin of Money – 2

1. Tally sticks – The First Credits.

A number of notched bones have survived from the Ice Age. The notches and marks made on these bones were clearly made by humans for some sort of intentional purpose.

The interpretation of these bones is, or course, highly speculative. However, a convincing argument has been put forward by studying the patterns inscribed on them that these bones were used as a form of primitive record-keeping. The patterns on them indicate a careful tracking of the lunar waxing and waning as a way of marking off time. Lunar cycles would have been used to track the migrations of herds, the reproductive and moulting patterns of animals, the growth of plants, and even the menstrual cycles of fertile females. In this latter role, they may be related to the enigmatic so-called “Venus figurines,” found throughout Ice-Age Europe, which appear to be pregnant females.

These calendrical rhythms were also used to order the ritual life of Ice Age peoples, indicating that even at this distant phase of history, humans were extremely social and not just isolated bands roaming peripatetically across the landscape:

Calendrical rhythms determined the times when sparse populations came together in the seasonal gatherings that were the occasions for exchange – of family members as well as gifts. These ritual sites typically were on rivers, often near distinguishing natural features such as caves. The most famous sites were orientated to the rising or setting of the sun at the four major points of the year, the solstices and equinoxes….

After the Ice Age (Michael Hudson)

The Lembobo bone is a fibula of a baboon with artificial notches on it which was found in a cave in Swaziland which dates from the Paleolithic period-about 45,000 years ago. The notches are thought to represent some sort of calendrical counting system, probably based on the phases of the moon. The Ishango bone is another baboon fibula bone from about 20,000 years ago bearing similar markings. This is thought to also have a possible lunar calendrical function, but it has also been speculated that it may represent a tally stick. The Wolf Bone, found in Europe and dated from about 30,000 years ago, is another example.

These tally sticks may have been single tally, in which an object is notched as a mnemonic device. Examples include the messenger sticks of the Inuit people, and the knotted strings used many native American tribes. In Peru, these evolved into the khipu: the bundles of strings used to manage the inventory of the Inka redistributive economy.

The other tally stick “technology” was the split tally, in which both parties to a transaction retained a copy of the transaction record as a means of verification. One half would go to the debtor, and the other half to the creditor. Some unique item which could be split apart was chosen, such as stick or a bone. The natural variability of the split and of the material itself prevented forgery. The ancient Chinese used bamboo sticks about the size of two chopsticks for this purpose.

In Medieval England, tally sticks were made of hazelwood harvested from the banks of the Thames near parliament. Such wood had a distinct feel and grain to prevent counterfeiting. Each tally stick would be squared off and marked–V-shaped notches would represent pounds, broad grooves would indicate shillings, and sharp notches would indicate pence. A debtor’s name and a short description of the transaction would be inscribed, and the stick would be split vertically in two down the center. The debtor would retain one piece, called the “foil,” while the creditor would receive the other piece, called the “stock.”

The portion of the stick retained by the creditor retained the entirety of the original base where the stick was cut from the tree or branch to prevent counterfeiting. If marks were altered by one party, the discrepancy would be obvious to the other, making sure the transaction was secure. In fact, the term “stock” used in tallies is the origin of our term today:

Curiously, our modern use of the term “stock” to represent a share in a corporation may derive from the stock and foil technology. Almost certainly the British term for fixed income obligations–stocks–comes directly from the use of stocks and foils up to the early nineteenth century to record loans to the Bank of England. For generations, to have “stock” in the Bank of England literally meant that one held a creditor’s wooden stock, and dividends were presumably collected by presentation of the stock at the bank.

The Origins of Value, p. 110

The tally system survived in England and was a major means for raising funds by the Exchequer for at least six centuries. Often times the credit portion might be transferred to someone else as a form of “payment.” That is tally sticks circulated as money–transferable credit. If the king needed money, he would “raise a tally” by issuing tally sticks addressed to the local tax collector in place of cash. These sticks would then circulate: their value came from the fact that they could be used to pay the tax obligation. The sticks would be presented at the time of tax collection (“I already paid”). In this way, they circulated as bills of exchange.

Geoffrey Gardiner imagines what such a system might look like in a pre-literate society:

Let us assume that the huntsman is in need of a supply of arrows, but until he can hunt he has nothing to give in exchange. So he promises the fletcher ten haunches of venison in exchange for a supply of arrows. In modern terminology he is asking for ‘trade credit.’ In evidence of his promise he notches ten bones and gives them to the fletcher. These are his ‘markers.’ The fletcher needs wood, so he asks the woodsman for trade credit, promising haunches of venison when the hunter has been successful. He could hand over some of the markers of the huntsman as evidence of his promise. The various deals might be notified to the headman, who, we may confidently assume, will also require a reward of venison in return for a promise to enforce the deals. The huntsman gets his arrows, and goes off to the hunt. Having been successful, he pays off his debts to the holders of his markers. The chief gets his reward too.

Wray, Credit and State Theory of Money, p. 119

In reality, the above scenario is not very likely. We know from anthropological studies that In small-scale tribal societies, cooperation is given open-handedly, without the need to have some sort of formal record of who owes what to whom.

But perhaps the notched bones above indicate some sort of dealing with outsiders, perhaps from another tribe. We know that rituals took place at certain specified portions of the year, and during these rituals, exchanges took place. In fact, we know that ritual reciprocal exchange was explicitly designed to establish and maintain social bonds in disparate groups, as in the Kula trade.

Such rituals and exchanges probably took place long before the advent of domesticated agriculture, far back into the Ice Age. The presence of seashell ornaments hundreds of miles inland indicates that such trade routes existed as far back as the Ice Age. We also know, for example, that the ochre used to decorate the painted cave walls at Lascaux did not come from the same region, or nearby, but instead came from hundreds of miles away from deep beneath the earth’s surface, probably changing hands along the way. This ocher indicates that already in the Ice Age there must have already been some sort of primitive “mining” industry.

The aboriginal natives of Australia lived a Stone-Age existence and yet had complex trade routes between various tribes, exchanging stones, ochres, tools, hides, ceremonial items and other resources. Tribes would come together at certain specified portions of the year for rituals involving music and dancing. At these rituals, ceremonial trade would take place.

On the Daly River, south of Darwin, trade took place at occasions when neighbouring tribes gathered for other reasons such as initiation or sacred ceremonies…each man and woman had a special trading partner in a complex network of gift exchange. A vast network of trade routes criss-crossed the Australian continent prior to white settlement, after which the trade contacts were soon broken. Pearl shell was traded from tribe to tribe to the Nullarbor Plain. Native tobacco moved from the central ranges to the south of the continent, while wombat fur for twine making moved from the south to the north. Stone spear heads were traded from the central Australian quarries to the tribes of Arnhem Land.

It’s possible that the tally sicks, whether single or split, were the earliest permanent records of economic transactions that we know of. Such items indicate that money is not a “thing” but transferable credits (neither the bones nor sticks themselves had any intrinsic value). Their simplicity is deceptive. In fact, they are surprisingly effective financial instruments, which is attested to by the longevity. The Napoleonic Code recognized them as valid financial instruments, and some were still in use in part of Central Europe into the Twentieth Century. When the Bank of England retired them from circulation in favor of coins and paper money in the nineteenth century, the tally sticks were burned en masse in a bonfire. The resulting fire burned down the Houses of Parliament; today’s iconic Gothic Revival building alongside the Thames is its replacement.

