The Many Faces of Slavery

“None are so hopelessly enslaved as those who falsely believe they are free.”
–Johann Wolfgang von Goethe

“Wages is a cunning device of the devil, for the benefit of tender consciences, who would retain all of the advantages of the slave system, without the expense, trouble and odium of being slave-holders.”
–Orestes Brownson

The ancient world ran on slave-power. Lacking heat engines and cybernetic devices, the only way to accomplish the many things civilization ran on–agriculture, construction, crafts, child-rearing, military operations, mining, transport, shipping, and so forth, was to use human and animal muscle power. Human labor has five core competencies, according to economist Brad DeLong:

(1) Moving things with large muscles.
(2) Finely manipulating things with small muscles.
(3) Using our hands, mouths, brains, eyes, and ears to ensure that ongoing processes and procedures happen the way that they are supposed to.
(4) Engaging in social reciprocity and negotiation to keep us all pulling in the same direction.
(5) Thinking up new things – activities that produce outcomes that are necessary, convenient, or luxurious – for us to do.

Surveying the ancient world, we see that slaves were the primary method for accomplishing the first two tasks, while the latter three were monopolized by the “educated” elite classes of the ancient world, who were always–and had to be–a minority (including in our world today, which is why “more education” cannot solve inequality). Simply put, no slavery–no civilization, and no state, as James C. Scott writes:

Slavery was not invented by the state…[but]…as with sedentism and the domestication of grain…the early state elaborated and scaled up the institution of slavery as an essential means to maximize its productive population and thus the surplus it could approporiate.

It would be almost impossible to exaggerate the centrality of bondage, in one form or another, in the development of the state until very recently…as late as 1800 roughly three-quarters of the world’s population could be said to be living in bondage…Provided that we keep in mind the various forms of bondage can take over time, one is attempted to assert: “No slavery, no state.” Against the Grain (ATG), pp. 155-156

Hence the ancient world had to come up with all sorts of philosophical justifications for slavery. Initially, however, race was not one of them. Anthropologist David Graeber points out that underlying the various justifications for slavery was the idea that the slave would otherwise be dead. Because their lives were spared, they were, in essence, the living dead, kind of like zombies! Because they were socially ‘dead’ as people, they had no rights and could be abused, bought and sold:

Slavery is the ultimate form of being ripped from one’s context, and thus from all the social relationships that make one a human being. Another way to put this is that the slave is, in a very real sense, dead. This was the conclusion of the first scholar to carry out a broad historical survey of the institution, an Egyptian sociologist named Ali ‘Abd al-Wahid Wafi, in Paris in 1931. Everywhere, he observes, from the ancient world to then-present-day South America, one finds the same list of possible ways whereby a free person might be reduced to slavery:

1) By the law of force
a. By surrender or capture in war
b. By being the victim of raiding or kidnapping
2) As legal punishment for crimes (including debt)
3) Through paternal authority (a father’s sale of his children)
4) Through the voluntary sale of one’s self

The book’s most enduring contribution, though, lay simply in asking: What do all these circumstances have in common? AI-Wahid’s answer is striking in its simplicity: one becomes a slave in situations where one would otherwise have died. This is obvious in the case of war: in the ancient world, the victor was assumed to have total power over the vanquished, including their women and children; all of them could be simply massacred. Similarly, he argued, criminals were condemned to slavery only for capital crimes, and those who sold themselves, or their children, normally faced starvation. Debt, the First 5000 Years, (DTF5kY) pp. 168-169

Many of the authors and scholars in Michael Hudson’s ISLET series about the ancient economy argue that slavery played only a subsidiary role in the establishment of early civilizations, and most of the labor was given voluntarily, such as a sort of social obligation, often involving work feasts. Author James C. Scott disagrees. He sees the existence of compulsory and unfree labor, in whatever form it took, as absolutely essential to the formation of the first states. He writes:

The general consensus has been that while slavery was undoubtedly present, it was a relatively minor component of the overall [Mesopotamian] economy…I would dispute this consensus.

Slavery, while hardly as massively central as in classical Athens, Sparta, or Rome, was crucial for three reasons: it provided the labor for the most important export trade good, textiles; it supplied a disposable proletariat for the most onerous work (for example, canal digging, wall building); and it was both a token of and a reward for elite status…When other forms of unfree labor, such as debt bondage, forced resettlement, and corvee labor, are taken into account, the importance of coerced labor for the maintenance and expansion of the grain-labor module at the core of the state is hard to deny.

Part of the controversy over the centrality of slavery in ancient Sumer is a matter of terminology. Opinions differ in part because there are so many terms that could mean “slave” but could also mean “servant,” “subordinate,” “underling,” or “bondsman.” Nevertheless, scattered instances of purchase and sale of people–chattle slavery–are well attested, though we do not know how common they were. ATG pp. 157-158

Three obvious reasons why Third Milennium Mesopotamia might seem less of a slave-holding society than Athens or Rome are the smaller populations of early polities, the comparably scarce documentation they left behind, and their relatively small geographical reach. Athens and Rome were formidable naval powers that imported slaves from throughout the known world, drawing virtually all their slave populations far and wide from non-Greek and non-Latin speaking societies. This social and cultural fact provided much of the foundation for the standard association of state peoples with civilization on the one hand and nonstate peoples with barabrism on the other…The greater the cultural and linguistic differences between slaves and their masters, the easier it is to draw and enforce the social and juridicial seperation that makes for the sharp demarcation typcial of slave societies…

Mesopotamian city-states by contrast, took their captives from much closer to home. For that reason, the captives were more likely to have been more culturally aligned with their captors. On this assumption, they might have, if allowed, more quickly assimilated to the culture and mores of their masters and mistresses In the case of young women and children, often the most prized captives, intermarriage or concubinage may well have served to obscure these social orgins within a couple of generations…ATG p. 174-175

In other words, Greece and Rome captured “barbarians” from outside society and incorporated them as a lower-tier slave strata to do all the stoop labor and scut work. The very word barbarian referred to someone who didn’t speak the Greek language.

In Mesopotamia, by contrast, the warfare was often between rival city-states—people who would have spoken similar languages and shared similar customs and beliefs. Thus, they would have appeared less like a foreign entity in the records and more like just a lower tier of society–their status obscured by cultural similarities and ambiguities in the terminology. Furthermore, this process would have been ongoing, with new layers of war captives being continually added to form the bottom strata of society, eventually “blending in” and “moving up” over time as new immigrants–er, slaves–took their place:

The continuous absorption of slaves at the bottom of the social order can also be seen to play a major role of social stratification–a hallmark of the early state. As earlier captives and their progeny were incorporated into the society, the lower ranks were constantly replenished by new captives, further solidifying the line between “free” subjects and those in bondage, despite its permeability over time. p. 169

One must surely wonder whether the Mesopotamian city-states met a substantial portion of their insatiable labor needs by absorbing captives or refugees from culturally similar populations. In this case such captives or refugees would probably appear not as slaves but as a special category of “subject” and perhaps would be, in time, wholly assimilated. ATG p. 175

Integrating war captives into society and isolating them from their original ethnic group rather than making them as a class permanently apart would have forestalled rebellion. Atomized people, without social ties, are much easier to control and cannot mount any sort of collective resistance to the prevailing social order (a point not lost on today’s ruling elites):

Insofar as the captives are seized from scattered locations and backgrounds and are separated from their families, as was usually the case, they are socially demobilized or atomized and therefore easier to control and absorb. If the war captives came from societies that were perceived in most respects as alien to the captors, they were not seen as entitled to the same social consideration. Having, unlike local subjects, few if any local social ties, they were scarcely able to muster any collective opposition…ATG, p. 167…

The principle of socially detached servants–Janissaries, eunuchs, court Jews–has long been seen as a technique for rulers to surround themselves with skilled but politically neutralized staff. At a certain point, however, if the slave population is large, is concentrated, and has ethnic ties, this desired atomization no longer holds. The many slave rebellions in Greece and Rome are symptomatic, although Mesopotamia and Egypt (at least until the New Kingdom) appeared not to have slavery on this scale. ATG pp. 167-168

James Scott considers slavery in ancient Sumeria, Babylonia, Assyria, Egypt and China as a form of manpower recruitment on the part of states–the original “human resources strategy.” Often military incursions were less about seizing territory as it was about seizing captives–what Max Weber called “booty capitalism.” Often, the people seized were those with rare and highly specialized skills that the attacking state did not possess:

Slave taking…represented a kind of raiding and looting of manpower and skills that the slaving state did not have to develop on its own…Women and children were particularly prized as slaves. Women were often taken into households as wives, concubines, or servants, and children were likely to be quickly assimilated, though at an inferior status…Women captives were at least as important for their reproductive services as for their labor. Given the problems of infant and maternal mortality in the early state and the need of both the patriarchal family and the state for agrarian labor, women captives were a demographic dividend. Their reproduction may have played a major role in alleviating the otherwise unhealthy effects of concentration and the domus. ATG, pp. 168-169.

One of the most common forms of slavery was domestic work. A major hallmark of elite status in the ancient world was how many lives you had control over. Large households were typically staffed with huge amounts of domestic servants, who were, in essence, slaves, even if they were not explicitly designated as such in historical records. These domestic servants cooked and cleaned, took care of the children, maintained gardens, bore their masters about in litters, and numerous other routine chores that elites prefer to use trafficked and immigrant labor for even today:

One imagines as well, that most of slaves not put to hard labor were monopolized by the political elites of early states. If the elite households of Greece or Rome are any indication, a large part of their distinction was the impressive array of servants, cooks, artisans, dancers, musicians, and courtesans on display. It would be difficult to imagine the first elaborate social stratification in the earliest states without war-captive slaves at the bottom and elite embellishment, dependent on those slaves, at the top. ATG, p. 169

David Graeber also points out this fact:

…this ability to strip others of their dignity becomes, for the master, the foundation of his honor…there have been places-the Islamic world affords numerous examples-where slaves are not even put to work for profit; instead, rich men make a point of surrounding themselves with battalions of slave retainers simply for reasons of status, as tokens of their magnificence and nothing else. DTF5kY, p. 170

And many forms of slavery were less obvious in the historical record. Scott includes things like forced resettlement, migrant workers, and serfdom as forms of compelled labor which also made civilization possible, but would be less likely to be noticed by archaeologists and economic historians:

In Athens in the fifth century BCE, for example, there was a substantial class, more than 10 percent of the population, of metics, usually translated as “resident aliens.” They were free to live and trade in Athens and had the obligations of citizenship (taxes and conscription, for example) without its privileges. Among them were a substantial number of ex-slaves. ATG p. 175

Finally, there are two forms of communal bondage that were widely practiced in many early states and that bear more than a family resemblance to slavery but are unlikely to appear in the textual record as what we think of as slavery. The first of these might be called mass deportation coupled with communal forced settlement. Our best descriptions of the practice come from the neo-Assyrian Empire (9II-609 BeE), where it was…systematically applied to conquered areas. The entire population and livestock of the conquered land were marched from the territory at the periphery of the kingdom to a location closer to the core, where they were forcibly resettled, the people usually as cultivators…In some cases, it seems that the captives were resettled on land abandoned earlier by other subjects, implying that forced mass resettlement may have been part of an effort to compensate for mass exodus or epidemics. ATG pp. 177-178

A final genre of bondage that is historically common and also might not appear in the historical record as slavery is the model of the Spartan helot. The helots were agricultural communities in Laconia and Messinia dominated by Sparta…They remained in situ as whole communities, were annually humiliated in Spartan rituals, and like the subjects of all archaic agrarian states were required to deliver grain, oil, and wine to their masters. Aside from the fact that they had not been forcibly resettled as war deportees, they were in all other respects the enserfed agricultural servants of a thoroughly militarized society.

Scott points out that the conquering and subjugation of an existing agricultural society by an incoming martial elite–as seems to have been the case in Sparta–may not technically look like slavery but be similar in most respects. The elites compel the producers to toil on behalf of their overlords. It is, in essence, serfdom. People are tied to a plot of land and obliged to provide food and goods to a militarized aristocracy, which is mass slavery in all but name.

And metics appear to be quite similar to today’s globalized peripatetic migrant worker, such as the thousands of “second-class citizens” that are the lifeblood of places like Dubai, or who pick the fruits and berries that end up in the supermarkets of Europe and North America. Interestingly, many immigrant workers in France today have embraced the term “metic” (métèque) tin reference to themselves.

Slavery was also an early way to punish criminals and enforce justice. The ancient world did not have the resources to feed and shelter large amounts of unproductive people in cages (jails, gaols) as we do today. Dungeons were mainly about holding people who were about to stand trail. To have basic shelter and three square meals a day without having to work would have been quite a luxury in the ancient world–people would have been purposely committing crimes to get it! Fines were not effective in pre-monetized and non-market economies. That’s one reason for the gruesome corporeal punishments we see doled out in the ancient world (eye-gouging, flogging, etc.). Making people into slaves took away many of their freedoms, but still compelled them to work on behalf of society–sort of a “work release” program in what was, in essence, an open-air prison. Even in today’s United States, slavery is legal if you are convicted of a crime. We still talk of criminals owing a “debt to society.”

Debt slavery was also often ignored in ancient accounts of slavery. We know that debt bondage became so common and so widespread that leaders had to periodically institute debt annulments in order to keep their societies functioning at all. This could take the form of regular mandated debt jubilees as in Mesopotamia, or emergency legislative actions like those of Solon the reformer in Athens. As David Graeber says, all ancient populism boils down to one single idea: “cancel the debts and redistribute the land” (i..e the means of production).

Slavery was also a major barrier to industrialization. In the new novel Kingdom of the Wicked, the author envisages an alternate Rome that has undergone an Industrial Revolution by the time of Christ. Slavery has been abolished, led by the Stoics whom she equates with Quaker abolitionists in Britain’s 19th century. This has led to the flowering of a “tinkering culture” exemplified by Archimedes and Heron to further their inventions into true labor-saving devices similar to those of early industrializing England. This is not so far-fetched: We know, for example, that the Romans employed water power on a massive scale for milling bread and manufacturing armaments, for example at Barbegal in modern-day France, and that the earliest factories of the Industrial Revolution (Arkwright’s mills) were water-powered, with fossil fuels coming only later due to wood shortages. The author writes of Roman Slavery:

…While Roman-era scientists later developed designs for things like steam engines (Heron of Alexandria) and built fabulous mechanical instruments (the Antikythera machine), they did so in a society that had been flooded with vast numbers of slaves (the late Republic and early Principate), and large-scale chattel slavery and industrialization are simply incompatible.

Chattel slavery undermines incentives to develop labour-saving devices because human labour power never loses its comparative advantage. People can just go out and buy another slave to do that labour-intensive job. Among other things, the industrial revolution in Britain depended on the presence (relative to other countries) of high wages, thus making the development of labour-saving devices worthwhile. The Antikythera mechanism is a thing of wonder, but it is also little more than a clockwork executive toy; no wonder the great lawyer Cicero had one. It’s just the sort of thing I can imagine an eminent [attorney] having on his desk in chambers.

Slavery—and its near relative, serfdom—have been pervasive in even sophisticated human societies, and campaigns for abolition few and far between. We forget that our view that slavery and slavers are obnoxious is of recent vintage. In days gone by, people who made fortunes in the slave trade were held in the highest esteem and sat on our great councils of state. This truism is reflected in history: The Society for Effecting the Abolition of the Slave Trade met for the first time in 1787. It had just twelve members—nine Quakers and three Anglicans…

…we know that the Romans didn’t think some people were ‘naturally servile’, which is at the heart of Aristotle’s argument in favour of slavery. The Roman view (consistent with their militarism) was always ‘you lost, we own you’. Roman law—even in its earliest form—always held that slavery was ‘contrary to nature’. Human beings were naturally free; slavery was a legally mandated status, however cruelly imposed.

It is also important to remember that ancient slavery was never race-based. No Roman argued that slaves were lesser forms of the human. Middle- and upper-class Roman children educated at home by slaves who were manifestly cleverer than them (not to mention mum and dad) knew this, intimately.

Author’s Note-Kingdom of the Wicked (

The Roman explicitly defined the lack of freedom implied by slavery as “contrary to nature” in their legal codes!

In fact, even when labor-saving devices were invented in the ancient world, they often were often intentionally ignored or neglected in order to ensure that the large amounts of human labor available to elites would have some way to be utilized:

[W]hen Vespasian was offered a labor-saving machine for transporting heavy columns, he was said to have declined with the words: “I must always ensure that the working classes earn enough money to buy themselves food.”

Emperor Vespasian has a Solution for Unemployment (

Not only was race or ethnic origin not a factor in Roman slavery, the ancient Romans did not regard slaves as inherently inferior in any way! In fact, they knew that slaves might even be more talented than their masters! There was no racial segregation or racial hierarchy; slavery was simply a social construct not based on any notion of superiority or racism, unlike in North America (as was it’s flip-side “citizenship”). This colors our view of ancient slavery. It also blinds us to the reality and essential role of slavery and bondage in human history. We are used to regarding slaves as “naturally” inferior due to the racist views utilized in America to justify it. A racial hierarchy was established in America after Bacon’s Rebellion in the South to make sure that poor whites and blacks would not unite against their rulers–another example of divide-and-rule atomization.

The problem for any culture that wants to spend time on literature, art, philosophy and science, is [that] somebody’s got to do the laundry. And so what we’ve done is, we have a washing machine. If we didn’t have a washing machine, my guess is, all over California there would be a lot more jobs at the lowest end–of people doing laundry. Just as the Chinese who entered California as basically indentured railway workers, they began to set up what we call Chinese laundries and Chinese restaurants. These are all low-skilled, high work.

Well, the Greeks; some of the cities–the ones that we admire like Athens–they had slaves because that was the way you got things done. They didn’t feel that slaves were inferior people. They just happened to be people often captured in war. We forget that the word slave comes from the word slav. The slaves come out of Russia into Europe through the Middle Ages. All the Middle ages were full of slaves.

The American slave experience was peculiar in that it was having people really who were not of their own culture; not of their own civilization. If you think about it, you’re in a Greek family and who’s the nursemaid for the children? Well, she has to be somebody who’s going to speak their language, and is going to be giving them the cultural values.

Anyone who lost in war…they were just people who lost; when you lost you got killed or be made a slave and most people given the choice thought, “well I’d rather try living and see how that works out.”