We cannot be sure that such arrangements ever happened exactly as thus surmised, but notched bones do survive from hunter-gatherer settlements of the Stone Age. Indeed, some are very elaborately notched, suggesting to some scholars quite sophisticated accounting. Others claim that the earliest notched bones are calendrical in character. This scholarly dispute may be of no great significance as accounting techniques must at some stage absorb calendrical technology, as time is an important factor in accounting, and the transition from astronomical notation to a notation of obligations is, we are informed, documented by c. 9000 BC.

Sticks are easier to notch than bones, and the notched stick was the main method of keeping permanent accounts in places with ample supplies of wood until the end of the 18th century. In Chapter 5 of The Universal History of Numbers (1994) Georges Ifrah introduces his readers to the mode of using notched sticks. In the first sentence of the English edition of this comprehensive work of impressive scholarship he tells his readers that notched sticks – tally sticks – were first used at least 40,000 years ago. He states that as a method of accounting the notched stick has stood the test of time. He suggests that only the invention of fire is older technology than the accounting tally.

In the first part of the chapter Georges Ifrah describes notched sticks merely as a means of counting, but on the second page he explains how the tally can be used as a form of bill and receipt, and then likens it to a wooden credit card, nearly as efficient and reliable as the plastic ones with magnetic stripes and microchips with which people today are so familiar.

Wray, Credit and State Theory of Money, pp. 119-120

The next archaeological indicators of formal economic arrangements are small clay tokens found throughout archaeological sites in the ancient Near East after 9000 BC. But to understand their role, we must first understand the changing nature of social relations are we moved into the Neolithic (farming) period of history. The changing nature of social relations due to farming, especially irrigated farming, is necessary to understanding the origin of money.

The Origin of Money – 1

“The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.”
–J.M Keynes

Last time we saw that the “conventional” definition of money does not hold in an anthropological context. We saw that different “money-things” functioned in different and often distinct spheres of exchange. We also saw that “money” was used primarily to discharge social obligations, rather than being used in closed-ended spot transactions. Often times, money used in market exchanges was kept distinct and separate from what was used in reciprocal social obligations, often to protect social relationships from monetization, as Karl Polanyi pointed out.

These facts are important to keep in mind when discussing the history of money.

1. The conventional theory is wrong

The conventional view is that money evolved to reduce transaction costs in an imaginary barter society. An intermediate commodity that would serve as a “medium of exchange” would be chosen by all members of the community through a process of trial-and-error. Not just any item would do, however. It had to be durable. It had to portable. It had to be divisible. And it couldn’t be too common, otherwise money would lost its value.

Gold (and silver), being all of these things, gradually emerged as the most logical choice. It does not oxidize or decay. It is malleable into different shapes. It is portable. It is reasonably rare:

Karl Menger, an Austrian economist, set out one school of thought as long ago as 1892. In his version of events, the monetisation of an economy starts when agricultural communities move away from subsistence farming and start to specialise. This brings efficiency gains but means that trade with others becomes necessary. The problem is that operating markets on the basis of barter is a pain: you have to scout around looking for the rare person who wants what you have and has what you want.

Money evolves to reduce barter costs, with some things working better than others. The commodity used as money should not lose value when it is bought and sold. So clothing is a bad money, since no one places the same value on second-hand clothes as new ones. Instead, something that is portable, durable (fruit and vegetables are out) and divisible into smaller pieces is needed. Menger called this property “saleableness”. Spices and shells are highly saleable, explaining their use as money. Government plays no role here. The origin of money is a market-led response to barter costs, in which the best money is that which minimises the costs of trade. Menger’s is a good description of how informal monies, such as those used by prisoners, originate.

On the origin of specie (The Economist)

Alfred Mitchell-Innes, the author of a groundbreaking paper on the true origins of money, laid out the conventional theory this way:

…under primitive conditions men lived and live by barter…as life becomes more complex barter no longer suffices as a method of exchanging commodities, and by common consent one particular commodity is fixed on which is generally acceptable; and which therefore, everyone will take in exchange for the things he produces or the services he renders and which each in turn can equally pass on to others in exchange for whatever he may want…this commodity thus becomes a “medium of exchange and measure of value.”

…a sale is the exchange of a commodity for this intermediate commodity which is called “money;”…many different commodities have at various times and places served as this medium, of exchange, – cattle, iron, salt, shells, dried cod, tobacco, sugar, nails, etc.;

…gradually the metals, gold, silver, copper, and more especially the first two, came to be regarded as being by their inherent qualities more suitable for this purpose than any other commodities and these metals early became by common consent the only medium of exchange…

What the Classical and Austrian economists did, in essence, was to try and imagine the origin of money by envisioning a society much like their own–Western European market societies, complete with dense populations of strangers, centralized governments and banks, and occupational specialization–and then take money away. How would people cope? They would have to barter for things, of course! And then they constructed the rest of the narrative from there.

However, this is bad anthropology, and bad science. Ancient societies were very different from their own market-oriented societies. Market societies are a historical contingency based on a great variety of factors, many which were not known to classical economists. You cannot simply imagine one’s own society, complete with all its various complex political and socioeconomic arrangements, and then take away one variable to construct the history of that variable.

Rather than using empirical reasoning to arrive at their conclusions, they used deductivist reasoning not rooted in actual data. Their conclusions were also predicated on the aggregate actions of isolated individuals who had no pre-existing social relationships with each other, something also not found in actual societies.

Several problems emerged almost immediately with this narrative. One is the extreme unlikelihood of a single standard emerging without recourse to some sort of established central authority, as Randy Wray notes:

Orthodoxy has never been able to explain how individual utility maximizers settled on a single numeraire. While the use of a single unit of account results in efficiencies, it is not clear what evolutionary process would have generated the single unit. Further, the higgling and haggling of the market is supposed to produce the equilibrium vector of relative prices, all of which can be denominated in the single numeraire. However, this presupposes a fairly high degree of specialization of labor and/or resource ownership–but this pre-market specialization, itself, is hard to explain.

Once markets are reasonably well-developed, specialization increases welfare; however, without well-developed markets, specialization is exceedingly risky, while diversification of skills and resources would be prudent. It seems exceedingly unlikely that either markets or a money of account could have evolved out of individual utility maximizing behavior.

Geoffrey Ingham argues that the typical sequence has it backwards: money had to be established first, before markets could form. Otherwise, how could anonymous market exchanges take place? In other words, money is historically anterior to markets, and therefore could not have emerged out of innumerable market transactions:

‘In the first place, without making a number of implausible assumptions, it is difficult to envisage that an agreed money of account could emerge from myriad bilateral barter exchange ratios, as the Mengerian commodity theory implies. How could discrete barter exchange of, say, 3 chickens to 1 duck or 6 ducks to 1 chicken, and so on, produce a universally recognised unit of account? The conventional answer that a ‘duck standard’ would emerge ‘spontaneously’ involves a circular argument. A single ‘duck standard’ cannot be the equilibrium price of ducks established by supply and demand because, in the absence of a money of account, ducks would continue to have a range of unstable exchange ratios.

As opposed to discrete truck and barter, which produces myriad bilateral exchange ratios, a true market, which produces a single price for ducks requires first and foremost a stable unit of account’.

As we have seen, most specialization took place within the context of a redistributive economy, whereby specialized products would be collected and redistributed by some sort of central authority such a tribal chief, religious authority, or palace, rather than a market-oriented one. Other economies functioned on a household basis where craft specialists were members of the same household and produced items for internal use of the group rather than external market exchange. Although some specialists might sell their surplus goods outside of the household context, and households exchanged surplus commodities with each other, this likely was not done through barter exchanges. Instead, merchant intermediaries would likely acquire surplus commodities from various households and store them for later use. These merchants would then match up goods with buyers over time in their shops. In other words, the producer was usually not also a seller. This was just as likely conducted through credit/debit relationships rather than though barter. This is how many small village markets operate even today in developing countries.

Another flaw in this theory is that very often specialist producers would have nothing to barter with until they first procured the the land or raw materials they needed in order to create their item. This means exchanges are often spaced out in time as well as space, requiring not spot transactions but, once again, credit.

For example, a farmer needs to acquire land and seeds long before she has any crop to sell. A herdsman needs to first procure the cattle for breeding before he can sell the calves. A smith needs to first procure metal before he can forge a tool. All of these exchanges require not spot trades, but rather credit. This means that barter was an unlikely basis for an economy even in more complex, specialized Neolithic economies:

The idea that barter, that is the direct free exchange of goods and services, was a viable basis for an economy is unrealistic for two reasons. First, due to the seasonal nature of many products, the things which people need to exchange may not be produced at the same time of the year.

Second, and even more important, is the fact that most productive activities involve a sequence of stages from the production of the primary raw material to the sale of the finished product. The perfecter of the finished article has nothing to exchange with the producer of the raw material: the latter has to supply on credit terms, that is on trust that at some future time he will be reimbursed in some way.

Wray, Credit and State Theory of Money pp. 118-119

There are other problems as well. The historical evidence indicates that in ancient times, precious metals were far too valuable to be used in everyday transactions:

it should not be accepted on faith that using monetary metal was simpler than barter. To begin with, the high value of silver and gold implied that they would be used only for large transactions. In the Old Babylonian period (2000-1600 BC), notes Marvin Powell, a shekel ‘represented a month’s pay’, thereby limiting the ability of most people to pay on the spot for consumer transactions. Measuring smaller quantities of monetary metal became more error-prone, with deviations rising to about 3 per cent for small weights.

Wray, Credit and State Theories of Money p. 101

This “stable unit of account” is what allowed markets to form and market trading to take place. It was a schedule of price equivalencies evaluated against a common standard which allowed market trading to take place. All historical and anthropological evidence indicates that this stable unit of account was established through the actions some sort of central governing authority, whether political or religious, in every society. In other words, money was first and foremost a social technology which facilitated cooperation and trade; it was not generated spontaneously through the gain-seeking actions of numerous “rugged individualists” by osmosis. It was a way of recording debts and credits, and was never an intrinsically valuable “thing.” The fact that precious metals were used to keep track of these is a historical contingency which masks the true nature of money.

In addition, coins are what have survived. The systems of credit clearing which underlay these items do not preserve in the archaeological record. This gives the mistaken impression that the precious metals contained in coins were what was being traded for, and credit was just a substitute–a promise to pay gold and silver later because the former were just to hard to carry around.

The flaws of the conventional theory are summed up by Tim Johnson:

The narrative that money emerges out of barter has become part of received wisdom and as with most ‘common sense’, it has no basis in fact. Just as astrophysicists use telescopes to look back in time, anthropologists visit isolated communities to see how society evolved, and the evidence of this research is summarised by Caroline Humphrey (a.k.a. Lady Rees of Ludlow):

“Barter is at once a cornerstone of modern economic theory and an ancient subject of debate about political justice, from Plato and Aristotle onwards. In both discourses, which are distinct though related, barter provides the imagined preconditions for the emergence of money …[however] No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing.” [Humphrey, 1985, p 48]

What actually happens in practice is that when individuals knew each other, exchange was based on reciprocity; a gift would be given in the anticipation of it being reciprocated in the future (when they don’t know each other there is barter, but in such situations money cannot emerge because cowrie shells might be important in one society, and gold in another).

One of the most famous stories illustrating the role of reciprocal exchange has concerns an anthropologist who after spending some time with bushmen, gave one of them his knife. When visiting the group some years later, anthropologists discovered that the knife had been owned, at some point in time, by every member of the community. The knife had not been communally owned, its ownership had passed from one person to the next and its passage was evidence of a social network in the community, just as the motion of planets is evidence of an, otherwise invisible, gravitational field.

Lady Credit (Magic, Maths and Money)

So how did money really come about? That’s what we’ll start to look at next time.

What Is Money?

1. Money is what money does.

What is money? It seems like a such simple question, but is anything but. For most of us, money is anything we can use to pay for stuff. It is the thing we earn at our jobs, which we then use to buy everything we need.

But in traditional societies, there are no “jobs” and no “markets.” So did they have money? If not, did they have “wealth?”

The usual way to define what constitutes “money” is to use the customary tripartite division given in economics textbooks: money is a means of exchange, a store of value, and a unit of account. For example, this Web site gives the “conventional” definition of money:

The item serves as a medium of exchange. In order for an item to be considered money, it must be widely accepted as payment for goods and services. In this way, money creates efficiency because it eliminates uncertainty regarding what is going to be accepted as payment by various businesses.

The item serves as a unit of account. In order for an item to be considered money, it must be the unit that prices, bank balances, etc. are reported in. Having a consistent unit of account creates efficiency since it would be pretty confusing to have the price of bread quoted as a number of fish, the price of fish quoted in terms of t-shirts, and so on.

The item serves as a store of value. In order for an item to be considered money, it has to (to a reasonable degree) hold its purchasing power over time. This feature of money adds to efficiency because it gives producers and consumers flexibility in the timing of purchases and sales, eliminating the need to immediately trade one’s income for goods and services.

As these properties suggest, money was introduced to societies as a means of making economic transactions simpler and more efficient, and it mostly succeeds in that regard. In some situations, items other than officially designated currency have been used as money in various economies.

For example, it used to be somewhat common in countries with unstable governments (and also in prisons) to use cigarettes as money, even though there was no official decree that cigarettes served that function.

But it turns out that this definition of money is highly misleading. By using the customary tripartite definition of money, we define what money is. That is, anything that fulfills all of the above criteria is “true” money, and by extension, anything that does not meet all of the these criteria is not “true” money” or maybe, “partial” money, or “money-like”.

But this is a mistake, argues anthropologist George Dalton, in his essay, Primitive Money (PDF). It is incorrect to determine what constitutes “true” money by comparing it to the Dollars, Yen, Pounds, Euros, Francs, Yuan, Pesos, Dinars, and so on, that we use in our market-oriented, capitalist economies. In our societies, these functions are all carried out by a single object that we call “money.”

In traditional societies, however, these purposes may be accomplished by a whole host of other “money-things.” When we see such items used in exchanges, we call these “money-things” primitive money:

…if one asks what is “primitive” about a particular money, one may come away with two answers: the money-stuff-woodpecker scalps, sea shells, goats, dog teeth-is primitive (i.e., different from our own); and the uses to which the money-stuff is sometimes put-mortuary payments, bloodwealth, bridewealth—are primitive (i.e., different from our own).

Dalton summarizes the ways in which primitive money differs from the type of money used in modern market-based industrial economies:

Primitive money performs some of the functions of our own money, but rarely all; the conditions under which supplies are forthcoming are usually different; primitive money is used in some ways ours is not; our money is impersonal and commercial, while primitive money frequently has pedigree and personality, sacred uses, or moral and emotional connections. Our governmental authorities control the quantity of money, but this is rarely so in primitive economies.