Tangentially Speaking – Jim Fadiman 57:10 – 59:35

David Graeber makes the same point regarding Roman slavery:

What made Roman slavery so unusual, in historical terms, was a conjuncture of two factors. One was its very arbitrariness. In dramatic contrast with, say plantation slavery in the Americas, there was no sense that certain people were naturally inferior and therefore destined to be slaves. Instead, slavery was seen as a misfortune that could happen to anyone. As a result, there was no reason that a slave might not be in every way superior to his or her master: smarter, with a finer sense of morality, better taste, and a greater understanding of philosophy. The master might even be willing to acknowledge this. There was no reason not to, since it had no effect on the nature of the relationship, which was simply one of power. The second was the absolute nature of this power… DTF5kY, p. 202

Indeed, H.G. Wells felt that the vast importation of slaves after the second Punic war was the final “nail in the coffin” for the Roman yeoman class. As Roman society was flooded with slaves from military expansion, the price of slaves went down dramatically. It then became cost effective to buy large amounts of slaves and work them to death on large plantations, meaning that ordinary family farms could not compete in what was effectively an early “free market” economy. Cheap slaves allowed unprecedented concentration of wealth in fewer and fewer hands.

In the Roman experience, this is the beginning of a 100-year-long process of Italy going from being a patchwork of smaller farms with some large estates to nothing but sprawling, commercially-oriented estates. And yes, the United States is continuing to go through a very similar process. At the founding of our republic, everybody’s a farmer, and now everything is owned by what, Monsanto?

Moving beyond just strictly agricultural companies, large American corporations are now employing more and more people. There seems to be this move away from people owning and operating their own establishments, and they’re instead being consumed by large entities. You’re talking about the Amazons of the world swallowing up so much of the market share, it just doesn’t pay to be a clerk in a bookstore or own a bookstore, you end up being a guy working in a warehouse, and it’s not as good of a job.

It doesn’t really feel like they could’ve arrested the process. Fifteen years after some land bill, you’d ask, “Who has the land? The poor?” No, they all just got bought up again. There never was a good political solution to it. The problem of these small citizen farmers was not solved until 100 years later when they simply ceased to exist.

Before the Fall of the Roman Republic, Income Inequality and Xenophobia Threatened Its Foundations (Smithsonian)

So slavery appears not to have been “race based” in most ancient societies, which is what makes the American experience so unique. Apart from places like plantations, mines and quarries, most slaves were probably indistinguishable from people around them. They went off to work every day just like everybody else. Again, slavery was a legal distinction more than anything else.

It’s also essential to keep in mind that our vision of slavery as constant beatings and starvation has also drastically colored our view. This is again a result of North American racially-based plantation slavery. In reality, slaves were an investment, and whipped and starving people hardly made the best workers.The cruelty of plantation slavery was highlighted and emphasized in written accounts, both by ex-slaves and abolitionists, to turn people against it. In reality, it was probably not as brutal as it is often depicted. To be crystal clear here, this is not a justification for slavery!!! But it also makes us overlook slavery in the ancient world, where it was more of a social/economic status than racial. In fact, most slavery looked indistinguishable from the routine of the average wage worker today!

John Moes, a historian of slavery…writes about how the slavery we are most familiar with – that of the antebellum South – is a historical aberration and probably economically inefficient. In most past forms of slavery – especially those of the ancient world – it was common for slaves to be paid wages, treated well, and often given their freedom.

He argues that this was the result of rational economic calculation. You can incentivize slaves through the carrot or the stick, and the stick isn’t very good. You can’t watch slaves all the time, and it’s really hard to tell whether a slave is slacking off or not (or even whether, given a little more whipping, he might be able to work even harder). If you want your slaves to do anything more complicated than pick cotton, you run into some serious monitoring problems – how do you profit from an enslaved philosopher? Whip him really hard until he elucidates a theory of The Good that you can sell books about?

The ancient solution to the problem…was to tell the slave to go do whatever he wanted and found most profitable, then split the profits with him. Sometimes the slave would work a job at your workshop and you would pay him wages based on how well he did. Other times the slave would go off and make his way in the world and send you some of what he earned. Still other times, you would set a price for the slave’s freedom, and the slave would go and work and eventually come up with the money and free himself.

Moes goes even further and says that these systems were so profitable that there were constant smouldering attempts to try this sort of thing in the American South. The reason they stuck with the whips-and-chains method owed less to economic considerations and more to racist government officials cracking down on lucrative but not-exactly-white-supremacy-promoting attempts to free slaves and have them go into business.

So in this case, a race to the bottom where competing plantations become crueler and crueler to their slaves in order to maximize competitiveness is halted by the physical limitation of cruelty not helping after a certain point…

Meditations on Moloch (Slate Star Codex)

Moes argues that the reason slavery declined in ancient Rome was not because slaves were treated so cruelly that they could not reproduce themselves (whips and chains), but as a result of widespread manumission. They were freed. Slaves often cut deals where they would buy their freedom by entering in with business deals with their owners. Often times, they would split the profits:

Profitable deals could be made with the slave or with the freedman, who could be and usually was obligated to render services to his former master. A freedman often continued in the same employment or else was set up in business with funds supplied by the master, or, on the land, was given part of the estate to work as a tenant. Hence the slave in fact bought his own freedom, either by being given the opportunity to accumulate savings of his own, the “peculium,” or afterward as a freedman, having received his freedom, so to speak, on credit.

This system was to the advantage of the owner because it gave the slave an incentive to work well and in general to make himself agreeable to his master. Thus, while the owner did not (immediately) appropriate the entire surplus that the slave earned over and above the cost of his maintenance, he still got great eeconomic benefits in the long run… the most highly valued slaves were the most likely to be freed, for the full benefit of their talents could not be obtained under the whiplash but only by giving them the positive incentive of immediate or ultimate freedom.

Seen from this perspective, the difference between a slave and the plight of the average modern American worker becomes awfully difficult to define. Of course, if you dare broach this topic, you are immediately confronted with opprobrium–how dare you! This is a legacy of the horrors of racebased plantation slavery to which we are constantly reminded. But, historically, slavery had nothing to do with racism or (direct) violence!

No, slaves were simply the people who had to labor above and beyond what they wished to in order to produce a surplus for someone else. They also had no control over their work circumstances. They had to do what their master told them to do, for the amount of time he told them to do it, in the place where he told them to do it, and the way he told them to do it. And the slave only kept a portion of what they produced, with the lion’s share going to his or her master.  That doesn’t sound all that different from the situation of the average worker today, now does it? The ancients were aware of this. Cicero wrote:

“…vulgar are the means of livelihood of all hired workmen whom we pay for mere manual labor, not for artistic skill; for in their case the very wage they receive is a pledge of their slavery.”

Thus wage slavery is simply another type of slavery, and not as distinct from its ancient counterpart as we have been led to believe. True, we aren’t regularly starved and beaten. Yes, we can find a different patron–er–employer. But we are just a human resource. We make profits for others. We don’t have control over our workplace. When you understand that, by and large, ancient slavery had nothing to do with racial inferiority–actual or perceived, or outright violence, and was just an economic category of individuals, you can understand why this is the case.

And consider this: how could our modern society function without the massive tier of low-paid workers? In fact, the people who get paid the least are the most essential to society’s everyday functioning, as David Graeber has pointed out. They do the non-automated agricultural work. They pick our fruits and vegetables. They cook and prepare our food. They look after our children and take care of our elderly. They teach our children. They drive our cars and trucks. They maintain our lawns and gardens. They build and maintain our infrastructure. They construct our buildings. They keep our shelves stocked with goods and deliver them to our doorstep. Not all of these are minimum wage workers, but an increasing number of them are! If they all vanished, society would grind to an immediate halt. Yet just three people “own” as much as half the American workforce!

The difference is that wage slaves are rented instead of owned. We are continually compelled by the invisible whip and the lash of utter poverty and destitution.

Today’s college system is virtually indistinguishable from indentured servitude. in fact, I would argue that it’s worse! With indentured servitude, it’s true that you could not leave your employer and “shop around” for another one. But, if you went into debt, you were guaranteed gainful employment for the duration of the loan–something today’s college students would kill for! Instead, they are expected to go deeply into the debt just for the mere chance of finding employment in their chosen field, which, more often than not, they don’t. Sometimes, they must even labor for free to get certain jobs (unpaid internships). And student debt, unlike other debt, cannot be discharged in bankruptcy. What, then, really is the difference between it and debt bondage??? H1-B visas are a similar scam, where imported workers often work for less than their native-born counterparts and cannot easily leave their employer (i.e. sponsor) to seek out other work.

And now, we are constantly informed that we must “love our jobs” to the extent that we will even work for free for the privilege! Employers depict themselves as a paternalistic  “family” (albeit one that you can be removed from at any time and for any reason). It’s a sort of Stockholm Syndrome on a societal scale. Today, we are totally defined by our work. It forms the core of our identity (“so, what do you do..?”). We are informed from birth that we must “love our jobs” and “like what we do” We no longer even think of our bondage as bondage! We are totally brainwashed to love our captivity and identify with our captors, the ultimate victory of tyranny over freedom. As Henry David Thoreau wrote:

“[i]t is hard to have a Southern overseer; it is worse to have a Northern one; but worst of all when you are the slave-driver of yourself.”

So, when you take all this into consideration, clearly civilization has always run on compelled labor of one form or another. It cannot be any other way. Corvee labor, forced resettlement, military drafts, tributary labor, convict labor, serfdom, migrant and trafficked labor, debt peonage and indentured servitude have all existed alongside chattel slavery since the beginnings of civilization. Freedom is just an illusion:

It is the secret scandal of capitalism that at no point has it been organized primarily around free labor. The conquest of the Americas began with mass enslavement, then gradually settled into various forms of debt peonage, African slavery, and “indentured service”-that is, the use of contract labor, workers who had received cash in advance and were thus bound for five-, seven-, or ten-year terms to pay it back. Needless to say, indentured servants were recruited largely from among people who were already debtors. In the 1600’s there were at times almost as many white debtors as African slaves working in southern plantations, and legally they were at first in almost the same situation, since in the beginning, plantation societies were working within a European legal tradition that assumed slavery did not exist, so even Africans in the Carolinas were classified, as contract laborers. Of course this later changed when the idea of “race” was introduced.

When African slaves were freed, they were replaced, on plantations from Barbados to Mauritius, with contract laborers again: though now ones recruited mainly in India or China. Chinese contract laborers built the North American railroad system, and Indian “coolies” built the South African mines. The peasants of Russia and Poland, who had been free landholders in the Middle Ages, were only made serfs at the dawn of capitalism, when their lords began to sell grain on the new world market to feed the new industrial cities to the west. Colonial regimes in Africa and Southeast Asia regularly demanded forced labor from their conquered subjects, or, alternately, created tax systems designed to force the population into the labor market through debt. British overlords in India, starting with the East India Company but continuing under Her Majesty’s government, institutionalized debt peonage as their primary means of creating products for sale abroad .

This is a scandal not just because the system occasionally goes haywire… but because it plays havoc with our most cherished assumptions about what capitalism really is particularly that, in its basic nature, capitalism has something to do with freedom. For the capitalists, this means the freedom of the marketplace. For most workers, it means free labor. DTF5kY, pp. 350-351

Today, living in a high-tech age of fossil fuels and automation, why have our “energy slaves” not liberated us from this burden? We’ll consider that next time.

BONUS: Ellen Brown (Web of Debt) has an interesting piece on student loan debt slavery over at Truthdig:

The advantages of slavery by debt over “chattel” slavery—ownership of humans as a property right—were set out in an infamous document called the Hazard Circular, reportedly circulated by British banking interests among their American banking counterparts during the American Civil War. It read in part:

“Slavery is likely to be abolished by the war power and chattel slavery destroyed. This, I and my European friends are glad of, for slavery is but the owning of labor and carries with it the care of the laborers, while the European plan, led by England, is that capital shall control labor by controlling wages.”

Slaves had to be housed, fed and cared for. “Free” men housed and fed themselves. For the more dangerous jobs, such as mining, Irish immigrants were used rather than black slaves, because the Irish were expendable. Free men could be kept enslaved by debt, by paying wages insufficient to meet their costs of living. The Hazard Circular explained how to control wages:

“This can be done by controlling the money. The great debt that capitalists will see to it is made out of the war, must be used as a means to control the volume of money. … It will not do to allow the greenback, as it is called, to circulate as money any length of time, as we cannot control that.”

The government, too, had to be enslaved by debt…

Student Debt Slavery: Bankrolling Financiers on the Backs of the Young (Truthdig)

The Scars of the Past

There’s been an explosion in scholarship pinning the collapse of societies on both outbreaks of disease and natural variations in climate. James Scott dedicates a good portion of Against the Grain to considering the fragility of early states. As he points out, when it comes to the formation of complex state societies, the question isn’t so much “what took so long” as “how could this even happen at all?”  People don’t inherently want to be controlled or dominated by a sociopathic oligarchy, so why did they “bend the knee,” and remain kneeling ever since?

And, in fact, what we see is, rather than a direct, steady progression to larger and more complex societies as depicted by old narratives of history (the “progress” narrative), we see states rising and falling. The idea that “bigger is better” is not in evidence from the standpoint of the average peasant living in these cultures. As Scott points out at length, states are fragile things prone to undermining their own existence through various factors. We see this trend even today with active secession movements in Catalonia, Scotland, the United States, and the criticisms of the European Union and “free trade.”

Ancient Egypt may have fallen in part because of riots caused by climate change and volcanoes, according to a new paper. The new study paints a picture of the ancient civilisation riven by droughts and disasters. It looked at the impact of the severe events of ancient Egypt, finding that they caused stress on its economy and ability to fight wars.

The Nile was incredibly important for the ancient Egyptians of Ptolemaic Egypt, between 350 and 30BC. Each year monsoon rainfall brought summer flooding that helped grow crops to support the society. When those crops failed, societal unrest would ensue, according to detailed reports at the time.

Until now, researchers haven’t known what caused those strange but important floods. They now propose they were the result of volcanic activity – which in turn would have altered the climate and brought about disruption to the most central parts of society.

“Ancient Egyptians depended almost exclusively on Nile summer flooding brought by the summer monsoon in east Africa to grow their crops,” said Joseph Manning, lead author on the paper and the William K & Marilyn Milton Simpson professor of history and classics at Yale, in a statement.

“In years influenced by volcanic eruptions, Nile flooding was generally diminished, leading to social stress that could trigger unrest and have other political and economic consequences

Ancient Egypt may have been brought down by volcanoes and climate change, researchers say (The Independent)

What we are learning, principally from pathogen genomics, is that the fall of the Roman Empire may have been a biological phenomenon.

The most devastating enemy the Romans ever faced was Yersinia pestis, the bacterium that causes bubonic plague and that has been the agent of three historic pandemics, including the medieval Black Death. The first pandemic interrupted a remarkable renaissance of Roman power under the energetic leadership of the emperor Justinian. In the course of three years, this disease snaked its way across the empire and carried off perhaps 30 million souls. The career of the disease in the capital is vividly described by contemporaries, who believed they were witnessing the apocalyptic “wine-press of God’s wrath,” in the form of the huge military towers filled with piles of purulent corpses. The Roman renaissance was stopped dead in its tracks; state failure and economic stagnation ensued, from which the Romans never recovered.

Recently the actual DNA of Yersinia pestis has been recovered from multiple victims of the Roman pandemic. And the lessons are profound…

Was the fall of Rome a biological phenomenon? (Los Angeles Times)

The winter seasonality of the Plague of Cyprian points to a germ that thrived on close interpersonal contact and direct transmission. The position of the Roman Empire astride some of the major flyways of migratory birds, and the intense cultivation of pigs and domestic fowl such as chickens and ducks, put the Romans at risk. Climate perturbations can subtly redirect the migratory routes of wild waterfowl, and the strong oscillations of the AD 240s could well have provided the environmental nudge for an unfamiliar zoonotic pathogen to find its way into new territory. The flu is a possible agent of the pestilence.

A second and more probable identification of the Plague of Cyprian is a viral hemorrhagic fever. The pestilence manifested itself as an acute-onset disease with burning fever and severe gastrointestinal disorder, and its symptoms included conjunctival bleeding, bloody stool, esophageal lesions, and tissue death in the extremities. These signs fit the course of an infection caused by a virus that induces a fulminant hemorrhagic fever.

Church Records Could Identify an Ancient Roman Plague (The Atlantic)

1. During the reign of Marcus Aurelius, a pandemic “interrupted the economic and demographic expansion” of the empire.

2. In the middle of the third century, a mix of drought, pestilence, and political challenge “led to the sudden disintegration of the empire.” The empire however was willfully rebuilt, with a new emperor, new system of government, and in due time a new religion.

3. The coherence of this new empire was broken in the late fourth and early fifth centuries. “The entire weight of the Eurasian steppe seemed to lean, in new and unsustainable ways, against the edifice of Roman power…and…the western half of the empire buckled.”

4. In the east there was a resurgent Roman Empire, but this was “violently halted by one of the worst environmental catastrophes in recorded history — the double blow of bubonic plague and a little ice age.”

The Fate of Rome (Marginal Revolution)

Explanations for a phenomenon of this magnitude [Rome’s collapse] abound: in 1984, the German classicist Alexander Demandt catalogued more than 200 hypotheses. Most scholars have looked to the internal political dynamics of the imperial system or the shifting geopolitical context of an empire whose neighbours gradually caught up in the sophistication of their military and political technologies. But new evidence has started to unveil the crucial role played by changes in the natural environment. The paradoxes of social development, and the inherent unpredictability of nature, worked in concert to bring about Rome’s demise…

It turns out that climate had a major role in the rise and fall of Roman civilisation. The empire-builders benefitted from impeccable timing: the characteristic warm, wet and stable weather was conducive to economic productivity in an agrarian society. The benefits of economic growth supported the political and social bargains by which the Roman empire controlled its vast territory. The favourable climate, in ways subtle and profound, was baked into the empire’s innermost structure.