The problem with the customary tripartite definition of money is that the distinctive features of what we call “money” all derive from us living in Western-style market-oriented economies with centralized governments and banking systems. As a result, they simply do not apply to primitive economies! For this reason, Dalton argues, judging what constitutes “primitive money” by comparing it with our own is fundamentally wrong. As Dalton points out, we would never do that in other areas of life when trying to understand other cultures:

[Anthropologists]…use the bundle of attributes money has in Western market economy to comprise a model of true money. They then judge whether or not money-like stuff in primitive economies is really money by how closely the uses of the primitive stuff resemble our own-a strange procedure for anthropologists who would never use the bundle of attributes of the Western family, religion, or political organization in such a way… Anthropologists do not hesitate to contrive special terms for special actions and institutions when to use terms from their own society would be misleading. They do not talk about the family, but about nuclear, extended, and matrilineal families. The same should be done with economic matters…

Other societies have very different social and economic arrangements than our own. In cultures where markets are absent or peripheral, and where banking systems are nonexistent, the type of anonymous, all-purpose “money-stuff” that we use in daily life is unknown. Many items in traditional cultures serve as “money-stuff,” but do not fulfill all of the criteria listed above, causing anthropologists and economists to erroneously dismiss them as not being “true” money.

In order to truly understand what constitutes “primitive” money, Dalton argues, we need to know how it is used, what it is used for, and who is using it. We typically do not make such distinctions when talking about Western capitalist market economies because it is assumed that all exchange is mediated by impersonal market transactions. Also, most exchanges are essentially commercial in nature, with other money uses being subsidiary. However, this is not the case in traditional cultures where markets play only a tangential role in social affairs:

Dollars have that set of uses called medium of exchange, means of payment, standard of value, etc., precisely because our economy is commercially organized. Where economies are organized differently, non-commercial uses of monetary objects become important, and ‘‘money” takes on different characteristics.

The question is not-as it is conventionally put-are shells, woodpecker scalps, cattle, goats, dog teeth, or Kula valuables “really” “money?” It is, rather, how are the similarities and the differences between such items and dollars related to similarities and differences in socio-economic structure?

To concentrate attention on money traits independently of underlying [social] organization leads writers to use the traits of Western money as a model of the real thing (while ignoring the structure of Western economy which accounts for the money traits). Then any primitive money which does not have all the traits of the Western model money is simply ruled out by definition-it is not money. This does not get us very far towards understanding primitive and peasant economies…

Dalton identifies three major types of economic arrangements distinct from the types of cosmopolitan, commercially-oriented market-based societies that we live in in the West. The uses and definitions of money are subsequently determined by these socio-economic arrangements. It should be noted that most economies prior to the advent of modern Western industrial capitalism fall into one of these three major categories:

Type I: Marketless – In marketless communities, land and labor are not transacted by purchase and sale but are allocated as expressions of kinship right or tribal affiliation. There are no formal market-place sites where indigenously produced items are bought and sold. These are “subsistence” economies in the sense that livelihood does not depend on production for sale. The transactional modes to allocate resources and labor as well as produced items and services are reciprocity and redistribution…

Type II: Peripheral Markets Only – Everything said above about marketless economies holds true for those with only peripheral markets, with one exception: market-place sites exist in which a narrow range of produce is bought and sold, either with some moneystuff used as medium of (commercial) exchange, or via barter in the economist’s sense (moneyless market exchange). We call these market exchanges “peripheral” because land and labor are not bought and sold and because most people do not get the bulk of their income from market sales…

Type III: Market-Dominated (Peasant) Economies – Small-scale market-dominated communities share with our own nationally integrated market economy the following features: (i) a large proportion of land and labor as well as goods and services are transacted by market purchase and sale; (ii) most people depend upon market sale of labor or products for livelihood; (iii) market prices integrate production. Labor and land move into and out of different production lines in response to profit (and other income) alternatives, as indicated by market prices. In such economies, the medium of (commercial) exchange function of money is the most important; the other commercial uses of money facilitate market transactions, and the same money is used for non-commercial transactions.

Peasant economies differ from primitive (subsistence) economies in that peasant producers depend upon production for sale. However, both peasant and primitive communities differ from large-scale, developed, nationally integrated Western economies on two counts: modern machine technology is largely absent, and traditional social organization and cultural practices are largely retained.

Rather than trying to define what money is in traditional economies, we should be looking at what money does. What may function as money in one context (e.g. the settling of debts), may not function in another (e.g. a means of exchange), and still again not in another (e.g. a store of value). It is also determined by the social relations between parties to the exchange. Different types of money are used in different types of transactions. For example, market exchange is very different from reciprocal gift exchange, which might be again different than redistribution carried out by centralized authorities such as chiefs or village elders.

For example, no one would head off to the marketplace with a herd of cattle in order to purchase things on sale from the vendors there. But cattle are often described as “money” in primitive societies because they are used for payments such as dowries. Cowrie shells might serve for impersonal market exchange with strangers, but would be inappropriate for bride exchange, restitution payments, or payments to authorities. In addition, the units used to denominate the exchange might be completely different from the objects used to settle the transaction. Debts denominated in a unit of account might be settled with any number of items— livestock, sea shells, tobacco, salt, bags of valuables, semi-precious stones, etc. Thus, it is very different from the type of general-purpose money that we are used to.

For example, payments to centralized political institutions in many ancient cultures were  extracted in the form of labor (corvée). This appears to have been the earliest known form of “taxation.” So is labor “money?” In ancient Mesopotamia, labor for large institutions was often remunerated with goods such as oil, salt, barley and beer. Does that make things like barley and beer “money?”

Not only does our definition of money distort our view of other cultures, but of historical economies as well. Many economic historians try and jam previous social relations into the Procrustean bed of “market” exchange by looking at the similarities, without acknowledging the differences. This allows them to claim that markets are timeless and universal—a natural feature of the human species stemming from our alleged innate desire for profit. But our modern economic arrangements, centered as they are around market exchange, may not be appropriate for analyzing past societies:

If we have a hard time applying modern economic theory to ancient societies, it is straightforward to see that we cannot get too exercised about the instruments that they used as money. For us, the notion of money is intertwined with the existence of a banking system. Modern banking system[s] developed over centuries, and they are far more complex entities than their equivalents in earlier eras. We will have a hard time relating our notions of money to the views of ancients…

Our exclusive focus on commercial exchange obscures the multiple roles that various “money-things” played in traditional societies. We tend to define money solely by market purchases (a medium of exchange).

In traditional societies, however, most exchanges are not impersonal commercial transactions, but instead are based on the discharging of reciprocal social obligations–for example, dowries, bridewealth, restitution for crimes to aggrieved parties (i.e. bloodwealth, weregeld), offerings to the gods/ancestors, initiation fees, child growth payments, military compensation, mortuary payments, tribute, and so on. Many things fulfill the functions of “money” in these contexts, but are very different from the type of general-purpose money we use in market transactions. As Marcel Mauss noted in The Gift, most exchanges in traditional, small-scale, societies are based around reciprocal gift-giving, and not market exchange for profit.

By contrast, the money that we use is a product of centralized institutions such as governments and banks in order to facilitate commercial (i.e. Impersonal market) transactions in fully-integrated, price-fixing markets:

The medium of (commercial) exchange function of money in our economy is its dominant function, and all other commercial uses of money are dependently linked-derived from-the use of dollars as media of (commercial) exchange.

For example, dollars are also used as a means of (commercial) payment of debt arising from market transactions. It is purchase and sale of resources, goods, and services which create the money functions of means of (commercial) payment and standard for deferred (commercial) payment. All the commercial uses of money are consequences of market integration, simply reflecting the highly organized credit and accounting arrangements that facilitate market purchases.