The end of this lucky climate regime did not immediately, or in any simple deterministic sense, spell the doom of Rome. Rather, a less favourable climate undermined its power just when the empire was imperilled by more dangerous enemies – Germans, Persians – from without. Climate instability peaked in the sixth century, during the reign of Justinian. Work by dendro-chronologists and ice-core experts points to an enormous spasm of volcanic activity in the 530s and 540s CE, unlike anything else in the past few thousand years. This violent sequence of eruptions triggered what is now called the ‘Late Antique Little Ice Age’, when much colder temperatures endured for at least 150 years. This phase of climate deterioration had decisive effects in Rome’s unravelling. It was also intimately linked to a catastrophe of even greater moment: the outbreak of the first pandemic of bubonic plague.

How climate change and disease helped the fall of Rome (Aeon)

Wealth inequality has been increasing for millennia (The Economist)

Where hunter-gatherers saw themselves simply as part of an inherently productive environment, farmers regarded their environment as something to manipulate, tame and control. But as any farmer will tell you, bending an environment to your will requires a lot of work. The productivity of a patch of land is directly proportional to the amount of energy you put into it.

This principle that hard work is a virtue, and its corollary that individual wealth is a reflection of merit, is perhaps the most obvious of the agricultural revolution’s many social, economic and cultural legacies.

The acceptance of the link between hard work and prosperity played a profound role in reshaping human destiny. In particular, the ability to both generate and control the distribution of surpluses became a path to power and influence. This laid the foundations for all the key elements of our contemporary economies, and cemented our preoccupation with growth, productivity and trade.

Regular surpluses enabled a much greater degree of role differentiation within farming societies, creating space for less immediately productive roles. Initially these would have been agriculture-related (toolmakers, builders and butchers), but over time new roles emerged: priests to pray for good rains; fighters to protect farmers from wild animals and rivals; politicians to transform economic power into social capital.

How neolithic farming sewed the seeds of modern inequality (The Guardian)

Scientists have traced the rise of the super-rich deep into our historical past to uncover the ancient source of social inequality. Their conclusion? Thousands of years ago, it was the use of large farm animals – horses and oxen that could pull ploughs – which created the equivalent of our multi-billionaire entrepreneurs today.

It was only with the domestication of cattle and horses – sometimes thousands of years after land cultivation had begun – that serious divisions between societies’ haves and have-nots began to emerge, eventually creating the ancient equivalent of today’s island-owning, jet-setting billionaires...

Super-rich shown to have grown out of ancient farming (The Guardian)

Not only was prehistory more equal, but people were physically stronger too:

Prehistoric women had stronger arms than today’s elite rowing crews (

Unearthing a masterpiece (University of Cincinnati)

Q: What inspired you to look into this story?

A: When I was doing the History of Rome [podcast], so many people asked me, ‘Is the United States Rome? Are we following a similar trajectory?’ If you start to do some comparisons between the rise and development of the U.S. and rise and development of Rome, you do wind up in this same place. The United States emerging from the Cold War has some analogous parts to where Rome was after they defeated Carthage [in 146 B.C.]. This period was a wide-open field to fill a gap in our knowledge.

Q: One topic you describe at length is economic inequality between citizens of Rome. How did that come about?

A: After Rome conquers Carthage, and after they decide to annex Greece, and after they conquer Spain and acquire all the silver mines, you have wealth on an unprecedented scale coming into Rome. The flood of wealth was making the richest of the rich Romans wealthier than would’ve been imaginable even a couple generations earlier. You’re talking literally 300,000 gold pieces coming back with the Legions. All of this is being concentrated in the hands of the senatorial elite, they’re the consuls and the generals, so they think it’s natural that it all accumulates in their hands.

At the same time, these wars of conquest were making the poor quite a bit poorer. Roman citizens were being hauled off to Spain or Greece, leaving for tours that would go on for three to five years a stretch. While they were gone, their farms in Italy would fall into disrepair. The rich started buying up big plots of land. In the 130s and 140s you have this process of dispossession, where the poorer Romans are being bought out and are no longer small citizen owners. They’re going to be tenant owners or sharecroppers and it has a really corrosive effect on the traditional ways of economic life and political life. As a result, you see this skyrocketing economic inequality…

Q: Do you see parallels between land ownership in Rome and in the modern United States?

A: In the Roman experience, this is the beginning of a 100-year-long process of Italy going from being a patchwork of smaller farms with some large estates to nothing but sprawling, commercially-oriented estates. And yes, the United States is continuing to go through a very similar process. At the founding of our republic, everybody’s a farmer, and now everything is owned by what, Monsanto?

Moving beyond just strictly agricultural companies, large American corporations are now employing more and more people. There seems to be this move away from people owning and operating their own establishments, and they’re instead being consumed by large entities. You’re talking about the Amazons of the world swallowing up so much of the market share, it just doesn’t pay to be a clerk in a bookstore or own a bookstore, you end up being a guy working in a warehouse, and it’s not as good of a job.

Before the Fall of the Roman Republic, Income Inequality and Xenophobia Threatened Its Foundations (Smithsonian)

I’ve mentioned previously previously about the role that the transformation of land and labor into commodities which could be bought and sold was critical to the establishment of capitalist market economies (along with the extensive monetization of the economy by the state).

Prior to the market economy, most land was distributed by feudal relations and not simply something to be bought and sold like a waistcoat or a side of beef. Land ownership and tenure was something that was critical to the social fabric. In England (as in much of Western Europe), much of the country’s land was held by the Catholic Church. When Hnery VIII broke with the Catholic Church, he seized monastic lands, and eventually sold them off. This created a market for land that had not existed before, and which was unique to Britain. This may have been the key even in turning land into a marketable commodity, which was key in the development of market capitalism. As Polanyi put it:

Production is interaction of man and nature; if this process is to be organized through a self-regulating mechanism of barter and exchange, then man and nature must be brought into its orbit; they must be subject to supply and demand, that is, be dealt with as commodities, as goods produced for sale.

Such precisely was the arrangement under a market system. Man under the name of labor, nature under the name of land, were made available for sale; the use of labor power could be universally bought and sold at a price called wages, and the use of land could be negotiated for a price called rent. There was a market in labor as well as in land, and supply and demand in either was regulated by the height of wages and rents, respectively; the fiction that labor and land were produced for sale was consistently upheld. Capital invested in the various combinations of labor and land could thus flow from one branch of production to another, as was required for an automatic levelling of earnings in the various branches.

Previous scholarship has argued that the demographic disaster after the Black Death caused a shortage of labor and led to the demise of the feudal system. Flight into cities would also have contributed to wage labor taking the place of status relations as the main form of contract. This, combined with the establishment of a market for land, may have both been the causes of the transformation of labor and land into saleable commodities, which was a necessary step toward the market economy. This paper argues that places where land was heavily commoditized after the dissolution of the monasteries correlate with places where the Industrial Revolution first took off. To my knowledge, this historical connection was never explored by Polanyi himself, but it does provide an interesting addendum to his argument that universal markets are created by top-down state power and authority. Fascinating stuff:

In 1534, Henry VIII decided to break with the Catholic Church. In addition to severing ties with Rome, Henry appropriated all taxes that monasteries, churches and other religious institutions paid to the Pope. When his financing needs – due to wars in France – became too great, he expropriated all monasteries in England, which collectively held about one third of all land in the country (Youings 1967). When the management of these vast properties turned out to outstrip the bureaucratic capacity of his government, Henry sold all monastic assets in England. The main effect of this dumping of land was the creation of local land markets. Where lands were before held in long leases whose rates were set by medieval custom, lands now changed hands frequently and at market rates. In a few years between 1535 and 1542, the majority of monastic land was sold. Since monastic holdings were often ancient and were spread out unevenly throughout England, villages were differentially impacted by this shock. Some villages had no monastic assets in them (monasteries often owned land far away from their physical buildings) whereas in others, a local – or distant – monastery may have held large tracts of land. We hypothesise that the creation of a land market can be linked to local differences in subsequent development and, ultimately, industrialisation.

The origins of the Industrial Revolution (VoxEU)

It’s notable that this event did not take place in France, or anywhere else in Western Europe! Is this why France lagged in the race to industry? The lands of the Church were, in fact, eventually seized and sold off, as in England. But this took place only in the aftermath of the French Revolution centuries later.

And where it did take place, it seems it had a similar effect as in England centuries earlier: higher agricutureal productivity and more industrial output:

The law passed by the French Constituent Assembly on 2 November 1789 confiscated all Church property and redistributed it by auction. Over the next five years, more than 700,000 ecclesiastical properties – about 6.5% of French territory – were sold…We find that in regions where more church land was auctioned off, land inequality was higher in the 19th century. Further, we show that this wealth imbalance was associated with higher levels of agricultural productivity and agricultural investments by the mid-19th century. Specifically, a district with 10% more Church land redistributed had 25% higher productivity in wheat production, about 1.6 more pipe manufacturers (used for drainage and irrigation projects), and about 3.8% less land left fallow. Our study also shows that the beneficial effects of revolutionary land redistribution on agricultural productivity gradually declined over the course of the 19th century. This result is consistent with other districts gradually overcoming the transaction costs associated with reallocating the property rights that came with the feudal system.

Economic consequences of revolutions: Evidence from the 1789 French Revolution (VoxEU)

And this article wonders whether Rome could have had an industrial revolution:

Could Rome Have Had an Industrial Revolution? (Medium)

And finally, the scars of destroying people’s way of life continue to linger hundreds of years later, down to the present day!

People living in the former industrial heartlands of England and Wales are more disposed to negative emotions such as anxiety and depressive moods, more impulsive and more likely to struggle with planning and self-motivation, according to a new study of almost 400,000 personality tests.

The findings show that, generations after the white heat of Industrial Revolution and decades on from the decline of deep coal mining, the populations of areas where coal-based industries dominated in the 19th century retain a “psychological adversity”.

Researchers suggest this is the inherited product of selective migrations during mass industrialisation compounded by the social effects of severe work and living conditions.

Industrial Revolution left a damaging psychological ‘imprint’ on today’s populations (

And entire populations continue to be destroyed under capitalism…

James C. Scott’s Against the Grain

During my long discursion on the history of money, the academic James C. Scott published an important book called Against the Grain: A Deep History of the First States.

Regular readers will know that this has been a longstanding area of research (or obsession) of mine. I’ve referred to Scott’s work before, particularly Seeing Like A State, which I think is indispensable in understanding many of the political divisions of today (and why left/right is no longer a useful distinction). We’re in an era where much of the “left” is supporting geoengineering and rockets to Mars, and the “right” (at least the alt-right) is criticizing housing projects and suburban sprawl.

It’s a shame that Scott’s book shared the same title as another one of my favorite books on that topic by journalist Richard Manning that came out a while ago: Against the Grain: How Agriculture Hijacked Civilization. Manning’s book is not only a historical account about how the rise of grain agriculture led to war, hierarchy, slavery and sickness, but a no-holds-barred examination of today’s grain-centric agribusiness model, where wheat, corn, soy and sugar are grown in mechanized monocultures and processed by the food industry into highly-addictive junk food implicated in everything from type two diabetes, to depression to Alzheimer’s disease (via inflammation):

Dealing with surplus is a difficult task. The problem begins with the fact that, just like the sex drive, the food drive got ramped up in evolution. If you have a deep, yearning need for food, you’re going to get along better than your neighbor, and over the years that gene is going to be passed on. So you get this creature that got fine-tuned to really need food, especially carbohydrates. Which brings us to the more fundamental question: can we ever deal with sugar? By making more concentrated forms of carbohydrates, we’re playing into something that’s quite addictive and powerful. It’s why we’re so blasted obese. We have access to all this sugar, and we simply cannot control our need for it—that’s genetic.

Now, can we gain the ability to overcome that? I’m not sure. You have to add to this the fact that there’s a lot of money to be made by people who know how to concentrate sugar. They have a real interest in seeing that we don’t overcome these kinds of addictions. In fact, that’s how you control societies—you exploit that basic drive for food. That’s how we train dogs—if you want to make a dog behave properly, you deprive him or give him food. Humans aren’t that much different. We just like to think we are. So as an element of political control, food and food imagery are enormously important.

The Scourge of Agriculture (The Atlantic)

Cancers linked to excess weight make up 40% of all US diagnoses, study finds (The Guardian)

Child and teen obesity spreading across the globe (BBC)

In that interview, Manning also makes this point which got so much attention in Yuval Noah Harari’s blockbuster, Sapiens (which came out years later):

…it’s not just human genes at work here. It’s wheat genes and corn genes—and how they have an influence on us. They took advantage of our ability to travel, our inventiveness, our ability to use tools, to live in a broad number of environments, and our huge need for carbohydrates. Because of our brains’ ability, we were able to spread not only our genes, but wheat’s genes as well. That’s why I make the argument that you have to look at this in terms of wheat domesticating us, too. That co-evolutionary process between humans and our primary food crops is what created the agriculture we see today.

As for the title, I guess Against the Grain is just too clever a title to pass up 🙂

I’m still waiting on the book from the library, but I have seen so many reviews by now that I’m not sure I’ll be able to add too much. What’s interesting to me is the degree to which the idea that civilization was a great leap backward from what we had before is starting to go mainstream.

The old, standard “Whig version” story of directional, inevitable progress is still pretty strong, though. Here’s one reviewer describing how it was articulated in the turn-of-the-century Encyclopedia Britannica:

The Encyclopaedia took its readers through a panorama of universal history, from “the lower status of savagery,” when hunter-gatherers first mastered fire; to the “middle status of barbarism,” when hunters learned to domesticate animals and became herders; to the invention of writing, when humanity “graduated out of barbarism” and entered history. Along the way, humans learned to cultivate grains, such as wheat and rice, which showed them “the value of a fixed abode,” since farmers had to stay near their crops to tend and harvest them. Once people settled down, “a natural consequence was the elaboration of political systems,” property, and a sense of national identity. From there it was a short hop—at least in Edwardian hindsight—to the industrial revolution and free trade.

Some unfortunate peoples, even entire continents such as aboriginal North America and Australia, might fall off the Progress train and have to be picked up by kindly colonists; but the train ran along only one track, and no one would willingly decline to board it…

What made prehistoric hunter-gatherers give up freedom for civilization? (The New Republic)

But,it turns out that the reality was quite different. In fact, hunter-gatherers resisted agriculture. Even where farmers and H-G’s lived side-by-side, the H-G’s (and herders) avoided farming as long as they could. When Europeans equipped “primitive” societies with seeds and hoes and taught them to farm, the natives threw away the implements and ran off into the woods. The dirt farmers of colonial America often ran away to go and live with the nomadic Indians, to the extent that strict laws had to be passed to prevent this (as documented in Sebastian Junger’s recent book Tribe).

At the ‘Man the Hunter’ symposium in Chicago in 1966, Marshall Sahlins drew on research from the likes of Richard B. Lee among the !Kung of the Kalahari to argue that hunter-gatherers enjoyed the ‘original affluent society’. Even in the most marginal environments, he said, hunter-gatherers weren’t engaged in a constant struggle for survival, but had a leisurely lifestyle. Sahlins and his sources may have pushed the argument a little too far, neglecting to consider, for instance, the time spent preparing food (lots of mongongo nuts to crack). But their case was strong enough to deal a severe blow to the idea that farming was salvation for hunter-gatherers: however you cut it, farming involves much higher workloads and incurs more physical ailments than relying on the wild. And the more we discover, as Scott points out, the better a hunter-gatherer diet, health and work-life balance look.

Why did we start farming? (London Review of Books)

So why did they do it? That is a question that nobody know the answer to, but it appears they stumbled into not because it was a better way of life, but due to some sort of pressures beyond their control. As Colin Tudge put it, “People did not invent agriculture and shout for joy; they drifted or were forced into it, protesting all the way.” Rather than taking up agriculture because it presented a better, more secure way of life as the Victorians thought (due to chauvinism and ignorance), it was actually much more unpleasant and much more work.

The shift to agriculture was in some respects…harmful. Osteological research suggests that domiciled Homo sapiens who depended on grains were smaller, less well-nourished and, in the case of women, more likely to be anaemic, than hunter-gatherers. They also found themselves vulnerable to disease and able to maintain their population only through unprecedentedly high birthrates. Scott also suggests that the move from hunting and foraging to agriculture resulted in ‘deskilling’, analogous to the move in the industrial revolution from the master tradesman’s workshop to the textile mill. State taxation compounded the drudgery of raising crops and livestock. Finally, the reliance on only a few crops and livestock made early states vulnerable to collapse, with the reversion to the ‘dark ages’ possibly resulting in an increase in human welfare.

Book Review: Against the Grain: A Deep History of the Earliest States by James C. Scott (London School of Economics)

Circumstances beyond their control must have played a role. Climate change is most commonly implicated. Overpopulation must have played a role, but this raises a chicken-and-egg problem: overpopulation is a problem created by agrarianism, so how could it have caused it?

One novel idea I explored earlier this year was Brian Hayden’s idea that the production of ever-increasing surpluses was part of a strategy by aggrandizing individuals in order to gain political power.

Periodic feasting events were ways to increase social cohesion and deal with uneven production in various climatic biomes–it was a survival strategy for peoples spread-out among a wide geographical area (mountains, plains, wetlands, riparian, etc.). If food was scarce in one area, resources could be pooled. Such feasting/resource pooling regimes were probably the earliest true “civilizations” (albeit before cities). It was also the major way to organize mass labor, which lasted well into the historical period (both Egyptian and Mesopotamian texts testify to celebratory work feasts).

At these events, certain individuals would loan out surplus food and other prestige items in order to lure people in debt to them. Cultural expectations meant that “gifts” would have to repaid and then some (i.e. with interest). These people would get their relatives and allies to work their fingers to the bone in order to produce big surpluses in societies where this was possible, such as horticultural and affluent forager ones. This would be used for feasting. They would then become “Big Men”–tribal leaders lacking “official” status.

Would-be Big-Men would then try and outdo one another by throwing larger, richer feasts than their rivals. Competitive feasting provided an opportunity for aggrandizers to try and outdo one another in a series of power games and status jockeying. But the net effect such power games had across the society was to ramp up food production to unsustainable levels. This, in turn, led to intensification.

At these feasts, highly prized foodstuffs would be used by aggrandizers to lure people into debt and other lopsided obligations, as well as get people to work for them. Manning notes above how food has been traditionally used to control people. And, Hayden speculates, the foods most commonly used were ones with pleasurable or mind-altering effects. One common one was almost certainly alcohol.

He speculates that grains were initially grown not for flavor or for carbohydrates, but for fermentation. It’s fairly certain that alcohol consumption played a major role in feasting events, and it’s notable that the earliest civilizations were all big beer drinkers (Egypt, Mesopotamia, China, Mesoamerica). Most agricultural village societies around the world have some sort of beer drinking/fermentation ritual, as Patrick E. McGovern has documented. The first “recipe” ever written down was for beer brewing. Hayden speculates that early monoliths like Göbekli Tepe and Stonehenge were built as places for such feasting events to take place, wedded to certain religious ideologies (all of them have astronomical orientations), and archaeology tends to confirm this. It’s notable that the earliest sites of domestication/agrarianism we know of are typically in the vicinity of these monoliths.

In other words, the root of this overproduction was human social instincts, and not just purely environmental or climatic factors. Is there some connection between plant/animal domestication and religious ideology? Is it any wonder that religious concepts in these societies transform to become very different from the animist ones of hunter-gatherers? Flannery and Marcus point out that the establishment of a hereditary priesthood that constructs temples and interprets the gods’ wishes (replacing the shaman) is always a marker of the transition from an egalitarian society to a hierarchical one with hereditary leadership. Even in the Bible, king and temple arise more or less simultaneously (e.g. Saul/David/Solomon).

Scott considers whether the Younger Dryas, a period of markedly colder and drier conditions between 12,900 and 11,700 years ago, forced hunter-gatherers into farming. But while the change in climate may have inspired more experimentation with cultivation and herding, the Younger Dryas is too early: communities committed to cereals and livestock didn’t arise until about ten thousand years ago. Scott overlooks another possible factor: religious belief. The discovery of the Neolithic hill-top sanctuary of Göbekli Tepe in southern Turkey in 1994 went against the grain of conventional archaeological understanding of the Neolithic. Here, around 11,000 years ago, hunter-gatherers had constructed a vast complex of massive decorated stone pillars in exactly the same place that domesticated strains of wheat had evolved.

The quantities of food needed to feed the workforce and those who gathered for rituals at Göbekli must have been huge: if the Neolithic gods could persuade people to invest so much effort in construction, and to suffer the physical injuries, ailments and deaths that came along with it, then perhaps expending those extra calories in the fields would have seemed quite trivial. Even then, Göbekli doesn’t help us explain why cereal farming and goat herding took such a hold elsewhere. Personally I find it difficult to resist the theory of unintended self-entrapment into the farming lifestyle, which was then legitimated by Neolithic ideology. We find evidence of burial rituals and skull cults throughout the Fertile Crescent.

Why did we start farming? (London Review of Books)

Scott’s book emphasizes the key role that grain cultivation played in the rise of the early states (even in the title). Cereals grown it river bottoms were easy to assess and tax, unlike other foodstuffs which would ripen at different times of the year, could be hidden, or grown in patches. They were storable and divisible. In some ways, grain may have been the earliest form of money:

Most early crops could not provide a source of taxation. Potatoes and tubers are easily hidden underground. Lentils produce annually and can be eaten as they’re picked. Grains, however, have determinate ripening times, making it easy for the tax collector to show up on time. They cannot be eaten raw. And because grains are so small, you can tax them down to the grain. Unlike squash or yams, grains are easy to transport. Spoilage time is nothing like that of vegetables. All these factors played into the first widespread form of currency.

Is the Collapse of Civilizations A Good Thing? (Big Think)

Grain is special, but for a different reason. It is easy to standardize—to plant in rows or paddies, and store and record in units such as bushels. This makes grain an ideal target for taxation. Unlike underground tubers or legumes, grain grows tall and needs harvesting all at once, so officials can easily estimate annual yields. And unlike fugitive wild foods, grain creates a relatively consistent surplus, allowing a ruling class to skim off peasant laborers’ production through a tax regime of manageable complexity. Grain, in Scott’s lexicon, is the kind of thing a state can see. On this account, the first cities were not so much a great leap forward for humanity as a new mode of exploitation that enabled the world’s first leisured ruling class to live on the sweat of the world’s first peasant-serfs.

What made prehistoric hunter-gatherers give up freedom for civilization? (The New Republic)

It’s worth noting that it wasn’t simply agriculture, but cereal production that relied on artificial irrigation that saw the rise of the first states. The need to coordinate all that labor, partition permanent plots of land, and resolve settlement disputes, must have led to the rise of an elite managerial class, as Ian Welsh points out:

Agriculture didn’t lead immediately to inequality, the original agricultural societies appear to have been quite equal, probably even more so than the late hunter-gatherer societies that preceded them. But increasing surpluses and the need for coordination which arose, especially in hydraulic civilizations (civilizations based around irrigation which is labor intensive and require specialists) led to the rise of inequality. The pharoahs created great monuments, but their subjects did not live nearly as well as hunter-gatherers.

The Right Stuff: What Prosperity Is and Isn’t (Ian Welsh)

Wealth inequality has been increasing for millennia (The Economist)

And sedentism, as I’ve noted, is not so much a product of agriculture as a cause. Likely sedentary societies needed to be around for some time in order to build up the kind of surpluses aggrandizing elites needed to gain power. These probably started as “redistributor chiefs” who justified their role through some combination of martial leadership and religious ideology:

Sedentism does not have its origins in plant and animal domestication. The first stratified states in the Tigris and Euphrates Valley appeared ‘only around 3,100 BCE, more than four millennia after the first crop domestications and sedentism’. Sedentism has its roots in ecologically rich, preagricultural settings, especially wetlands. Agriculture co-existed with mobile lifestyles in which people gathered to harvest crops. Domestication itself is part of a 400,000 year process beginning with the use of fire. Moreover, it is not a process (or simply a process) of humans gaining increasing control over the natural world. People find themselves caring for dogs, creating an ecological niche for mice, ticks, bedbugs and other uninvited guests, and spending their lives ‘strapped to the round of ploughing, planting, weeding, reaping, threshing, grinding, all on behalf of their favorite grains and tending to the daily needs of their livestock’.

This was also noted in the Richard Manning interview, above:

…we always think that agriculture allowed sedentism, which gave people time to create civilization and art. But the evidence that’s emerging from the archeological record suggests that sedentism came first, and then agriculture. This occurred near river mouths, where people depended on seafood, especially salmon. These were probably enormously abundant cultures that had an enormous amount of leisure time—they just had to wait for the salmon runs to occur. There are some good records of those communities, and from the skeleton remains we can see that they got up to 95 percent of their nutrients from salmon and ocean-derived sources. Along the way, they developed highly refined art—something we always associate with agriculture.

Of course, urban societies using irrigation and plow-based agriculture, with their palaces and temples, are very different from horticultural village societies practicing shifting cultivation (which Scott terms “late-Neolithic multispecies resettlement camps.”). This is likely why early agricultural societies were roughly about as egalitarian as their immediate predecessors, as Ian Welsh pointed out above. But once the plow allowed men to wrest control of food production away from the garden plots of women, the fortunes of females declined rapidly. Political control became exclusively centered in the households run by patriarchs, with women becoming little more than chattel. And because there was now property to be passed down, women’s sexual behavior became strictly regulated and monogomy enforced (for commoners but not for elites). Several thousand years of increasing surpluses and population led to the Neolithic “experiment” metastasizing into the first city-states and empires in various parts of the world. This was not a swift process, but instead took thousands of years to develop–longer than all of “recorded” history:

…why did it take so long – about four thousand years – for the city-states to appear? The reason is probably the disease, pestilence and economic fragility of those Neolithic villages. How did they survive and grow at all? Well, although farming would have significantly increased mortality rates in both infants and adults, sedentism would have increased fertility. Mobile hunter-gatherers were effectively limited by the demands of travel to having one child every four years. An increase in fertility that just about outpaced the increase in mortality would account for the slow, steady increase in population in the villages. By 3500 BCE the economic and demographic conditions were in place for a power-grab by would-be leaders.

Why did we start farming? (London Review of Books)

How agriculture grew on us (Leaving Babylon)

Once such societies were established, they were under an obligation to expand. This was due to the depletion of their agricultural resource base thanks to overgrazing, salinization, erosion, deforestation, and numerous other environmental problems caused by agriculture, along with rapid population growth. New farmers require new land, since their birthrates are higher. As such societies expanded, their neighbors had only three options: fight back by adopting similar measures, succumb and be assimilated, or run away. Many did run away, which is why so much of the the world’s inhabitants lived outside of state control until the 1600’s, as Scott points out (Scott calls them ‘Barbarians’; he uses it a term of respect rather than Victorian derision).

Scott also emphasizes the key role played by slavery in agrarian states. In Scott’s view, slavery was absolutely essential to the functioning of the state. Because sedentary, agricultural societies tended to have so much unpleasant “grunt” labor to be done, there was a strong incentive to acquire slaves to do the dirty work required to keep the society running. Three major ways labor was compelled in the ancient world were corvée labor, chattel slavery, and (we often forget) debt bondage. This only ended once we got “energy slaves” to do much of this grunt work for us. Yet even today, we use wage slavery compelled by poverty along with migrant labor to do the grunt work necessary for us. Non-mechanized agricultural labor is still completely dependent on migrant labor in the U.S. and Europe, as are many low-skill, non-automated professions (driver, nanny, gardener, etc.) Ancient slavery was less about skin color or point of origin, as it was in the Americas (where a racial hierarchy was instituted by Europeans). Instead it was simply more of a legal status, much like a temp or migrant worker in countries today (or the Chinese Hukou system):

In the world of states, hunter-gatherers and nomads, one commodity alone dominated all others: people, aka slaves. What agrarian states needed above all else was manpower to cultivate their fields, build their monuments, man their armies and bear and raise their children. With few exceptions, the epidemiological conditions in cities until very recently were so devastating that they could grow only by adding new populations from their hinterlands. They did this in two ways. They took captives in wars: most South-East Asian early state chronicles gauge the success of a war by the number of captives marched back to the capital and resettled there. The Athenians and Spartans might kill the men of a defeated city and burn its crops, but they virtually always brought back the women and children as slaves. And they bought slaves: a slave merchant caravan trailed every Roman war scooping up the slaves it inevitably produced.

The fact is that slaving was at the very centre of state-making. It is impossible to exaggerate the massive effects of this human commodity on stateless societies. Wars between states became a kind of booty capitalism, where the major prize was human traffic. The slave trade then completely transformed the non-state ‘tribal zone’. Some groups specialised in slave-raiding, mounting expeditions against weaker and more isolated groups and then selling them to intermediaries or directly at slave markets. The oldest members of highland groups in Laos, Thailand, Malaysia and Burma can recall their parents’ and grandparents’ memories of slave raids. The fortified, hilltop villages, with thorny, twisting and hidden approaches that early colonists found in parts of South-East Asia and Africa were largely a response to the slave trade.

Crops, Towns, Government (London Review of Books)

In describing the early city-states of Mesopotamia, Scott projects backwards from the historical records of the great slave societies of Greece and Rome. His account of the slaves and the way they were controlled seems strangely familiar. Much like migrant labourers and refugees in Europe today, they came from scattered locations and were separated from their families, demobilised and atomised and hence easier to control. Slaves, like today’s migrants, were used for tasks that were vital to the needs of the elites but were shunned by free men. And slaves, like refugee workers, were gradually integrated into the local population, which reduced the chance of insurrection and was necessary to keep a slave-taking society going. In some early states human domestication took a further step: written records from Uruk use the same age and sex categories to describe labourers and the state-controlled herds of animals. Female slaves were kept for breeding as much as for manual labour.

Why did we start farming? (London Review of Books)

How we Domesticated

I’ve often wondered if, when certain humans learned how to domesticate plants and animals, they used it as much on their fellow man as they did their flora and fauna. In this Aeon article, this passage really struck me:

When humans start treating animals as subordinates, it becomes easier to do the same thing to one another. The first city-states in Mesopotamia were built on this principle of transferring methods of control from creatures to human beings, according to the archaeologist Guillermo Algaze at the University of California in San Diego. Scribes used the same categories to describe captives and temple workers as they used for state-owned cattle.

How domestication changes species including the human (Aeon)

Indeed, the idea that humans domesticated themselves is another key concept in Harari’s Sapiens. But perhaps that domestication was much more “literal” than we have been led to believe. Perhaps human sacrifice was a way for early religious leaders to “cull” individuals who had undesirable traits from their standpoint: independence, aggression, a questioning attitude, etc. Indeed, hunter-gatherers still do not like obeying orders from a boss. I wonder to what extent this process is still going on, especially in modern-day America with its schools, prisons, corporate cubicles, police, military, etc.:

Anthropologists and historians have put forward the ‘social control hypothesis’ of human sacrifice. According to this theory, sacrificial rites served as a function for social elites. Human sacrifice is proposed to have been used by social elites to display their divinely sanctioned power, justify their status, and terrorise underclasses into obedience and subordination. Ultimately, human sacrifice could be used as a tool to help build and maintain systems of social inequality.

How human sacrifice helped to enforce social inequality (Aeon)

How humans (maybe) domesticated themselves (Science News)

And this is very relevent to our recent discussion of money: writing and mathematics were first used as methods of social control. As Janet Gleeson-White points out in this essay, accounting was our first writing technology. Money–and taxes–were an outgrowth of this new communications technology:

War, slavery, rule by élites—all were made easier by another new technology of control: writing. “It is virtually impossible to conceive of even the earliest states without a systematic technology of numerical record keeping,” Scott maintains. All the good things we associate with writing—its use for culture and entertainment and communication and collective memory—were some distance in the future. For half a thousand years after its invention, in Mesopotamia, writing was used exclusively for bookkeeping: “the massive effort through a system of notation to make a society, its manpower, and its production legible to its rulers and temple officials, and to extract grain and labor from it.”

Early tablets consist of “lists, lists and lists,” Scott says, and the subjects of that record-keeping are, in order of frequency, “barley (as rations and taxes), war captives, male and female slaves.” Walter Benjamin, the great German Jewish cultural critic, who committed suicide while trying to escape Nazi-controlled Europe, said that “there is no document of civilization which is not at the same time a document of barbarism.” He meant that every complicated and beautiful thing humanity ever made has, if you look at it long enough, a shadow, a history of oppression.

The Case Against Civilization (The New Yorker)

Collecting cereal grains directly as taxes would have been cumbersome for administrators, which no doubt led to the innovations we’ve been discussing recently: a unit of account and debt/credit records. The temples were the first institutions to create and store surpluses, making them arguably the ancestor to later corporations (and capitalism). They were the first to do economic planning and charge interest. Later, rulers would strongly desire to monetize the economy by issuing coins, because it was far easier to collect coins and record taxes using this method than collecting resources in kind. We’ve already seen how money, markets, and the state are intimately intertwined (and not separate as libertarians claim).

The connection between the earliest writing and domestication/subjugation is powerfully made by this article from the BBC documenting the world’s oldest writing:

In terms of written history, this is the very remote past. But there is also something very direct and almost intimate about it too. You can see fingernail marks in the clay. These neat little symbols and drawings are clearly the work of an intelligent mind.

These were among the first attempts by our human ancestors to try to make a permanent record of their surroundings. What we’re doing now – my writing and your reading – is a direct continuation. But there are glimpses of their lives to suggest that these were tough times. It wasn’t so much a land of milk and honey, but porridge and weak beer.

Even without knowing all the symbols, Dr Dahl says it’s possible to work out the context of many of the messages on these tablets. The numbering system is also understood, making it possible to see that much of this information is about accounts of the ownership and yields from land and people. They are about property and status, not poetry.

This was a simple agricultural society, with a ruling household. Below them was a tier of powerful middle-ranking figures and further below were the majority of workers, who were treated like “cattle with names”. Their rulers have titles or names which reflect this status – the equivalent of being called “Mr One Hundred”, he says – to show the number of people below him.

It’s possible to work out the rations given to these farm labourers. Dr Dahl says they had a diet of barley, which might have been crushed into a form of porridge, and they drank weak beer. The amount of food received by these farm workers hovered barely above the starvation level. However the higher status people might have enjoyed yoghurt, cheese and honey. They also kept goats, sheep and cattle.

For the “upper echelons, life expectancy for some might have been as long as now”, he says. For the poor, he says it might have been as low as in today’s poorest countries.

Breakthrough in world’s oldest undeciphered writing (BBC)

So the earliest writing tends to confirm Scott’s account. And not just Scott’s account, but that of anthropologist James Suzman, who has simultaneously come out with a book about the disappearing way of life of the the !Kung San Bushmen of the Kalahari. This is also reviewed in the New Yorker article, above. These hunter-gatherers are going through today exactly what those people in the Near East experienced roughly 6-8000 years ago, giving us a window into history:

The encounter with modernity has been disastrous for the Bushmen: Suzman’s portrait of the dispossessed, alienated, suffering Ju/’hoansi in their miserable resettlement camps makes that clear. The two books even confirm each other’s account of that sinister new technology called writing. Suzman’s Bushman mentor, !A/ae, “noted that whenever he started work at any new farm, his name would be entered into an employment ledger, documents that over the decades had assumed great mystical power among Ju/’hoansi on the farms. The secrets held by these ledgers evidently had the power to give or withhold pay, issue rations, and determine an individual’s right to stay on any particular farm.”

Writing turned the majority of people into serfs and enabled a sociopathic elite to live well and raise themselves and their offspring above everyone else.

And here we are at the cusp of a brand new “information revolution” where literally our every thought and move can be monitored and tracked by a tiny centralized elite and permanently stored. And yet we’re convinced that this will make all our lives infinitely better! Go back and reread the above. I’m not so sure. I already feel like “cattle with a name” in our brave new nudged, credit-scored, Neoliberal world.

We’re also experiencing another period of rapid climate change and resource depletion, just like that experienced at the outset of the original coming of the state. We’re now doing exactly what they did: intensification, and once again it’s empowering a small sociopathic elite at the cost of the rest of us. And yet Panglossians confidently tell us we’re headed for a peaceful techno-utopia where all new discoveries will be shared with all of us instead of hoarded, and we’ll all live like gods instead of being exterminated like rats because we’re no longer necessary to the powers that be. Doubtless the same con (“We’ll all be better off!!!”) was played on the inhabitants of early states, too. Given the human social instincts noted above, let’s just say I’m not optimistic. Please pass the protein blocks.