This is why economists in writing about our economy need not attach the qualifier “commercial” to the money uses. Indeed, we in our market-integrated national economy sometimes regard the terms “money” and “medium of exchange” as interchangeable. But for primitive communities where market transactions are absent or infrequent, it would be distorting to identify money with medium of (commercial) exchange…

In market-oriented societies, most items are for sale (alienable) and this is coordinated by prices, which assumes a concept of universal economic value which is often lacking from non-market societies. Furthermore, selling and producing for the market is absolutely essential for survival for most people, unlike traditional (i.e. subsistence) economies. Market transactions are usually impersonal and anonymous, and do not depend on status relations between the buyer and seller. In traditional societies, however, the social relations between giver and receiver are paramount. Thus, primitive money is often neither impersonal nor fungible:

…our market economy [is] based on contract rather than status…having the money price is a sufficient condition for buying most goods. Not only is Western money anonymous, so to speak, but money users are also anonymous: the market sells to whoever has the purchase price and only rarely imposes status prerequisites on the use of money as medium of (commercial) exchange.

In contrast, there usually are status prerequisites in non-commercial uses of primitive money. For example, in the use of cattle as means of (reciprocal) payment of bridewealth, status requisites such as lineage, age, rank of the persons, must be complied with. The money users are not anonymous, and a special kind of limited purpose money is necessary to the transaction.

In addition to not being fungible, primitive money is often not divisible. Certain “monies” can only be used for certain types of transactions, and “lower” money is not necessarily convertible into “higher” forms, like we are used to with our cents adding up to quarters adding up to dollars. Seeing money through our own system leads to mistakes and distortions, as Dalton points out using the example of papers written about the shell money used on Rossel Island in the Pacific by an economist named W.E. Armstrong in the 1920’s:

Armstrong asserts that Rossel Island money is a rough equivalent of our own: that it is a medium of exchange used to purchase a wide range of goods and services, and that it is a standard of value for stating prices…The Rossel Islanders use two types of shell money, ndap and nko. Ndap money consists of individual shells (Armstrong calls them coins), each of which belongs to one of 22 named classes or denominations, which Armstrong ranks from 1-22, a higher numbered class indicating a higher valued shell…

By ranking [Rossel island shell monies] 1-22 Armstrong implies that the differences between ndap shell classes are cardinal differences: that a No. 22 is 22 times more valuable than a No. 1, in the sense that a $20 bill is 20 times more valuable than a $1 bill. There are no such cardinal differences among ndap shells. To number them 1-22 is to give a false impression of similarity between ndap shell classes and Western money denominations and a false impression about the commensurability or the “purchasing power” relationship between lower and higher numbered ndap shells … the shells are not quite like dollar bills numbered 1-22 with a No. 20 (say), bearing twice the value of a No. 10, or an item priced at No. 20 purchasable with two shells of No. 10 variety… something priced at No. 20 must be paid for with a No. 20 shell, rather than with lower denomination pieces adding up to 20. ..Nos. 18-22 cannot be acquired by any amount of lower class shells, and there is no way of gauging how many times more valuable a No. 18 is compared to a No. 6 because they enter entirely different transactions.

Without exception, Nos. 18-22 enter non-commercial transactions exclusively: they are used as means of (reciprocal or redistributive) payment or exchange in transactions induced by social obligation. Payments of a No. 18 are a necessary part of ordinary bridewealth, as well as necessary payment for shared wives, and for sponsoring a pig or dog feast, or a feast initiating the use of a special kind of canoe. No. 20 is a necessary indemnity payment to the relatives of a man ritually murdered and eaten, a transaction which is part of mortuary rites for the death of a chief. Moreover, there is a connection between shells 18-22 and lineage affiliation which Armstrong notes but makes nothing of. “. . . Nos. 18 to 22 are regarded as property peculiar to chiefs, though continually lent by the latter to their subjects.”

Primitive money is often not general purpose. As seen above, very different “money-things” may be used for different (and distinct) purposes–reciprocal gift exchange, centralized redistribution, the settling of debts, payments to collective institutions (i.e. taxes), restitution, and so on:

In primitive economies-i.e., small-scale economies not integrated by market exchange-different uses of money may be institutionalized separately in different monetary objects to carry out reciprocal and redistributive transactions. These money objects used in non-commercial ways are usually distinct from any that enter market place transactions. And the items which perform non-commercial money uses need not be full-time money, so to speak; they have uses and characteristics apart from their ability to serve as a special kind of money.

In contrast, the dollars that we use are general-purpose, and can be used by both private and public entities for anything-the settlement of debts, the payment of taxes and fines, redistribution, gift exchange, etc.

Primitive money is often non-commercial. Many exchanges take place outside of the market:

…anthropologists use Western monetary terms ambiguously whenever they fail to distinguish between the market and the non-commercial modes of transaction. [Conrad] Reining, for example, states: “There seems to have been little exchange among households although iron tools and spears made from locally smelted ore had a limited application as a medium of exchange, being used primarily for marriage payments”

…Since brides are not acquired through impersonal market transactions by random buyers and sellers, the iron tools are not used as media of (market) exchange, but as media of (reciprocal) exchange: as part of a non-commercial transaction in which a man acquires a bundle of rights in a woman and her children in return for iron tools and other indemnification payments to her kin…

It seems useful to regard the bridewealth items as special purpose “money” because the iron tools and spears-or in other societies, cows or goats-are the required items, and because they carry out money uses which do have counterparts in our own society. Whether one calls them special purpose monies or highly ranked treasure items necessary to the transaction…only matters when the subject of money uses in primitive compared to Western economies is raised. Then we can show that cows and armbands of shells do perform some of the uses of dollars but in noncommercial situations…

Those aspects of primitive economy which are unrelated to market exchange can only be understood by employing socio-economic terms: ceremonial prestige and subsistence goods; reciprocity and redistribution; spheres and conversions; limited purpose money. Such terms contain a social dimension and so allow us to relate economic matters to social organization, and to express the folk-view toward the items, services, persons, and situations involved.

The economist dealing with monetary transactions in Western economy need not concern himself with personal roles and social situations because of the peculiarly impersonal nature of market exchange. The anthropologist dealing with marketless transactions cannot ignore personal roles and social situations and still make sense of what transpires.

…When we consider money in communities not integrated by market exchange-the Nuer, the Trobriands, the Tiv-it becomes essential to distinguish among the several transactional modes and among the several money uses: primitive money-stuff does not have that bundle of related uses which in our economy is conferred on dollars by market integration and by the use of dollars in both commercial and non-commercial transactions. The differences between cattle-money or shell-money and dollars are traceable to the differences in the transactional modes which call forth money uses. When [anthropologist Bronislav] Malinowski says that kula valuables are different from Western currency, he is really pointing out that reciprocal gift-giving is different from market purchase and sale…

Kula armbands, potlatch coppers, cows, pig tusks, Yap stones, etc., are variously described as money of renown, treasure items, wealth, valuables, and heirlooms. Malinowski says kula valuables are regarded like crown jewels or sports trophies in Western societies. Writers on East Africa say that cows are regarded like revered pets. Such treasures can take on special roles as non-commercial money: their acquisition and disposition are carefully structured and regarded as extremely important events; they change hands in specified ways, in transactions which have strong moral implications. Often they are used to create social relationships (marriage; entrance into secret societies), prevent a break in social relationships (bloodwealth, mortuary payments), or to keep or elevate one’s social position (potlatch). Their “money-ness” consists in their being required means of (reciprocal or redistributive) payment.