Welcome to 2030. I Own Nothing, Have No Privacy, and Life Has Never Been Better (Futurism)

Scott points out that the state is a very novel development, despite what we read in history books. We read about the history of states because states left written history, and we are their descendants. But that doesn’t mean most people lived under them. By Scott’s account, most humans (barbarians) lived outside of nation-states well into the 1500’s:

…Homo sapiens has been around for roughly 200,000 years and left Africa not much earlier than 50,000 years ago. The first fragmentary evidence for domesticated crops occurs roughly 11,000 years ago and the first grain statelets around 5000 years ago, though they were initially insignificant in a global population of perhaps eight million.

More than 97 per cent of human experience, in other words, lies outside the grain-based nation-states in which virtually all of us now live. ‘Until yesterday’, our diet had not been narrowed to the three major grains that today constitute 50 to 60 per cent of the world’s caloric intake: rice, wheat and maize. The circumstances we take for granted are, in fact, of even more recent vintage …Before, say, 1500, most populations had a sporting chance of remaining out of the clutches of states and empires, which were still relatively weak and, given low rates of urbanisation and forest clearance, still had access to foraged foods. On this account, our world of grains and states is a mere blink of the eye (0.25 per cent), in the historical adventure of our species.

Crops, Towns, Government (London Review of Books)

Why a leading political theorist thinks civilization is overrated (VOX)

Wither Collpase?

One of the more provocative ideas from Scott’s book is to question whether the withering away of state capacity–that is, a collapse–is really a bad thing at all!

We need to rethink, accordingly, what we mean when we talk about ancient “dark ages.” Scott’s question is trenchant: “ ‘dark’ for whom and in what respects”? The historical record shows that early cities and states were prone to sudden implosion.

“Over the roughly five millennia of sporadic sedentism before states (seven millennia if we include preagriculture sedentism in Japan and the Ukraine),” he writes, “archaeologists have recorded hundreds of locations that were settled, then abandoned, perhaps resettled, and then again abandoned.” These events are usually spoken of as “collapses,” but Scott invites us to scrutinize that term, too.

When states collapse, fancy buildings stop being built, the élites no longer run things, written records stop being kept, and the mass of the population goes to live somewhere else. Is that a collapse, in terms of living standards, for most people? Human beings mainly lived outside the purview of states until—by Scott’s reckoning—about the year 1600 A.D. Until that date, marking the last two-tenths of one per cent of humanity’s political life, “much of the world’s population might never have met that hallmark of the state: a tax collector.”

Book Review: Against the Grain: A Deep History of the Earliest States by James C. Scott (LSE)

Indeed, is collapse even a relevant concept when discussing history? What, really is collapsing? States can collapse, but cultures transform:

We also need to think about what we apply the term ‘collapse’ to – what exactly was it that collapsed? Very often, it’s suggested that civilisations collapse, but this isn’t quite right. It is more accurate to say that states collapse. States are tangible, identifiable ‘units’ whereas civilisation is a more slippery term referring broadly to sets of traditions. Many historians, including Arnold Toynbee, author of the 12-volume A Study of History (1934-61), have defined and tried to identify ‘civilisations’, but they often come up with different ideas and different numbers. But we have seen that while Mycenaean states collapsed, several strands of Mycenaean material and non-material culture survived – so it would seem wrong to say that their ‘civilisation’ collapsed. Likewise, if we think of Egyptian or Greek or Roman ‘civilisation’, none of these collapsed – they transformed as circumstances and values changed. We might think of each civilisation in a particular way, defined by a particular type of architecture or art or literature – pyramids, temples, amphitheatres, for example – but this reflects our own values and interests.


States collapsed, civilisations or cultures transformed; people lived through these times and employed their coping strategies – they selectively preserved aspects of their culture and rejected others. Archaeologists, historians and others have a duty to tell the stories of these people, even though the media might find them less satisfactory. And writers who appropriate history for moral purposes need to think carefully about what they are doing and what they are saying – they need to make an effort to get the history as right as possible, rather than dumbing it down to silver-bullet theories.

What the idea of civilisational collapse says about history (Aeon)

Scott looks at the fragility of states–and their propensity to revert to more simplified forms, as simply a necessary and inevitable part of the process of history. Rather than a catastrophe, a reduction in complexity often leads to an increase in personal freedom, social experimentation, autonomy, and even artistic development and cultural expression. The Middle Ages is often portrayed as a “dark age,” but that depiction was an invention of the Renaissance, and “dark” referred to the lack of written historical sources, not necessarily wail and woe. Note that the tools of the oppressor – written records, taxation, slavery, usury and money – all fade during this time period. This is not to dismiss the very real disappearance of technology, epidemic disease and warfare that accompanies a state collapse, but merely to suggest a more nuanced view. The Middle Ages was centered around the values of the Church, and society was reoriented along these lines.

Scott writes about the normalising effects of state collapse. Often it was the best thing possible for a people now emancipated from disease, taxes and labour. In the subsequent ‘dark ages’ – a propaganda term used by the elite – democracy and culture could flourish. Homer’s Iliad and Odyssey date from the dark age of Greece. This is in marked contrast to the consequences of state collapse today, now that there is no longer an external barbarian world to escape into. When Syria collapsed its refugees had no choice but cross the border to another state, whether Lebanon, Jordan or Turkey.

Why did we start farming? (London Review of Books)

While Scott’s topics are timely—tribalism, taxation, trade, warfare—one is particularly relevant: the collapse of civilizations. Shifting landscapes, battles, and resource depletion are all factors that forced newly sedentary societies to pack it up and move on once again. Scott does not see this as a necessary evil, but rather part of the natural order of things: “We should, I believe, aim to “normalize” collapse and see it rather as often inaugurating a periodic and possibly even salutary reformation of political order.”

Is the Collapse of Civilizations A Good Thing? (Big Think)

Scott argues that the loss of state capacity, rather than a tragedy, can often be seen as a liberating event. Yes, such periods mean more poverty, but without the yoke of the state, it can also paradoxically mean more freedom and happiness for the survivors of the collapse. And since relative poverty appears more harmful psychologically than absolute poverty, many societies tend to have greater well being after they’ve fallen apart. He writes:

When the apex disappears, one is particularly grateful for the increasingly large fraction of archaeologists whose attention was focused not on the apex but on the base and its constituent units. From their findings we are able not only to discern some of the probable causes of “collapse” but, more important, to interrogate just what collapse might mean in any particular case…much that passes as collapse as, rather, a disassembly of larger but more fragile political units into their smaller and often more stable components. While “collapse” represents a reduction in social complexity, it is these smaller nuclei of power—a compact small settlement on the alluvium, for example—that are likely to persist far longer than the brief miracles of statecraft that lash them together into a substantial kingdom or empire.

Over time an increasingly large proportion of nonstate peoples were not “pristine primitives” who stubbornly refused the domus, but ex–state subjects who had chosen, albeit often in desperate circumstances, to keep the state at arm’s length…The process of secondary primitivism, or what might be called “going over to the barbarians,” is far more common than any of the standard civilizational narratives allow for. It is particularly pronounced at times of state breakdown or interregna marked by war, epidemics, and environmental deterioration. In such circumstances, far from being seen as regrettable backsliding and privation, it may well have been experienced as a marked improvement in safety, nutrition, and social order. Becoming a barbarian was often a bid to improve one’s lot.

Thus, the leveling effects of “collapse” may be not as “disastrous” as we are led to believe.

Scott’s book gives us hope that the collapse of states, rather than being a universally bad thing, might lead to a flourishing of human freedom. In that, there is some hope. I’ll end with this thought from Scott’s review of Diamond:

Anthropology can show us radically different and satisfying forms of human affiliation and co-operation that do not depend on the nuclear family or inherited wealth. History can show that the social and political arrangements we take for granted are the contingent result of a unique historical conjuncture.

The Origin of Money – Key Takeaways

“We begin with the story of the greatest conqueror in history, a conqueror possessed of extreme tolerance and adaptability, thereby turning people into ardent disciples. This conqueror is money. People who do not believe in the same god or obey the same king are more than willing to use the same money. Osama Bin Laden, for all his hatred of American culture, American religion and American politics, was very fond of American dollars. How did money succeed where gods and kings failed?”
~ Yuval Noah Harari, “Sapiens: A Brief History of Humankind,” (2015)

So I’m done for now writing about the history of money, which is doubtless good news to any readers I still have left (if there are any). I went way too far down the rabbit hole on this one 😊.

But the way it started was actually very simple. When I started, I had two major questions. One was, where did the notion of a “national debt” come from??? I mean, you never hear about the national debt of ancient Greece and Rome do you? In fact, it’s hard to imagine any ancient empire, from Persia to China voicing concerns about the national debt. Yet now it seems to drive just about every decision any government makes. We’re constantly told that “we can’t afford” this or that because it would increase the national debt. But how can a nation-state go into debt merely by issuing its own money? And how can every country in the world be simultaneously in debt? Since every nation-state is the ultimate source of its own currency, how can they be in debt? To whom?

The other major question I had was how did we get this weird hybrid system where we have government money, but private banks and financiers seem to control it? After all, money is a public good. We all need it. It should theoretically be under democratic control. But actual control over it is exercised by a secretive cabal of bankers and financiers who are not accountable to any democratic institutions. As Michael Hudson says, “every economy is planned, it’s only a matter of who does the planning.” He argues that in our society it is the private financial interests who do the planning rather than government bureaucrats, and they do so primarily to benefit themselves, even to the detriment of society. As Frederick Soddy said:

“… every monetary system must at long last conform, if it is to fulfil its proper role as the distributive mechanism of society. To allow it to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of government.”(The Role Of Money[1932]).

Hopefully we learned some answers to those two questions. A thoroughgoing history of money, rather than just being of historical interest, does give us some crucial insights into current dilemmas and what we need to do going forward.

So, by way of conclusion, here are some of the major takeaways I got while writing this series of posts. If your eyes glazed over during the series or you just quit reading over the summer (and I don’t really blame you), I encourage you to come back and at least read this instead:

What is money and finance at its heart? It’s a way to get large numbers of people to cooperate on the same goal. As Yuval Noah Harari writes in Sapiens, because our “natural” group size is fairly small (only about 150 or so), we need to invent shared fictions to get people in order to cooperate at larger and larger scales.

For a long time, religion was the major one. Then came the nation-state. Now finance seems to be the major way of controlling people and getting them to cooperate. With enough money you can get people to do just about anything, including have sex with you or kill one another. Money is permission. But usually it’s used for more benign purposes, such as getting thousands of people from all over the world to cooperate in a shared goal such as building electric cars or making and selling fizzy drinks.

Homo sapiens have no natural instincts for cooperating with large numbers of strangers. Humans evolved for millions of years living in small bands. Consequently, there are no instincts for mass social cooperation. To make up for that, humans have to rely on all kinds of imagined realities that regulate cooperation on such a huge scale. The human empires are based on shared common beliefs, social and legal norms that sustain them. The stability of the complex societies is not based on natural instinct or on personal acquaintance, but on shared imagined realities. Coursera: A Brief History of Humankind by Dr. Yuval Noah Harari

Both the corporation and the nation-state are shared legal fictions invented to bind large numbers of people together with imaginary ties to some sort of common purpose. Since its invention in the 1600’s, the corporate form has gained more and more power relative to the nation-state which created it.

Money is transferable debt (or credit). This is the “credit theory of money.” In “primitive” societies, many items are used to signify debts and obligations between various individuals, groups, and families. But once these obligations can be transferred among unrelated people, it becomes a type of money, even if the “exchange” is just by oral agreement (as on the island of Yap). “Money” may not even have corporeal form, but if it does, then it is usually standardized in some way (stone disks, shells, beads, coins, paper, etc.).

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 (Innes 1913, p.16)

…money is anything that denotes and extinguishes one’s debt/liability to another; it was not a product of market exchanges but rather a byproduct of social relations based on debt…the nature of money is a credit-debt relationship that can only be understood in institutional and social contexts…Therefore, money originated as a byproduct of social relations based on debt and realized its standard form through the need of the central authority, as opposed to private individuals, to establish a standard unit of account to measure debt obligations or production surplus.
Vincent Huang, On the Nature of Money, p. 6

In fact, there are numerous examples from history where the state has stopped issuing money or the banks have closed (such as Ireland in the 1960’s), and private credit circulated as money in the form of checks. Rather than barter, the establishment of new credit-clearing systems is the common response when currency systems seize up and go under at levels greater than a local village. Also, we see that throughout history the shrinking of the state has led to a curtailment of trade, not an expansion, suggesting that the markets, money and governments are symbiotic and not in opposition as we are led to believe.

Money emerges when one class is able to impose obligations on the rest of society. This is the contention of John F. Henry. This could be a redistributor chief, a warlord, a royal household or a divine priesthood. Henry contends that hydraulic engineers were the first such class to emerge in ancient Egypt. Carroll Quigley argues that ancient priests used their knowledge of reading the movements of the heavens to predict floods, and this allowed them to set themselves up as a ruling class. Others posit that the need to wage warfare led to warlords setting themselves up a ruling class. Religion probably played a key role; the root of the word hierarchy is “hiero-“ meaning sacred.

In every case, this class probably engaged in astronomy; managed collective labor in some way, whether in military or engineering endeavors; and collected goods for redistribution among the populace.

Money has no value in and of itself. It is not the thing that matters, but the ability of one section of the population to impose its standard on the majority, and the institutions through which that majority accepts the will of the minority. Money, then as a unit of account, represents the class relations that developed in Egypt (and elsewhere), and class relations are social relations.

To service the activities of this class, resources needed to be deployed to fund their efforts. To keep track of these resources, a unit of account was established by these authorities (priests and scribes).

As James C. Scott points out, writing was originally invented as a tool for social control of the masses by the ruling class, not as a form of cultural expression (which was oral). Written records first emerge to manage inputs and outputs. There is a fascinating argument that clay bullae envelopes were a form of double entry bookkeeping, with debits represented by tokens placed inside and credits represented by the markings on the outside.

Apart from its role in the invention of writing, accounting is significant for human civilization because it affects the way we see the world and shapes our beliefs. To take this early example, the invention of token accounting in Mesopotamia was important not only because it facilitated economic exchanges and generated writing, but, according to Mattessich, “because it encouraged people to see the world around them in terms of quantifiable outcomes. …
Jane Gleeson-White, Accounting: Our First Communications Technology

Along with writing, establishing common standards of measurement appears to have been a chief function of the ruling classes since their emergence. Ancient priests tracked cyclical movements of celestial bodies and divided the year into discrete units to determine the precise timing of the planting and harvest, as well as ritual gatherings and feasts. They encoded these heavenly movements and measurements into their monuments in order to depict a kind of cosmic order on earth–“as above so below.” The built calendrical monuments such as Gobeckli Tepe, Stonehenge and Nabta Playa. They began to measure distance in addition to time (to mark off plots of land) and weights and quantities (to measure offerings to the gods). This process happened independently in both the Old World and the New. Thus, the creation of a unit of measurement to establish equivalencies between disparate goods produced by households was a logical extension of the duties of the ruling class once people began to occupationally specialize.

…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. To put it simply, as soon as one witnesses the emergence of money, one observes the rise of class society and economic inequalities. Money, class society, and inequality came into being simultaneously, so it seems, mutually reinforcing the development of one another. Semenova and Wray, The Rise of Money and Class Society: The Contributions of John F. Henry (PDF) p.2

Which leads to the following conclusion:

The “unit of account” role appears to have been the first function of money to emerge (and not the “means of exchange” or “store of value” functions). Thousands of years before the first coins were minted, tributes and donations to temples were denominated in a standard unit of account, such as the shekel in Babylonia and the deben in Egypt. Babylonian scribes established money-prices for internal administrative purposes to track the crops, wool, barley, and other raw materials distributed to their dependent workforce, as well as to calculate the rents, debts and interest owed to the temples and palaces. These prices were then fixed to a certain weight of silver, allowing it to be used as a standard measure of value and means of payment. Initially, grain (the principal product of the Mesopotamian economy) was used, but its value fluctuates too widely from year-to-year, so silver replaced it.

Thus, the authorities can determine, for example, that 1 horse = 2 cows = 5 pigs = 10 bushels of grain = 1 ounce of silver. This was used to calculate inputs and outputs for the redistribution economies of the Bronze Age. It was also used in assessing fines and punishments by legal and religious authorities. Such compensation payments for transgressions kept societies stable in the face of increasing numbers of strangers living shoulder-to-shoulder. There are clues in our language: the word for “debt” also means “sin” or “transgression” in many languages, and the verb “to pay” also means “to appease” or “to pacify.”

…money as a unit of account precedes its roles as a medium of exchange and store of value… It thus follows that the physical manifestation of money (the “money things”) is not necessary since money as a debt relation needs not be physically tangible. This has been demonstrated as early as in Mesopotamia (3100BC) where crops and silver were used as standard units of account but not as a general medium of exchange. Exchanges simply took the form of credit and debit entries in clay tablets, similar to our electronic payment system today. Vincent Huang, On the Nature of Money p.6

Money (a standard unit of account, used to denote debts or assess value) predates coins by [millennia], and coins only ever comprised a small fraction of the money in daily use. Most ancient money was in the form of marks on clay tablets or notes on pieces of papyrus, just as it is today (computers replacing clay or papyrus)…Coins were for spot transactions, untrusted persons and ceremonial gifts (donatives). The real cost of making money was and is in establishing and maintaining the trust needed to support it.

The unit of account was typically based on what was most appropriate for giving to the gods. This is a point David Graeber makes. We are all “in debt” from the moment we are born–to the gods, to our ancestors, to our parents, and to our society. This “primordial debt” is discharged by sacrificing to the gods or gifts to temples (mediated by the religious authorities). Hence, that “universal debt” becomes the cornerstone of taxation, and hence the first monetary systems. For example, the Bible demands a ten-percent gift of one’s income to the temple (a tithe).

Every tithe of the land, whether of the seed of the land or of the fruit of the trees, is the Lord’s; it is holy to the Lord. If a man wishes to redeem some of his tithe, he shall add a fifth to it. And every tithe of herds and flocks, every tenth animal of all that pass under the herdsman’s staff, shall be holy to the Lord. One shall not differentiate between good or bad, neither shall he make a substitute for it; and if he does substitute for it, then both it and the substitute shall be holy; it shall not be redeemed.” (LEV. 27:30–34)

So, for example, in ancient Mesopotamia, the fact that silver is “captured sunlight,” gives it a divine quality which makes it highly desirable for gifts to the temple. Thus, the unit of account becomes equivalent to a certain weight of silver.

Silver was sort of a “goldilocks commodity” – there was enough of it for coinage, but no so much that it would be too easy for anyone to procure. It only comes from a single place–a mine down deep in the earth, most of which were owned by the authorizes. Things like apples and hides could not be useful, for example, because they were widely distributed. You had to use something whose issuance could be controlled by the state. By stamping the ruler’s mark on the coins, it gained value in exchange over and above its precious metal value. That is, they were tokens:

Coinage arose at approximately the end of the seventh century BCE in Lydia (in what is now western Turkey), where there was an abundant supply of electrum, a natural alloy of gold and silver. But coinage was first used in everyday life in the Greek city-states on the coast of Lydia. One plausible theory is that it arose out of the best possible way for the Lydian monarchy to use its abundant electrum to pay Greek mercenaries. Each piece of electrum had a different and undeterminable proportion of gold and silver (and so a different metallic value), but numerous pieces each with exactly the same value could be created by stamping them with a mark meaning ‘this is worth x’. And so from the very beginning of coinage its conventional value was different from (generally greater than) its metallic value. Radical Anthropology, Richard Seaford interview (PDF)

In ancient Greece, cattle were ranked and sacrificed to the gods. Thus, the value of things such as ships and armor were measured against cattle, even though no one ever used cattle to buy or sell anything. In ancient Ireland, slave girls (kumals) were the most valuable commodity, so items were evaluated against them. Eventually, the kumal became just an abstract unit of account for trading purposes, divorced from its original context.

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…Later, we read in Homer that the Greeks priced goods in terms of oxen, the animal that was reserved for sacrifices to the gods, ..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. Lady Credit (Magic, Maths and Money)

The Unit of Account and the Means of Exchange need not be the same. In fact, for most of history they weren’t! In the Middle Ages, prices were denominated and taxes assessed in a common unit of account (e.g. livres tournois), but hundreds of different coins churned out by dozens of mints were used to pay them (such as the Piece of Eight or Louis d’Or).

In many places, there was often no coin equivalent to the unit of account. Coins were exclusively minted by authorities. The coins didn’t have a fixed value, rather their exchange value fluctuated and was dictated by government fiat. However, their bullion value fluctuated according to supply and demand in the marketplace. Imbalances between bullion and exchange values led to surfeits and shortages of precious metals, with corresponding price swings (e.g. the “Price Revolution”). This led to efforts by authorities to restrict the movements of precious metals (bullionism).

Similarly, bills of exchange were denominated in an abstract unit of account (écu de marc), which did not correspond to any particular sovereign currency in circulation. The arbitrage between this abstract unit of account and the currencies of the time is how bankers made their money when usury was still illegal.

An interesting example of this was seen in Brazil in the 1990’s. The government created a totally new unit of account, the “Unit of Real Value” (URV) which would hold its value relative to the currency (the cruzeiro), which was subject to hyperinflation. Prices, taxes and wages would be denominated in the URV, which would remain constant, while the amount of cruzeiros needed to equal 1 URV would vary. Eventually, once prices stabilized, the country would introduce a totally new currency equivalent to the URV (the real).: How Fake Money Saved Brazil (NPR)

Items that can be accepted in payment as fines or taxes to authorities acquire value in private transactions. As MMT economists point out, the dollar is given value by the ability to pay ones taxes with it, that is, one is able to discharge one’s personal obligations to the state with dollars (and only dollars). Thus, prices are typically denominated in dollars as well, and producers accept dollars in exchange for goods and services.

While private money can be created and issued, the ability to pay one’s taxes with dollars means there is always a demand for them. Also, since money is transferable credit, the government’s credit is typically much more reliable than that of private individuals. This is often referred to as the “state theory of money,” of “chartalism”:

[While] private individuals may have different units of accounts (cattle, watermelon, etc.)…It is unlikely that any individual could have sufficient power to induce others to hold its liabilities as a standard unit of account…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”. 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.

Money’s value comes from faith in the issuing government’s credit. The loss of faith in the currency had much more to do with the stability of the issuing government rather than the amount of precious metal contained in the coin. Numismatists can find no solid correlation between prices and the precious metal content of coins over millennia. Nor can they find a consistent standard of how much specie a coin “should” have.

In the case of paper money, the paper itself is not valuable; it is the enforceable claim written on it that’s valuable. Originally this promised to pay the bearer in coin. Then it evolved into banknotes–sort of a “paper coin”–a signifier of government debt which did not pay interest.

The above leads to the following conclusion:

Money led to markets, not vice-versa. Once the concepts of money and prices are firmly established by central authorities, only then can decentralized exchanges can take place in markets. That these standards were initially set by authorities makes far more sense (and is historically better supported), than the idea that money emerged spontaneously by private individuals to reduce search costs without recourse to any centralized authority through innumerable acts of barter.

Once the state has created the unit of account and named what can be delivered to fulfill obligations to the state, it has generated the necessary pre-conditions for development of markets. The evidence suggests that early authorities set prices for each of the most important products and services. Once prices in money were established, it was a short technical leap to creation of markets. This stands orthodoxy on its head by reversing the order: first money and prices, then markets and money-things (rather than barter-based markets and relative prices, and then numeraire money and nominal prices). The Credit Money and State Money Approaches by L. Randall Wray, p.9

Religion played a key role in the establishment of money and markets from the very beginning. This makes sense, since religion was the primary unifying and coordinating “story” for ancient societies. The source of the word religion literally means “to bind together.” We saw above the Biblical instructions on tithing.

Temples appear to have been the first banks and the first treasuries. Sumerian temples stored precious metals, made loans, rented land, coordinated labor, established prices for key goods, and determined fees and fines. The obolos, the lowest denomination Greek coin, derived its name from the iron spits (obelos) through which sacrificial roast meat was evenly distributed to the members of the tribe. The drachma derives its name from obeliskon drachmai, a ‘handful’ of spits. This communal ritual is thought to have influenced Greek ideas of decentralized exchange and universal value, in contrast to the centrally-administered economies of the Near East. The iron spits acquired value in interpersonal exchange. Later, Greek temples distributed stndardized lumps of metal, stamped with the city’s emblem, to all adult male members of the polis which allowed for the unique social order to be maintained.

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.Some of the vocabulary of early coinage comes from animal sacrifice. For instance, the word ‘obol’, used of a coin, comes from the word for a spit. In the communal egalitarian distribution meat was distributed on iron spits, which were of standard size as well as being portable and durable, i.e. they could be used as money (in a limited way). With the use of more precious metal in exchange, ‘obol’ was transferred to a piece that was of roughly equal value and so of much smaller size (and so even more convenient). Radical Anthropology, Richard Seaford interview (PDF)

Markets also appear to have emerged around religious buildings. Many ancient exchanges were near temples. The great fairs of Europe in places like Champagne and Lyon took place near churches and cathedrals under the watchful eye of the all-seeing God. Since so much of trade relies on trust and belief (credit comes from credere = “to believe”), it is logical that religion would play a central role:

We tend nowadays to think of religion as the non-material activity of mankind. Did not Jesus expel the moneychangers from the Temple? Does not Islam forbid the charging of interest on loans? Did not a similar Christian prohibition of usury hold back mediaeval Europe’s economic development for centuries? Yet when Jesus took his action against the money-changers he must have been reversing the tradition of several millennia. The temples were the source of commercial law and practice. They had developed writing for the keeping of their accounts. They imposed the moral code which made promises inviolable. In Mesopotamia temples employed the poor, the widows and the orphans in factories which produced textiles to be traded abroad for the commodities the region lacked, including silver, copper, tin and lead. They were, it seems, the major business centres. (Innes p. 136)

Some theorists posit that as exchanges became more common and societies became more affluent, they invented “big gods” that could see everything and demanded that we behave a certain way (honest, truthful, etc.). These “Big gods” could transcend the limits of the old tribal gods that were based on shared ancestry and culture. All you had to do was profess belief! Wealth may have driven the rise of today’s religions (Science)

Trade Credit (not gold or silver) was the primordial form of commercial money. Rather than barter or coins, credit lines were probably what was used for exchanges in the days before currency became commonplace. In “primitive” cultures, reciprocity performs this role, where one’s gifts to others circulate back to the giver in time without a formal accounting of who owes what to whom. This helps maintain social relationships in small, close-knit societies.

As societies scale up, reciprocity is replaced with more formal agreements, often denominated in the standard unit of account. Even in modern times, credit is what is used to purchase inputs upfront, rather than just repeated spot transactions (as any businessperson or farmer can tell you).

The word credit is derived, very appropriately, from the Latin word for ‘to trust’. …the division of labour, from the very first moment it was applied, required the creation of a credit system of some kind. It was absolutely necessary to be able to trust one’s fellow workers’ promises to reward one appropriately at some future moment for one’s own products or services. It would have helped to have an enforcing authority, and that makes it all the more likely that trade was conducted in a regulated way, not by free individual option…it is obvious that a completely free market economy has rarely, if indeed ever, existed. We all rely on the existence of an enforcement system. We rely on the rule of law.

Trade credit (bills of exchange) formed much of the “money” of the Middle Ages and facilitated the commercial expansion in the absence of adequate gold and silver supplies. Huge amounts were transferred using double-entry bookkeeping (the “Venetian Method”) without any cash changing hands. Bankers would settle accounts at the conto which concluded the fairs. In fact, this may have been the original purpose of the fairs, with retail trade being subsidiary. Eventually, as commerce became more and more important after 1600, these economic activities were located in permanent banks and bourses established by the major port cities in order to facilitate the activities of merchants and the expansion of long-distance trade.

Trade credit is the essential foundation of the whole economic system, and the essential financial problem of economic development is to monetise trade credit, to turn it into an instrument for transferring value, for measuring value and for storing value. Wray. 121

Tally sticks, which keep track of debts and credits, may be the earliest form of money to emerge, even before coins or clay tablets. They were made of organic materials such as wood and bone. Because metal coins are what survive, tally sticks are sadly omitted in standard accounts of money: What tally sticks tell us about how money works (BBC)

Debt servitude appears to be the earliest form of mass slavery. While slaves were often captured prisoners of war in primitive cultures, their numbers were necessarily limited because having too many hostile foreigners living among your society and doing its essential chores would be dangerous (if not outright suicidal). That’s why in the ancient Near East, they were mainly women and children employed in domestic labor (cooking, cleaning, weaving, child care, etc.). Rather than slave labor, their massive walls and monuments were built by voluntary, mainly corvée labor, which served as a sort of social glue and proxy form of taxation in the absence of money.

But once debt becomes commonplace, large numbers of one’s own people could be compelled to labor for others in order to service their debts. This, as David Graeber points out, would be seen as just and fair, and thus the debtors would be less inclined to rebel. In fact, this may have been how the very first classes formed in ancient societies–debtors and creditors–rather than through military conquest or political decisions. Debt and chattel slavery existed side-by-side in most ancient societies. Even in colonial America, there were more indentured servants than African slaves.

Early rulers realized they needed to occasionally release the people from their debt obligations to public institutions (temples and palaces), otherwise they would lose the support of the people. They also needed enough free men to staff the armed forces, as debt-serfs could not afford to train or equip themselves. Debt serfs could also run away. Some argue that the debt serfs of ancient Mesopotamia, the Habiru, are the ancestors of the Jews (Hebrews).

And ye shall hallow the fiftieth year, and proclaim liberty throughout the land unto all the inhabitants thereof; it shall be a jubilee unto you; and ye shall return every man unto his possession, and ye shall return every man unto his family.
— Leviticus 25:10

Later, when professional soldiers replaced citizen armies, debt forgiveness was abolished and debts were held sacrosanct. This gave rise to a large class of hereditary debt serfs.

Only later on do prisoners of war become the major source of slaves in the Classical world. Some of the first markets to emerge were slave markets where prisoners of war were bought and sold. The Roman war machine brought in tens of thousands of slaves, diving their costs down and displacing free labor in agriculture. This allowed wealth to concentrate to a degree that undermined social cohesion. This may have been an underlying cause of Rome’s decline and fall.

All the major innovations in money and finance seem to have been created either to manage long-distance trade or to fund wars. The need to raise funds for war has seemingly driven all financial innovations since Medieval times. The “national debt” began when Venice needed to fund a war with Byzantium, and so they borrowed from their wealthy merchant classes. This borrowing eventually became done on a permanent basis. All the creditors’ obligations were eventually consolidated in one lump sum, revenue streams were dedicated to them, and payments were managed by a state-run bank. Thus the “national debt” was born. Borrowing was done by various municipalities in Northern Europe, but none of these were national debts. The Dutch seem to be the first country to leverage those techniques effectively on a national scale to fight for their independence from Spain.

Going even farther back, it appears that coinage was first invented to pay troops. Coins were distributed to soldiers as payment. Then a tax was then imposed on the conquered populations. The way to pay the tax was to acquire signifiers of the state’s debt in the form of coins by selling goods and services to the occupiers, thus redeeming signifiers of the state’s debt. There is another clue in the language here: the word soldier comes from the soldius, a gold coin used to pay troops in the late Roman Empire.

There is firm evidence to support money being a state creation. Money appears in Europe at the time the Greek city states became reliant on mercenary armies. Cities paid soldiers in gold to conquer some community, the soldiers then spent the gold in the colonised lands and the state recovered the gold by taxing the colonised merchants and innkeepers using the tokens that the soldiers had paid for food and lodgings. Greek and Roman citizens never paid tax, only the conquered paid for the privilege and were bound to the conqueror by having to exchange their resources for the Imperial currency. The model would survive and drive colonialism in the modern age, in the 1920s the British taxed Kenya at a rate of about 75% of wages, forcing the colonised to grow cash-crops to be consumed by the colonisers. Lady Credit (Magic, Maths and Money)

Financial innovations spread through the need to wage wars. If a system gave one nation a competitive advantage, it had to be adopted by other nations in order to compete. It was a sort of a Darwinian arms race: if a financial innovation allows a country to be more effective in trade or warfare, it will dominate countries that are unable to deploy their resources as effectively. The others will either adapt the innovation on their own or be subsumed into the empire (and thus gain the innovation that way).This is probably why financial techniques spread so rapidly in Western Europe as compared with China and the Middle East, who relied upon conscription and command-and-control systems rather than mercenaries & borrowing to fight wars.

In “patrimonial states”, where the state was an extension of the ruling family’s household, loans were essentially personal loans to the monarch that could be refuted at any time. Only when parliamentary systems come into play does state borrowing become a reliable means for governments to raise money. Thus merchant republics led the way, first in Italy, and then in Holland.

John Law’s financial innovations were an attempt to consolidate and manage the massive debts Louis 14th had run up with his wars and extravagances. Similarly, the debts generated by King William’s Glorious Revolution and subsequent wars led to the creation of the Bank of England, a joint-stock company designed to loan to the government and manage the state’s debt. This is the ancestor of today’s central banks.

Borrowing marks a time when citizens become not only debtors of the state, but creditors as well, profoundly altering the social relations between the state and its citizens. There effects were distributional–from the public sector at-large to the wealthy citizens and institutions who held the bonds. Over time, this group became more and more influential. Borrowing allows nations to bring resources forward in time. It also allows borrowing from a wider range of people and institutions than just banks.

Warfare has also been the reason for abandoning precious metal standards. The need to issue adequate money to fight wars has led to the suspension of convertibility of money and the rise of fiat currencies. Every time any sort of fixed standard has been tried, warfare undermines it.

Trading Empires are the major source for financial innovations. It’s no coincidence that major financial innovations occur in thassalocracies reliant upon long-distance trade. First the Italian city-states such as Venice and Genoa, then the Spanish and Portuguese empires, then the United Provinces (Dutch Republics), and finally the English Whig merchants who invented the modern monetary system.

Why were trading empires such a fertile source for innovations such as insurance and limited-liability corporations? Because trading voyages require enormous sums of investment upfront and the outcome is highly uncertain.

Consider the enormous length of time it took these wind-powered trading voyages. It took 12-18 months to make it to the Indies, and then you had to procure the cargo. That meant it could be 3-4 years before a profit is was realized. That meant that trading voyages required a very high level of capitalization; investors did not get an immediate return on their funding. They also required large amounts of infrastructure: ships were expensive, trading forts were expensive, soldiers were expensive, and so large amounts of resources had to be brought together. This was beyond the capacity of any single entity, so resources needed to be pooled. In addition, unlike one-off trading voyages, trade with the Indies required a permanent infrastructure rather than resources to fund a single voyage. You needed a trade with long-term continuity to realize a profit; single-purpose funding would not do.

It is these requirements that led to financial innovations, from medieval Italian commenda (a temporary limited partnership) to the limited-liability joint-stock corporation, where ownership is negotiable and is wholly separated from direct management.

Money played a huge role in the evolution of Western philosophy and mathematics. European mathematics achieved a high degree of sophistication due to the need to deal with multiple currencies at the same time as the Church’s prohibition on usury. The earliest mathematical treatises were all concerned with practical matters in trade and jurisprudence, not abstract science. Rather than sophisticated mathematics being developed to explain physical phenomena, it was first developed to manage trade risks and calculate transaction costs. Later on, these math techniques began to be applied to the natural world. Often, early scientists began their mathematical training in commerce. Newton and Copernicus both wrote treatises on Money. After 1600 the commercial and scientific revolutions both gained steam.

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…” It seems that Fibonacci did not just influence medieval merchants, those scholars keeping an eye on merchant’s dubious dealings, also, became obsessed with mathematics… Who was the first quant? (Magic, Maths and Money)

Going even further back in time, many of the distinctive features of ancient Greek society (and hence Western civilization) such as science, philosophy and democracy, may have their origins in the use of money and trade in the Greek world:

The first ever pervasive monetisation in history (of the Greek polis) made possible for the first time various features of Greek culture that have in asense persisted throughout monetised society up to the present. I confine myself here to two examples. One is the idea that the abstract is more real than the concrete, which was a basis of much ancient philosophy. Another is the absolute isolation of the individual: this is especially manifest in Greek tragedy, where, for instance, Oedipus is entirely alienated from the gods and from his closest kin. Both these features are familiar to us, but do not occur in pre-monetary society. Radical Anthropology, Richard Seaford interview (PDF)

Loans create deposits, not vice-versa. This is called the “endogenous theory of money.” It claims that the amount of money is constrained only by the number of willing borrowers in the economy, and not the amount of reserves held by the central bank.