Anthropologists have developed a concept called spheres of exchange to explain this phenomenon. Exchanges can only take place between specific individuals in specific contexts. This is done to protect the underlying social relations of a particular culture.

The concept of spheres of exchange was introduced by Paul Bohannan and Laura Bohannan in analyzing their field work with the Tiv in Nigeria. The Bohannan’s discuss three types of ranked exchange objects, each restricted to its own separate exchange sphere; ideally, objects do not flow between spheres.

The subsistence sphere included food such as yams, grains, vegetables, and small livestock, as well as eating utensils, farming tools and tools for food-preparation. The second sphere of wealth included brass rods, cattle, white cloth, and slaves. A third and most prestigious sphere was marriageable female relatives.

“In calling these different areas of exchange spheres, we imply that each includes commodities that are not regarded as equivalent to those commodities in other spheres and hence in ordinary situations are not exchangeable. Each sphere is a different universe of objects. A different set of moral values and different behavior are to be found in each sphere.” As a result, it is considered immoral to use prestige objects to purchase goods from a lower sphere. Similar examples of exchange spheres have been noted by Frederik Barth among the Fur of Sudan; by Raymond Firth among the Tikopia in the south Pacific; by Bronislaw Malinowski in the Trobriand Islands off New Guinea amongst others.

In traditional economies, many resources are communally available and the artificial scarcity that market production requires is not present. As a result, primitive money is usually not under the control of a centralized authority which determines its quantity and value:

It has often been noted that in primitive societies there is seldom any conscious control by political authority over money objects. Such is not merely a difference between primitive monetary systems and our own, but one that reflects differences between their economic systems and ours.

In economies not integrated by market exchange, non-commercial monetary transactions are only occasional events (e.g., bloodwealth, bridewealth), and non-commercial money is not usually connected with production and daily livelihood. That the non-commercial money-stuff may be fixed in quantity for all time (Yap stones), or increase in quantity only through natural growth (cows, pig tusks) does not affect production and daily livelihood (as would be the case with us if dollars were fixed in quantity).

Market economies, on the other hand, rely upon the issuance of general-purpose money by a centralized authority. The quantity of this “official” money must be carefully managed by the authorities, since everyone is dependent upon production for the market in order to survive:

In national market economies, governments deliberately control the quantity of general purpose money because dollars (francs, sterling) carry out market sales which the populace depends on for livelihood. Roughly speaking, if the authorities allow too much money to come into use as medium of (market) purchase, the result is inflation. If the authorities allow too little money to come into use, the result is deflation and unemployment (a contraction in the rate of market purchasing below the full employment capacity rate of production). The need to deliberately vary the quantity of money is a direct result of economy-wide market integration.

This sort of money comes into being specifically to facilitate markets. As we shall see, all the evidence indicates that fully-integrated Western-style markets were brought into being by the issuance of the “money-thing” by centralized authorities, and did not spontaneously arise by higgling and haggling amongst numerous unrelated strangers. This “money-thing” differs in various cultures, but pieces of (durable) metal became the most common thing to use in the large agrarian states of Eurasia, although other things also served this purpose. As Ingham put it; “money is logically anterior to and historically prior to the market.”

Moreover, we tend to make a distinction between general-purpose “money” which is issued by a central authority (such as a mint or bank) for commercial purposes, and other forms of wealth—a distinction which is arbitrary and may not hold for other cultures.

Even in our modern industrial societies, what constitutes “money” is not so clear-cut. For example, government bonds are considered to be a store of wealth, yet they are not typically used for commercial transactions. Bonds are denominated in dollars (or whatever the bond-issuing government’s currency is), as is a checking account, yet the checking account can be drawn upon to pay for goods and services, while the bond cannot. Thus, bonds are not considered “money,” even though both bonds and checking accounts are theoretically stores of value denominated in the same unit of account.

Even in industrial economies, there are often parallel, local, community-oriented, and private currencies that exist alongside the “national” currency. One example of this is frequent-flier miles, which can be redeemed for any number of items besides flights. Another example might be gift cards. These are issued by vendors and typically used for gift exchange, such as holidays, birthdays, and wedding/baby showers. They can be exchanged for any items for sale at the vendor’s store. Are gift cards “money?” They are denominated in dollars, and can be used as a medium of exchange and a store of value, but they cannot be used in payment of taxes or to purchase goods from other retailers.

In U. S. economy, objects such as jewelry, stocks, and bonds are not thought of as money because (like cattle among the Bantu) these come into existence for reasons other than their “money-ness.” Each is capable of one or two money uses, but not the full range which distinguishes dollars, and particularly not the medium of (commercial) exchange use of dollars…Dollars serve as a store of (commercial and non-commercial) value because dollars can be held idle for future use. But this is true also for jewelry, stocks and bonds, and other marketable assets. However, in U. S. economy jewelry is not a medium of (commercial) exchange because one cannot spend it directly, and it is not a means of (commercial or non-commercial) payment because it is not acceptable in payment of debt or taxes…

In our society, all these different types of exchanges, both public and private, are mediated by the existence of integrated, universal, price-fixing markets. The money used for everyday commercial transactions is the same as that used to pay taxes, fees, and fines. The government, which issues the currency, purchases what it needs using these same markets, including labor and military support. The unit of account (dollars) in which prices are denominated bears the same name and 1:1 equivalency with the currency issued by the government (also called dollars). Debts are denominated in dollars, and dollars “can be used to settle all debts, both public and private” as it says right on the bill itself. The government issues the currency and manages its supply to prevent excessive inflation and deflation, which would adversely impact the markets. This makes our “universal” definition of money only really applicable to centralized bank money in market economies such as of our own:

In the economies for which the English monetary vocabulary was created, there is one dominant transactional mode, market exchange, to which all money uses relate…Economists do not find it necessary to distinguish among the transactional modes of market exchange, reciprocity, and redistribution, because market exchange is so overwhelmingly important. For the same reason economists do not find it necessary to describe at length the different uses of money in our own economy: with only a few exceptions they all express market exchange transactions.

U. S. dollars may be called general purpose money. They are a single monetary instrument to perform all the money uses. Moreover, the same dollars enter modes of transaction to be called redistribution and reciprocity, as enter into market exchange. These features of U.S. money are consequences of economy-wide market integration…In U. S. economy the government makes use of the market in the process of redistribution: medium of (commercial) exchange money earned as private income is used by households and firms as means of (redistributive) payment of politically incurred obligation (taxes). The government then buys on the market the services and products it requires-civil servants, guns, roads-to provide community services.

In our system, the same can be said for another mode of transaction, reciprocity, or gift-giving between kin and friends. The same money serves the different transactional modes: in purchasing a gift, the money paid is used as medium of (commercial) exchange; giving the gift is part of a reciprocal transaction (a material or service transfer induced by social obligation between the gift partners). If cash is given as a gift, it is means of (reciprocal) payment of the social obligation discharged by the gift-giving…redistribution and reciprocity make use of market exchange and make use of the same money used in market exchange. In Western economy, therefore, tax and gift transactions appear as simple variations from the private market norm-special types of expenditure or outlay-which present no theoretical difficulties.

American reliance upon market sale for livelihood and upon the price mechanism for allocating resources to production lines does the following: it makes the medium of (commercial) exchange use of money its dominant attribute, it makes other money uses serve market transactions, and it confers that peculiar bundle of traits on our general purpose money which mark off dollars from non-monetary objects. It is our market integration which makes it necessary to institutionalize all uses of money in the same money instrument.

In summary, Dalton argues that by viewing all societies through the lens of our disembedded market-centric economy, we cannot truly understand primitive money, which remains embedded in the underlying social relationships and extra-market transactions.

Two distinctions which allow us to contrast primitive and Western money are the distinctions between commercial and non-commercial uses of money, and between marketless economies, those with peripheral markets only, and market-integrated economies. In sum, money has no definable essence apart from the uses money objects serve, and these depend upon the transactional modes that characterize each economy: as tangible item as well as abstract measure, “money is what money does.”

2. A traditional example: Yap stone money

The “stone money” used on the Micronesian island of Yap is one of the most famous examples of “primitive” money. This system was described extensively by an American physician-turned-anthropologist William Henry Furness, who visited the island in 1903.

On Yap, stones called fei were used as currency. These consisted of limestone rocks of argonite quarried on the nearby island of Palau and transported to Yap by boat (Yap itself had no metal deposits). They had a hole in center to facilitate transport. These stone wheels ranged enormously in size, from small enough to carry, to several tons apiece, but in reality they were rarely moved. Neither were they exchanged hand-to-hand in spot transactions.

Rather, ownership of the stones was transferred by mutual agreement among islanders to settle outstanding debts. These were typically “exchanged” by oral agreement, usually for large-ticket purchases such as dowries. In fact, in one famous incident, a large fei stone ended up on the bottom of the ocean during transport. It was decided that, since such items were rarely moved anyway, this stone could still be used as currency, as Furness explains:

“[I]t was universally conceded…that the mere accident of its loss overboard was too trifling to mention, and that a few hundred feet of water off shore ought not to affect its marketable value … The purchasing power of that stone remains, therefore, as valid as if it were leaning visibly against the side of the owner’s house, and represents wealth as potentially as the hoarded inactive gold of a miser in the Middle Ages, or as our silver dollars stacked in the Treasury in Washington, which we never see or touch, but trade with on the strength of a printed certificate that they are there.”

In this case, primitive money was in no way used a medium of exchange. The island’s economy had few tradeable commodities anyway besides fish, coconuts and sea cucumber. Stone money certainly did not facilitate barter or trading in markets. Rather, these were records of debt and credit relationships, mainly centered around reciprocal social obligations. The fei stones were the denominations. This was the origin of money, not barter for sale, as Felix Martin notes:

The story of Yap does not just present a challenge to the conventional theory’s account of money’s origins…[i]t also raises serious doubts about its conception of what money actually is. The conventional theory holds that money is a “thing”–a commodity chosen from amongst the universe of commodities to serve as a medium of exchange–and that the essence of monetary exchanges is the swapping of goods and services for this commodity medium of exchange. But the stone money of Yap doesn’t fit this scheme.

In the first place, it is difficult to believe that anyone could have chosen “large, solid, thick stone wheels ranging in diameter from a foot to twelve feet” as a medium of exchange–since in most cases, they would be a good deal harder to move than the things being traded…it was clear that fei were not a medium of exchange in the sense of a commodity that could be exchanged for any other–since most of the time, they were not exchanged at all…in the case of the infamous shipwrecked fei, no one had ever seen the coin in question, let alone passed it around as a medium of exchange. No, there could be no doubt: the inhabitants of Yap were curiously indifferent to the fate of the fei themselves.

The essence of their monetary system was not stone coins used as a medium of exchange, but…the underlying system of credit accounts and clearing of which they helped to keep track…the inhabitants of Yap would accumulate credits and debts in the course of their trading in fish, coconuts, pigs, and sea cucumber. These would be offset against one another to settle payments. Any outstanding balances carried forward at the end of a single exchange, or a day, or a week, might, if the counterparties so wished, be settled by the exchange of currency–a fei–to the appropriate value; this being a tangible and visible record of the outstanding credit that the seller enjoyed with the rest of Yap.

Coins and currency, in other words, are useful tokens to record the underlying process of clearing. They may even be necessary in an economy larger than Yap, where coins could drop to the bottom of the sea and yet no one would think to question the wealth of their owner. But currency is not in itself money. Money is the system of credit accounts and their clearing that currency represents.

3. So, what is money really???

As we saw above, the customary tripartite definition of money simply does not work in trying to understand what money really is. It gives us little insight into economies not based around fully-integrated price-fixing markets.

A better way might be to define the essential nature of money, rather than its particular contextual uses:

In discussions about money, its three functions are often mentioned: “store of value, medium of exchange, and unit of account” — the order of these may vary. This is usually said in a peremptory tone, as being self-evident and not really worth discussing. These three functions of money constitute the tripod on which the accepted wisdom about money rests.

Let us start by noting that the usual approach is to try and define the nature of a thing, before describing its functions and features. It is therefore curious that money would be defined by its functions. The reason is that, since the beginning of modern economics, there has been great confusion about the nature of money — a confusion that has not been definitely resolved until today…

Debunking the “three functions of money” (Medium)

According to Alfred Mitchell-Innes, the nature of money is credit, or more specifically a credit/debit relationship:

“Credit is the purchasing power so often mentioned in economics works as being one of the principle attributes of money, and, as I shall try to show, credit and credit alone is money. Credit, and not gold or silver [or cattle, or pigs tusks, or iron bars or cowrie shells…] is the one property which all men seek, the acquisition of which is the aim and object of all commerce.”

By understanding that money is credit, we may get closer to understanding primitive money than by trying to use the customary three-part definition given in economics textbooks. From this essential nature, the various functions of money arise, although they may not all be subsumed in a single instrument.

For example, it’s clear in the above examples that there is a debit/credit relationship based in the reciprocal social obligations of a particular society. If I acquire a bride from you, I owe you compensation for her “loss” from your household. If I have wounded you, I owe you for the bodily injury. In peace treaties, villages are often compensated for the loss of warriors from their tribe–essentially the loss their productive capacity. The same concept is used for killings—the aggrieved family is owed for the loss of their family member and his/her future productive capacity. Pigs may be exchanged to settle this “debt” as, for example, in New Guinea. In fact, the words for “debt” and “sin” or “transgression” are the same in many languages. If I make offerings to the gods or ancestors, I owe the gods/ancestors for their continued intercession and favor. To a large extent, every one of us is in “debt” to our ancestors.

These debts may be settled immediately, or they may be deferred.

The store of value function of money comes from its ability to settle outstanding debts. I can store up value by holding onto claims on other people’s labor or assets. I can then redeem these at a later date. The value comes from what it is redeemable for (along with how reliable the claims are, which, in turn, depends on the social conditions). The total amount of money circulating in such cases has little impact, which is why it is not centrally controlled in primitive societies.

More than 97% of all money is created when banks provide loans to governments, businesses or individuals. “National” money is really bank-debt money–outstanding IOUs from banks. The money issuer is in debt to the bearer. Money is created when banks extend loans. When money is created on the bank’s liability side, a loan is facing it on the asset side. These assets (including bonds, includes bonds, which are securitized loans) are what give the bank’s money its value.

The unit of account function becomes more important when writing and numbers are introduced into a society, the society becomes larger, and markets are introduced (Types II and III). In gift economies, credits and debits are informal and are known by both parties. In larger societies, more formal means are required. Debts are denominated in a unit of account, which engenders the concept of equivalent value for unrelated items—i.e. prices. This may, in turn, develop into the idea of universal economic value. These units are usually introduced by political leaders, for example, to determine tax or restitution payments.