In short, the endogenous money approach reverses two causalities proposed by orthodoxy: 1) reserve creates deposits; and 2) deposits create loan. On the contrary, the endogenous money holds that loans create deposits that then create the need for the central bank to accommodate with reserve. In other words, banks first make loans, and then seek reserves to meet central bank regulations…

…Suppose Henry decides to hire Joshua to build a condo. In theory, Henry could issue his own money/IOU to Joshua in exchange for Joshua’s labor time. The problem is, Joshua would probably not accept Henry’s own liability (Henry dollar) because Henry cannot sufficiently indebt the rest of the population to create a demand for his own IOU. Instead, Joshua agrees to exchange his labor only for the liability of the state (U.S. dollars). Therefore, Henry needs somehow to convert his own IOU to the state IOU in order to get Joshua’s labor. Now Henry walks into a bank and asks for a loan, the loan officer does not check the bank’s reserves at the central bank and comes back to tell Henry, “sorry, we are out of money!” If the bank thinks Henry’s project is good, it creates a Henry loan simply by crediting the Henry’s deposit account. To meet the reserve requirement, the bank then borrows reserves from other banks that have excess reserves or directly from the central bank. What distinguishes the bank’s IOUs and Henry’s IOUs is that the former is directly convertible to the central bank/state IOUs while the latter is not. Vincent Huang, On the Nature of Money

The government is not revenue constrained. The above leads to the conclusion that in order to collect taxes, the government must first issue the money-thing it wishes to collect. This leads to the conclusion that rather than taxes funding spending, spending funds taxes! If the government (public sector) collects more in taxes than it spends, it reduces the money supply and causes the private sector to go into deficit in the equivalent amount (the “sectoral balances” approach).

A sovereign issuer of currency can never “run out” of money, nor can it go “bankrupt.” It can, however, be short of key resources, productive capacity, willing borrowers, or faith in the governing institutions. In such cases, excess money in the economy could lead to inflation, which is the real constraint on issuing money. Taxation serves as a way of “un-printing” money to bring inflation under control.

Although the finer points of MMT can get quite involved, the most basic takeaway is very simple. For societies with currency-issuing governments:

If something can be done, it is “affordable”.

If we have access to the raw materials, the labor power, the skills, the equipment and the facilities needed to produce something, then we can afford to produce it. The cost of doing so is not financial. The cost is a real cost: the exertion of human effort and know-how, the wear and tear on facilities and equipment, and the depletion of natural resources.

On one level, it is bizarre that this basic takeaway of MMT is not already mainstream. If the idea is heterodox, it is only because we are currently living in a very topsy-turvy world, in which up is presented to us as down, black as white, with everything reversed. In reality, it should be much harder to believe the opposite: that what we are capable of is impossible. If it’s Doable, it’s Affordable (hetereconomist)

What constitutes “money” is not so simple. Many things can be used as money. Stocks can be thought of a kind of money (since they are an IOU). Equity can be used as money. Items with intrinsic value (or perceived intrinsic value) can be used as money. Gift cards are a type of money. So are airline points. No doubt John Law’s theories derived in part from his observations at the gambling tables of Europe. There he observed that all sorts of things could serve as money in a pinch: coins, stocks, bonds, jewelry, certificates of deposit, deeds to land, checks, even hastily scribbled IOU notes. Anything that is accepted in payment, whether gold, stocks, bonds, cash, or IOUs, can be used as money, he concluded.

As MMT theorists say, anyone can create money, the challenge is getting it accepted. As we saw, private monies circulated alongside state money and borrowing before the two were combined in England, where bills of exchange became enforceable by contract law outside of merchant courts. Because the state’s liabilities and credit are generally the most reliable (except in cases of state failure), its money generally becomes the ‘money thing’ at the top of the pyramid—the ultimate means of settlement for various debts.

Recall that money represents a promise/IOU and that these promises can be created by anyone. The ‘secret’ to turning these promises into money is getting other individuals or institutions to accept them. Therefore, the ‘hierarchy of money’ can be thought of as a multi-tiered pyramid where the tiers represent promises with differing degrees of acceptability. At the apex is the most acceptable or ‘ultimate’ promise…The ‘simplified hierarchy’ can be envisioned as a four-tiered pyramid, with the debts of households, firms, banks and the state each representing a single tier…All money in the hierarchy represents an existing relationship between a creditor and a debtor, but the more generally acceptable debts will be situated higher within the hierarchy…as the decisive money of the system, both the state’s promises and banks’ promises rank high among the monies of the hierarchy. Although bank money is part of the ‘decisive’ money of the system, its acceptance at state pay-offices really requires its conversion into state money (i.e., bank reserves). That is, bank money is converted to bank reserves so that (ultimately) the state actually accepts only its own liabilities in payment to itself. The debt of the state, which is required in payment of taxes and is backed by its power to make and enforce laws, is the most acceptable money in the pyramid and, therefore, occupies the first tier. Stephanie Bell, The role of the state and the hierarchy of money, p. 10-12

The test of ‘moneyness’ depends on the satisfaction of both of two conditions. First, the claim or credit is denominated in an abstract money of account. Monetary space is a sovereign space in which economic transactions (debts and prices) are denominated in a money of account. Second, the degree of moneyness is determined by the position of the claim or credit in the hierarchy of acceptability. Money is that which constitutes the means of final payment throughout the entire space defined by the money of account. Geoffrey Ingham, The Emergence of Capitalist Credit Money p. 214

In our society, money has multiple uses: means of exchange, store of value, unit of account, and settlement of debts. That these things are all embodied in a single item we call “money” is not a natural phenomenon but a feature of capitalist credit money which allows this system to function as it does. That invention took a long time and it’s probably not over yet.

The Origin of Money 10 – The Birth of Modern Finance

 Money Becomes Metal

It is one of the great ironies of history that at the same time the modern financial system and banking was being invented, Enlightenment thinkers discarded thousands of years of monetary history and declared money to be based on the intrinsic value of precious metals alone.

Events like the Kipper and Wipperzeit had convinced scholars in Europe that a stable value of coins depended on issuing coins with constant and fixed amounts of precious metal. This, they reasoned, would prevent the rapid hyperinflation and deflation that were wreaking havoc on monetary systems throughout Europe.

…This monetary terrorism had its roots in the economic problems of the late 16th century and lasted long enough to merge into the general crisis of the 1620s caused by the outbreak of the Thirty Years’ War, which killed roughly 20 percent of the population of Germany. While it lasted, the madness infected large swaths of German-speaking Europe, from the Swiss Alps to the Baltic coast, and it resulted in some surreal scenes: Bishops took over nunneries and turned them into makeshift mints, the better to pump out debased coinage; princes indulged in the tit-for-tat unleashing of hordes of crooked money-changers, who crossed into neighboring territories equipped with mobile bureaux de change, bags full of dodgy money, and a roving commission to seek out gullible peasants who would swap their good money for bad. By the time it stuttered to a halt, the kipper- und wipperzeit had undermined economies as far apart as Britain and Muscovy, and—just as in 1923—it was possible to tell how badly things were going from the sight of children playing in the streets with piles of worthless currency.

“Kipper und Wipper”: Rogue Traders, Rogue Princes, Rogue Bishops and the German Financial Meltdown of 1621-23 (Smithsonian Magazine)

In England, this concept was most forcibly argued by John Locke. A pound was a specific amount of silver, he declared, and should be held inviolable.

The reason he did this was because he wanted to argue that property rights were natural and absolute phenomena, and did not rest on any sort of monarchial authority or social contract. In line with this reasoning, he needed money to also be a “natural thing” not anchored in social relations and certainly not under the control of a sovereign.

At this time, England’s coinage was in rough shape. Much of the coinage had remained unchanged in a hundred years and clipped coins circulated alongside newer issues. People tended to save the good coins and spend the clipped ones, causing a loss of faith in the currency.

It was increasingly clear that the Mint had to offer recoinage …But at what rate? Mercantilists, who tended to be inflationist, clamoured for debasement, that is, recoinage at the lighter weight, devaluating silver coin and increasing the supply of money. In the meanwhile, the monetary problem was aggravated by a burst of bank credit inflation created by the new Bank of England, founded in 1694 to inflate the money supply and finance the government’s deficit. As the coinage problem came to a head in that same year, William Lowndes (1652–1724), secretary of the treasury and the government’s main monetary expert, issued a “Report on the Amendment of Silver Coin” in 1695, calling for accepting the extant debasement and for officially debasing the coinage by 25 percent, lightening the currency name by a 25 percent lower weight of silver.

[John] Locke had denounced debasement as deceitful and illusionist: what determined the real value of a coin, he declared, was the amount of silver in the coin, and not the name granted to it by the authorities. Debasement, Locke warned…is illusory and inflationist: if coins, for example, are devalued by one-twentieth, “when men go to market to buy any other commodities with their new, but lighter money, they will find 20s of their new money will buy no more than 19 would before.” Debasement merely dilutes the real value, the purchasing power, of each currency unit.

Threatened by the Lowndes report, Locke’s patron, John Somers, who had been made Lord Keeper of the Great Seal in a new Whig ministry in 1694, asked Locke to rebut Lowndes’s position before the Privy Council. Locke published his rebuttal later in the year 1695…Locke superbly put his finger on the supposed function of the Mint: to maintain the currency as purely a definition, or standard of weight of silver; any debasement, any change of standards, would be as arbitrary, fraudulent, and unjust as the government’s changing the definition of a foot or a yard. Locke put it dramatically: “one may as rationally hope to lengthen a foot by dividing it into fifteen parts instead of twelve, and calling them inches.”

…Locke’s view triumphed, and the recoinage was decided and carried out in 1696 on Lockean lines: the integrity of the weight of the silver denomination of currency was preserved. In the same year, Locke became the dominant commissioner of the newly constituted board of trade. Locke was appointed by his champion Sir John Somers, who had become chief minister from 1697 to 1700. When the Somers regime fell in 1700, Locke was ousted from the board of trade, to retire until his death four years later. The Lockean recoinage was assisted by Locke’s old friend, the great physicist Sir Isaac Newton (1642–1727) who, while still a professor of mathematics at Cambridge from 1669 on, also became warden of the Mint in 1696, and rose to master of the Mint three years later, continuing in that post until his death in 1727. Newton agreed with Locke’s hard-money views of recoinage.

John Locke vs. the Mercantilists and Inflationists (Mises Institute)

Because the price paid by the Royal Mint for gold and silver was fixed and no longer allowed to adjust freely based on supply and demand, the effect this had was for gold to be shipped to England, where the Mint paid a premium for it, and silver to leave the country for continental Europe, where it was worth more. This led to a shortage of silver coins in England, causing economic contraction.

…the Bank of England’s formation also coincided with the reconceptualization of money as simply precious metal in another form—a fable told most prominently by John Locke. In earlier centuries, everyone accepted that kings could reduce the metal content of coins and, indeed, there were good economic reasons to do so. Devaluing coins (raising the nominal price of silver) increased the money supply, a constant concern in the medieval and early modern periods, while revaluing coins (keeping the nominal price of silver but calling in all old coins to be reminted) imposed deflation on the economy. But Locke was the most prominent spokesperson for hard money—maintaining the metal content of coins inviolate. The theory was that money was simply metal by another name, since each could be converted into the other at a constant rate.

The practice, however, was that the vast majority of money—Bank of England notes, bills of exchange issued by London banks, and bank notes issued by country banks—could only function as fiat money. This had to be the case because the very policy of a constant mint price had the effect of driving silver out of coin form, vacuuming up the coin supply. If people actually wanted to convert their paper money into silver or gold, a financial crisis could be prevented only through a debt-financed expansion of the money supply by the Bank of England—or by simply suspending convertibility, as England did in the 1790s.

… at the same time that the English political system invented the modern monetary system, liberal theorists like Locke obscured it behind a simplistic fetishization of gold. The fable that money was simply transmutated gold went hand in hand with the fable that the economy was simply a neutral market populated by households and firms seeking material gain. This primacy of the economic over the political—the idea that government policy should simply set the conditions for the operation of private interests—is, of course, one of the central pillars of the capitalist ethos. Among other things, it justified the practice of allowing private banks to make profits by selling liquidity to individuals (that’s what happens when you deposit money at a low or zero interest rate)—a privilege that once belonged to sovereign governments.

Mysteries of Money (The Baseline Scenario)

The Great Monetary Settlement

By the late 1600’s two major forms of currency circulated: the government money issued in coin form, and the capitalist credit money issued by private bankers. Both were forms of transferable debt, but were used in very different spheres of exchange:

By the late seventeenth century, the two forms of money were available but unevenly spread across Europe – private credit and public metallic coinage. However, they remained structurally distinct and their respective producers – that is, states and capitalist traders – remained in conflict…England was best placed…to effect any integration of the different interests that were tied to the different moneys…[1]

Unlike its cousins on the continent, England’s finances were fairly stable, and its debt manageable. That is until 1672, when the Stop of the Exchequer was declared by King James II. This was essentially a default by England on its debts. The crown refuted the tallies owed to them, causing tally sticks to fall into disrepute and clearing the way for paper instruments to replace them as signifiers of state debt:

Charles II’s debt default in 1672 was critically important in hastening the adoption of public banking as a means of state finance and credit money creation. Since the fourteenth century, English kings had borrowed, on a small scale, against future tax revenues. The tally stick receipts for these loans achieved a limited degree of liquidity ‘which effectively increased the money supply beyond the limits of minting’.

However, compared with state borrowing in the Italian and Dutch republics, English kings, like all monarchs, were disadvantaged by the very despotic power of their sovereignty. Potential creditors were deterred by the monarch’s immunity from legal action for default and their successors’ insistence that they could not be held liable for any debts that a dynasty might have accumulated. [2]

The rising Whig merchant class wanted a monarch who would put the country’s finances on a more sound basis. Since they were overwhelmingly Protestant, they decided that putting a Protestant on the throne in place of the Catholic James Stuart would be the perfect excuse for overthrowing the monarchy. It was, in essence, a coup d’etat by the banking and merchant classes.

With an impending war with the Dutch, an annual Crown income of less than £2 million, and accumulated debts of over £1.3 million, Charles II defaulted on repayment to the tally holders in the Exchequer Stop of 1672. This event…culminated in the invitation to William of Orange to invade and claim the throne…[3]

An alliance of the Whigs and Tories got the husband of James’ sister Mary, the Dutch prince William of Orange, for the job. William and Mary took the throne in the last major invasion of England. It was a mostly bloodless revolution, but not entirely peaceful, and all sorts of rebellions would roil parts of the British Isles for decades (the Jacobite risings), mainly in the outer regions of the empire (e.g. Scotland, Ireland, etc.)

The bloodless coup would have profound effects for the history of the financial system. William brought “Dutch finance” across the channel to England, where it would be used to reorganize the state’s finances.

Because the revolution had been backed and funded by Whig parliamentarians, they called the shots. It was the end of England’s absolute monarchy and the beginning of the “king-in-parliament,” an unusual fusion of monarchial power and public accountability. They made William sign a “Bill of Rights” in 1689 and one of the things it specified was that the ability to raise funds would be strictly delegated to parliament. In other words, no more arbitrary taxes or defaults.

William subsequently dragged England into several wars on the continent:

Roey Sweet: “So the reason why the national debt is rising at this time, and by 1714 it’s about 48 million [pounds], is that Britain’s been involved in two long and expensive wars. Following the Glorious Revolution, William of Orange brings Britain into the Nine Years War against Louis the 14th, and then from 1701 Britain’s been involved in the War of the Spanish Succession which is a battle essentially to try and prevent the Bourbons from gaining ascendancy in Europe by uniting the Spanish and the French empires. So Britain has been fighting this, and it’s seen as a Whig war…and there’s a suspicion that it’s being prolonged purely for Whig interests. And so [Chancellor of the Exchequer Robert] Harley wants to try and end the war and also to get the debt into manageable proportions.” [4]

William needed to borrow to fight his wars, and his credit score was awful. His debt load from conducting the Glorious Revolution was already very high, meaning that no one wanted to loan to him. The interest rates he was looking at were in the neighborhood of modern-day credit cards—18-20 percent.

The prevention of any recurrence of default was a paramount consideration which parliament put to the new Dutch king in the constitutional settlement of 1689. In the first place, William was intentionally provided with insufficient revenues for normal expenditure and, consequently, was forced to accept dependence on parliament for additional funds. Second with William’s approval, and the expertise of his Dutch financial advisors, the government adopted long-term borrowing in the form of annuities (Tontines). These were funded by setting aside specific tax revenues for the interest payments. [5]

England managed its debt in a variety of ways, many of them similar to the methods used on the continent. But one new technique was coming to bear. By this time, in order to exploit the resources of the New Word and conduct trading operations where long-term investments were required, Europeans had invented the joint-stock company—a company where ownership was diversified among a group of unrelated individuals and ownership could be bought and sold at will.

The legal ingredients that comprise a corporation came together in a form we would recognise in England, on New Year’s Eve, in 1600. Back then, creating a corporation didn’t simply involve filing in some routine forms – you needed a royal charter. And you couldn’t incorporate with the general aim of doing business and making profits – a corporation’s charter specifically said what it was allowed to do, and often also stipulated that nobody else was allowed to do it. The legal body created that New Year’s Eve was the Honourable East India Company, charged with handling all of England’s shipping trade east of the Cape of Good Hope. [6]

Joint-stock companies had been originally formed to undertake long-distance trading expeditions and to exploit the resources of the New World. Now they would be pressed into service to reorganize and manage the nation’s debt. The idea was to use such  companies to manage the state’s finances. They would be chartered for this purpose:

Melvin Bragg: How was the government handling its debt before the South Sea Company was set up?

Anne Murphy: The government is handling its debt in three ways.

It’s created lottery schemes which are very popular, and they’re attractive to a broad spectrum of individuals. So it can raise money that way.

It sells annuities which again are very popular, but they’re very costly, and they’re quite inflexible.