The unit of account may be separate from the medium of exchange, however. For example, I may owe someone fifty quatloos for a bride, but that debt may be paid with any number of items – cows, grain, beer, pigs, axes, gold, jewels, etc. Thus, in considering what “money” is, it’s important to make this distinction. For us, they are one in the same (i.e. dollars), but in the past and in other cultures, these were often different. Even in late medieval Europe prices were often listed in an “official” unit of account but paid for with a wide variety of different coins (leading to a brisk money-changing business that tracked equivalencies between the various types of circulating coins).

The medium of exchange aspect of money, so emphasized by anthropologists and economists, is relatively minor. You can have an economy—even a market-based one–without it, so long as you have a way to clear credits and debits, as the case of Yap showed.

The “medium of exchange” aspect has clouded our definitions of money going back to the very founding of economics. Adam Smith argued that all sorts of commodities functioned as mediums of exchange in primitive cultures. If you go to a museum today, for example, you’ll see all sort of things that were supposedly used as “money,” from quetzal feathers to wampum beads, to cowrie shells. This gave rise to the idea that money was always some sort of “thing” that was used as an intermediate good for people to trade for the things they really did want.

Smith used the example of cod in Newfoundland. In his view, cod was a convenient “medium of exchange” used because there was no metal available. People would just swap cod, even if they didn’t want it, knowing that cod could be exchanged for whatever they did want. Smith argues that some commodity would always be chosen based on the prevailing local conditions: dried cod in Newfoundland, tobacco in Virginia, sugar in the West Indies, cacao shells and quetzal feathers in Mesoamerica, wampum beads in North America, and even iron nails in Scotland.

The problem is, it’s very difficult to get from this type of barter trading to the creation of “money.” If I hold to on to various items not because I want them, but because others do, this is not a sufficient condition for one single thing to become institutionalized as money. People do this all the time with all sorts of different items in traditional societies. However, there is no evidence that the kind of universal, all-purpose “money” that we use ever arose out of this sort of behavior. Exchanges were likely done “open-handedly” or through credits, just like at bars today: “I owe you one.”

It turns out that the “father of economics” had gotten it wrong. Almost immediately, other economics writers noticed problems with this story. In the cases Smith cited, trade was actually accounted for in some sort of unit of account. Outstanding balances were settled in commodities, but that did not make such commodities into “money”:

In every case, these were examples of trade that were accounted for in pounds, shillings, and pence, just as it was in modern England. Sellers would accumulate credit on their books, and buyers debts, all denominated in monetary units. The fact that any net balances that remained between them might be discharged by payment of some commodity or other to the value of the debt did not mean that the commodity was ‘money.’ To focus on the commodity payment rather than the system of credit and clearing behind it was to get things completely the wrong way round. And to take the view that it was the commodity itself that was money, as Smith did, might start out seeming logical, but would end in nonsense. As Alfred Mitchel Innes…summed up the problem with Smith’s report of cod-money:

“A moment’s reflection shows that a staple commodity could not be used as money, because ex hypothesi the medium of exchange is equally receivable by all members of the community. Thus, if the fishers paid for their supplies in cod, the traders would equally have to pay for their cod in cod, an obvious absurdity.”

Cowrie shells, for example, can really be seen as debt markers (i.e. tokens). They simply allow the easy quantification and tracking of outstanding debt. Money is just an IOU, evidence that the issuer is in debt to the bearer. Even in spot transactions in markets, we can see that money is simply debt.

If I buy a chicken from a market vendor for 5 quatloos, the seller functionally “gives” me a chicken and I’m in debt for 5 seconds until I hand over the “money-thing,” which immediately extinguishes that debt. Or if I happen to hand over the “money-thing” first, they are in debt to me by 1 chicken until they settle that debt moments later by handing the chicken over to me. The “money-thing” can be anything–what matters is the debt. That debt may be settled on the spot or later. The price unit and the “money-thing” may be equivalent, or they may be different.

In many cases, the real distinction between “primitive” money and “true” money is that true money is transferable credit. This allows debts to circulate in the economy as third-party IOUs. This allows business to be transacted among unrelated people. What matters is the trustworthiness of the issuer of IOU’s. As Felix Martin writes:

Money is not a commodity medium of exchange, but a social technology composed of three fundamental elements:

– The first is an abstract unit of value in which money is denominated.

– The second is a system of accounts, which keeps track of the individuals’ or the institutions’ credit or debt balances as they engage in trade with one another.

– The third is the possibility that the original creditor in a relationship can transfer their debtor’s obligation to a third party in settlement of some unrelated debts.

This third element is vital. Whilst all money is credit, not all credit is money: and it is the possibility of transfer that makes the difference. An IOU which remains for ever a contract between just two parties is nothing more than a loan. It is credit, but it is not money. It is when that IOU can be passed on to a third party-when it is able to be “negotiated” or “endorsed, comes to life and starts to serve as money. Money, in other words, is not just credit-but transferable credit. As the nineteenth-century economist and lawyer Henry Dunning Macleod put it:

“These simple considerations at once shew the fundamental nature of a Currency. It is quite clear that its primary use is to measure and record debts, and to facilitate their transfer from one person to another; and whatever means be adopted for this purpose, whether it be gold, silver, paper, or anything else, is a currency. We may therefore lay down our fundamental Conception that Currency and Transferable Debt are convertible terms; whatever represents transferable debt of any sort is Currency; and whatever material the Currency may consist of, it represents Transferable Debt, and nothing else.”

As we shall see, this innovation of the transferability of debts was a critical development in the history of money. It is this, rather than the graduation from a mythical barter economy, which has historically revolutionised societies and economies. In fact, it is barely an exaggeration-if we make allowance for the unmistakable overtone of Victorian melodrama-to say, as Macleod did:

“If we were asked-Who made the discovery which has most deeply affected the fortunes of the human race?’ We think, after full consideration, we might safely answer-The man who first discovered that a Debt is a Saleable Commodity.”

So, then, the difference between “primitive” money and “real” money might be stated as the transferability of debt, or “debt as a saleable commodity”. Primitive money is simply whatever is used for interpersonal transactions based on the prevailing social conditions. These transactions can (and usually do) take place outside of markets, and profit is seldom involved.

But true “money” as we know it emerges once the “money-stuff” becomes transferable credit between various third parties, denominated in some sort of abstract, commonly agreed-upon unit of account. These credits and debts can then circulate, facilitating economic coordination between unrelated people. Typically debts owed to some sort of powerful political entity—whether it be chief, king, temple, palace, emperor, sovereign, or democratic government, are what typically circulate as money universally throughout an economy.

…even though [money] is nothing but credit, cannot just be created at will by anyone. For sellers to accept buyers’ IOUs in payment, they must be convinced of two things. They must have reason to believe that the debtor whose obligation they are about to accept will, if it comes to it, be able to satisfy their claim: they must believe, in other words, that the money’s issuer is creditworthy. This much would be enough to sustain the existence of bilateral credit.

The test for money is more stringent. For credit to become money, sellers must also trust that third parties will be willing to accept the debtor’s IOU in payment as well. They must believe that it is, and will remain indefinitely, transferable-that the market for this money is liquid. Depending on how powerful are the reasons to believe these two things, it will be easier or harder for an issuer’s IOUs to circulate as money. It is because of this third critical element of transferability that money issued by governments, or by the banks which governments endorse and backstop, is thought to be special…

While it may seem like a discussion of “primitive” money is merely of academic interest to anthropologists, it is, in fact, critical to understanding the history and the essential nature of money–“whence it came, where it went,” as John Kenneth Galbraith put it.

How did “primitive” money become modern? We’ll start telling that story next time.