And the government is also using the moneyed companies to support its debt raising activities. The first one of those is called the Bank of England which is set up in 1694. The Bank of England does two things: it lends to government, and also it’s one of the first companies that does the debt for equity swaps that the South Sea Company is to become so famous for, later.


Melvin Bragg: Was that seen at the time as something that was okay; that a private company taking over part of a national debt was fine?

Anne Murphy: It’s actually just a change of lender, really. What’s being switched here is the many, many lenders–the individuals who bought annuities or who bought lottery tickets from the government–for one lender: the Bank of England or the South Sea Company. So it’s not that a private company is in essence taking over the debt. What it’s doing is just consolidating the debt in one set of hands rather than many sets of hands.

And this helps because it makes administration easier and it brings costs down, and that’s what the government wants. So it’s a desirable thing to do. [7]

The modern money system began when governments started using joint-stock corporations to manage their finances in exchange for “special” privileges–specifically the privilege of extending credit denominated in the government’s official currency. The government, in essence, became a debtor to these private corporations, which are the ancestors of our modern banks. The debt was then monetized and circulates to this day as money. The Bank of England, funded by the subscribers from the merchant classes, bought the state’s debt and used it as backing for their banking operations. The merchant bankers, in essence, kidnapped the state’s money for their own uses.

From 1694 to 1697, the directors of the new Bank of England laid the true foundations for the financial revolution by lending the government £1.2 million, at the then attractive rate of 8 per cent, in order to secure their monopoly on joint-stock banking, raising the funds by selling Bank stock. Though redeemable on one year’s notice from 1706, the loan was in fact perpetual. In 1698, the New East India Company made a similar 8 per cent perpetual loan to secure its charter, as did the newly merged United East India Company in 1709.

From 1704 to 1710, the exchequer also issued irredeemable annuities…and…a series of highly popular lottery loans. Meanwhile, in 1711, the newly formed South Sea Company bought up…short-term floating debts and converted them into so-called perpetual stock with a 5 per cent return; and in 1720, it converted another £13.99 million in other loans and annuities into 5 per cent perpetual stock, a venture that led to its collapse in 1721 in the famous ‘Bubble’. Thereafter, while redeeming £6.5 million in South Sea stock and annuities, the Bank of England, on behalf of the government, issued several series of redeemable ‘stock’, many containing the popular lottery provisions, with generally lower rates of interest…

The Bank of England wasn’t the world’s oldest bank, nor even was it the first state bank. But what made it unique was the idea of the merchant classes loaning to the government, and in return gaining a measure of control over the nation’s finances. The multiple and conflicting systems of money and borrowing would be fused together for the first time in one supranational institution. Felix Martin calls this “The Great Monetary Settlement:”

The Bank’s primary role would … be to put the sovereign’s credit and finances on a surer footing. Indeed, its design, governance, and management were to be delegated to the mercantile classes precisely in order to ensure confidence in its operations and credit control. But in return the sovereign was to grant important privileges. Above all, the Bank was to enjoy the right to issue banknote-a licence to put into circulation paper currency representing its own liabilities, which could circulate as money. There was to be, quite literally, a quid pro quo. [8]
… the idea of the hybrid Bank of England found a powerful group of supporters in the circle of ambitious Whig grandees who were soon to dominate the first party-political administration of the country. They realised that [Projector William] Paterson’s Project could deliver a Great Monetary Settlement.

If they and the private money interest they represented would agree to fund the king on terms over which they, as the Directors of the new Bank, would have a statutory say, then the king would in tum allow them a statutory share in his most ancient and jealously guarded prerogative: the creation of money and the management of its standard. To be granted the privilege of note issue by the crown, which would anoint the liabilities of a private bank with the authority of the sovereign-this, they realised, was the Philosopher’s Stone of money. It was the endorsement that could liberate private bank money from its parochial bounds. They would lend their credit to the sovereign-he would lend his authority to their bank. What they would sow by agreeing to lend, they would reap a hundredfold in being allowed to create private money with the sovereign’ s endorsement. Henceforth, the seigniorage would be shared. [9]

With the foundation of the Bank of England, the money interest and the sovereign had found an historic accommodation…This compromise is the direct ancestor of the monetary systems that dominate the world today: systems in which the creation and man agement of money are almost entirely delegated to private banks, but in which sovereign money remains the “final settlement asset, the only credit balance with which the banks on the penultimate tier of the pyramid can be certain of settling payments to one another or to the state. Likewise, cash remains strictly a token of a credit held against the sovereign, but the overwhelming majority of the money in circulation consists of credit balances on accounts at private banks. The fusion of sovereign and private money born of the political compromise struck in 1694 remains the bedrock of the modern monetary world.  [10]

This effectively created modern finance. The state’s debt was monetized by private banks, who gained the ability to loan the state’s “official” money through the extension private credit. No longer would money creation and manipulation be exclusively a tool of the sovereign. The two different money systems—government coinage and bills of exchange, were fused into one here for the first time. Because it was backed by state debt (and ultimately tax revenue), the bank’s money became by far the most trustworthy legal means of settlement, and soon it became the predominant one—the final “money thing” at the apex of the pyramid.

In effect, the privately owned Bank of England transformed the sovereign’s personal debt into a public debt and, eventually in turn, into a public currency.

This fusion of the two moneys, which England’s political settlement and rejection of absolutist monetary sovereignty had made possible, resolved two significant problems that had been encountered in the earlier applications of the credit-money social technology.

First, the private money of the bill of exchange was ‘lifted out’ from the private mercantile network and given a wider and more abstract monetary space based on an impersonal trust and legitimacy…

Second, parliament sanctioned the collection of future revenue from taxation and excise duty to service the interest on loans…The new monetary techniques conferred a distinct competitive advantage, which, in turn, eventually ensured the acceptability of England’s high levels of taxation and duties for the service of the interest on the national debt.

The most important, but unintended, longer-term consequence of the establishment of the Bank of England was its monopoly to deal in bills of exchange. Ostensibly, the purchase of bills at a discount before maturity was a source of monopoly profits for the Bank. But it also proved to be the means by which the banking system as a whole became integrated and the supply of credit money (bills and notes), influenced by the Bank’s discount rate.

The two main sources of capitalist credit money that had originated in Italian banking practice -that is, the public debt in the form of state bonds and private debt in the form of bills of exchange – were now combined for the first time in the operation of a single institution. But of critical importance, these forms of money were introduced into an existing sovereign monetary space defined by an integrated money of account and means of payment based on the metallic standard. [11]

The bank of England would issue banknotes, which were liabilities of the bank that could circulate as money. Banknotes were originally records of deposits of coin (sterling) redeemable at the banks. Eventually banknotes simply became records of deposits unlinked to any other coins or commodities. They circulated as paper records of debits and credits, similar to the tally sticks which they replaced (the old tallies were burned en masse):

In 1694, the Bank of England stepped in. Originally a private company, it was founded to create money backed by its gold holdings that could be exchanged for Treasury pledges over future taxes. In contrast to the old tally stick system, these pledges, known as ‘gilt-edged’ stock, or gilts, came with redemption dates and paid a fixed rate of interest.

These changed characteristics of a fixed date and rate of return made the pledges resemble debts. However, the difference is that these pledges are ownership claims created by an individual over his own income, whereas a debt claim is created by one individual over another individual’s income. The correct analogy is to think of gilt-edged stock as akin to interest-bearing shares or equity bought by investors in UK Incorporated, with a redemption date.

The position today is quite similar, except that the Bank of England is now State owned and the pound sterling is not backed by gold but by faith alone.

The fiscal myth of tax and spend shared by virtually all schools of economics is that tax is first collected and then spent. This has never been the case: the reality… has always been that government spending has come first and taxation later. The reality is that taxation acts to remove money from circulation and to prevent inflation: it does not fund and never has funded public spending.

The Myth of Debt (UCL)

The second method to finance the debt mentioned above was a debt-for-equity swap. This was tried in both England and France. While it failed in a bursting stock bubble in both countries, the differences would have profound consequences for world history.

In England, the monetary system would remain fairly intact. In France, by contrast, it would take down the entire financial system and cripple the nation economically for a generation. The end result would be an Industrial Revolution in England, and revolt, revolution and dictatorship in France.

Remarkably, this would all take place in just 4 years–from 1716 to 1720. One result would be the issuance of the first true paper money in Europe. The other would be the first major stock bubble and collapse.

John Law’s System

John Law was the son of an Edenborough goldsmith. Goldsmiths, like pawnbrokers before them, functioned as low-level proto-bankers. The issued receipts against the gold deposited with them. Occasionally they would issue receipts in excess of the gold stored in their vaults, knowing that not everyone would wish to redeem their gold at the same time. These receipts circulated as proto-money, but are not the direct ancestor of the banknotes we use today as some have claimed.

In 1694, when the Bank of England was being founded, John Law killed a man in a duel over a woman. Law was living large in England at the time. Now an outlaw, he first went to hide out in Scotland, and when the Acts of Union were passed in 1707, he fled for the continent. He made his way to Genoa, and then to Amsterdam, where he was able to observe their financial systems and banking practices first hand.

Eventually he made his way to France where he became a professional gambler, dandy, and bon-vivant. Through an unlikely series of circumstances and networking, he wound up being a personal friend of Phillip II, the Duc de Orleans, a high-ranking aristocrat who was the regent of France for Louis 15th, the future heir to the throne of France, who was still a teenager.

Just as in England, the finances of the French state were a disaster due to funding  wars all over the continent and the profligacy of the king. Versailles didn’t come cheap.

Europe’s most powerful nation had several major financial problems: 1.) There was not enough money in circulation because of a shortage of coins (a ‘liquidity crisis’) 2.) The French government’s debt was effectively unpayable. The interest rates were staggering and the billets d’etat were what we might today call “junk bonds” and 3.) The privatized and localized tax system was horribly inefficient, preventing the state from collecting taxes effectively. It was riddled with graft and corruption—only a fraction of what was collected made its way into state coffers. The rest ended up in the hands of a corrupt money interest, who resisted any attempts at reform.

When Louis the 14th, the “Sun King,” died, France was in a state of bankruptcy. Continuous warfare had left France short of money and facing a sizeable state debt. Furthermore, the tax revenue collection system had been farmed out to the private sector, leaving the financiers (gens de finance)…the veritable controllers of the financial system. They exerted control by managing the tax farms and lending money to the state. In effect, the state was heavily mortgaged to the financiers. [12]

Law used his friendship with the regent to propose a radical reorganization of the French state finances. Law had seen the English system at work. When he fled Scotland, he spent time in both Genoa and Amsterdam and was able to observe up-close the functioning of their banking and financial systems. This gave him the foundation for his own ideas.

[Law’s] theory consisted in two propositions. One was that the world had insufficient supplies of metal money to do business with. The other was that, by means of a bank discount, a nation could create all the money it required, without depending on the inadequate metallic resources of the world…Law did not invent this idea. He found the germs of it in a bank then in existence— the Bank of Amsterdam. This Law got the opportunity to observe when he was a fugitive from England.

The Bank of Amsterdam, established in 1609, was owned by the city. Amsterdam was the great port of the world. In its marts circulated the coins of innumerable states and cities. Every nation, many princes and lords, many trading cities minted their own coins. The merchant who sold a shipment of wool might get in payment a bag full of guilders, drachmas, gulden, marks, ducats, livres, pistoles, ducatoons, piscatoons, and a miscellany of coins he had never heard of.

This is what made the business of the moneychanger so essential. Every moneychanger carried a manual kept up to date listing all these coins. The manual contained the names and valuations of 500 gold coins and 340 silver ones minted all over Europe. No man could know the value of these coins, for they were being devalued continually by princes and clipped by merchants. To remedy this situation the Bank of Amsterdam was established.

Here is how it worked. A merchant could bring his money to the bank. The bank would weigh and assay all the coins and give him a credit on its books for the honest value in guilders. Thereafter that deposit remained steadfast in value. It was in fact a deposit. Checks were not in use. But it was treated as a loan by the bank with the coins as security. The bank loaned the merchant what it called the bank credit. Thereafter if he wished to pay a bill he could transfer to his creditor a part of his bank credit. The creditor preferred this to money. He would rather have a payment in a medium the value of which was fixed and guaranteed than in a hatful of suspicious, fluctuating coins from a score of countries. So much was this true that a man who was willing to sell an article for a hundred guilders would take a hundred in bank credit but demand a hundred and five in cash.

One effect of this was that once coin or bullion went into this bank it tended to remain there. All merchants, even foreigners, kept their cash there. When one merchant paid another, the transaction was effected by transfer on the books of the bank and the metal remained in its vaults. Why should a merchant withdraw cash when the cash would buy for him only 95 per cent of what he could purchase with the bank credit? And so in time most of the metal in Europe tended to flow into this bank.

It was…a one hundred percent bank–[f]or every guilder of bank credit or deposits there was a guilder of metal money in the vaults. In 1672 when the armies of Louis XIV approached Amsterdam and the terrified merchants ran to the bank for their funds, the bank was able to honor every demand. This established its reputation upon a high plane. The bank was not supposed to make loans. It was supported by the fees it charged for receiving deposits, warehousing the cash, and making the transfers.

There was in Amsterdam another corporation—the East India Company. A great trading corporation, it was considered of vital importance to the city’s business. The city owned half its stock. The time came when the East India Company needed money to build ships. In the bank lay that great pool of cash. The trading company’s managers itched to get hold of some of it. The mayor, who named the bank commissioners, put pressure on them to make loans to the company—loans without any deposit of money or bullion. It was done in absolute secrecy. It was against the law of the bank. But the bank was powerless to resist.

The bank and the company did this surreptitiously. They did not realize the nature of the powerful instrument they had forged. They did not realize they were laying foundations of modern finance capitalism. It was Law who saw this…Here is what Law saw. It is an operation that takes place in our own banks daily. The First National Bank of Middletown has on deposit a million dollars. Mr. Smith walks into the bank and asks for a loan of $10,000. The bank makes the loan. But it does not give him ten thousand in cash. Instead the cashier writes in his deposit book a record of a deposit of $10,000. Mr. Smith has not deposited ten thousand. The bank has loaned him a deposit. The cashier also writes upon the bank’s books the record of this deposit of Mr. Smith. When Mr. Smith walks out of the bank he has a deposit of ten thousand that he did not have when he entered. The bank has deposits of a million dollars when Mr. Smith enters. When he leaves it has deposits of a million and ten thousand dollars. Its deposits have been increased ten thousand dollars by the mere act of making the loan to Mr. Smith. Mr. Smith uses this deposit as money. It is bank money.

That is why we have today in the United States about a billion dollars in actual currency in the banks but fifty billion in deposits or bank money. This bank money has been created not by depositing cash but by loans to the bank depositors. This is what the Bank of Amsterdam did by its secret loans to the East India Company, which it hoped would never be found out. This is what Law saw, but more important, he saw the social uses of it. It became the foundation of his system…[13]

He argued that money was not any particular object, in his words, it was not the value for which goods are exchanged but by which goods are exchanged. For that reason, it could be anything. Law reasoned that the demand for money was greater than the supply, and like any other commodity the supply needed to be increased. An increase in the money supply would cause economic expansion and drive down interest rates. To get around the supply and demand problems encountered with gold and silver, he would retire them and replace them with paper instead.Phase one of Law’s plan would increase the amount of money circulating by introducing paper money in place of metal. Law’s bank would take the coins and issue paper money based on the deposits. The paper money would then retain its value. This was the beginning of true paper money as we know it today:

…his new proposal laid out plans for a private bank, funded by himself and other willing investors, which would issue notes backed by deposits of gold and silver coins and redeemable at all times in coins equivalent to the value of the coin at the time of the notes’ issue, “which could not be subject to any variation.” Thus, Law pledged, his notes would be more secure than metal money, a hedge against currency vacillations, and therefore a help to commerce. Moreover, paper notes would increase the amount of circulating money and trade would be boosted. In short, he vowed, his bank would offer hope and the promise of a better future. [14]

The regent helped by making his well-publicized deposits and ensured that everyone knew he was using the bank for foreign transactions. Foreigners followed his lead, and at last found somewhere in Paris to discount their bills of exchange with ease and at reasonable prices. The influx of foreign cur rency alleviated the shortage of coins, and, with the slow trickle of banknotes Law printed and issued to depositors, boosted the money supply sufficiently for commerce to begin to pick up. Traders liked the banknotes because the guarantee of being paid in coin of fixed value meant that they knew exactly what something would cost or what price they would receive. The notes began to command a premium, like those issued by the Bank of Amsterdam. [15]

The bank was a success, expanding the money supply and goosing the French economy as planned. In 1717 the regent ordered that all public funds be deposited in the Banque Generale. The notes of the bank became authorized for payment of taxes. The center of French finance moved from Lyon to Paris. Law controlled the issuance of banknotes so that at least 25 percent of the circulating value of the notes could be redeemed in gold or silver. To further remove the link with metal, it was forbidden for most people to own specie or use it for transactions. The Bank was eventually bought out by the government and renamed the royal bank (Banque Royale).

In December 17 18, the Banque Generale became the Banque Royale, the equivalent of a nationalized industry today. Law continued to direct it, and under his leadership over the next months, the finances of France leaned more heavily on it. New branches opened in Lyon, La Rochelle, Tours, Orleans, and Amiens. To ensure that everyone made use of paper money, any transactions of more than 600 livres were ordered to be made in paper notes or gold. Since gold was in short supply, this obliged nearly everyone to use paper for all major transactions. Meanwhile. for the leap of confidence they had shown in purchasing shares in the bank in its early uncertain days, and perhaps to buy his way into their world, Law rewarded investors lavishly. Shares that they had partly bought with devalued government bonds were paid out in coin. Both he and the regent had been major shareholders and were among those who profited greatly from the bank’s takeover.

Few recognized the dangers signaled by the bank’s new royal status. Hitherto Law had kept careful control of the numbers of notes issued. There had always been coin reserves of around 25 percent against circulating paper notes. Now, with royal ownership and no shareholders to ask awkward questions, the bank became less controllable. The issuing and quantity of printed notes and the size of reserves would be decided by the regent and his advisers. The temptation to print too much paper money too quickly would thus be virtually unchecked.

Within five months of its royal takeover…eight printers, each of whom earned only 500 livres a year, were employed around the clock printing 100-, 50- and 10· livre notes. A further ominous change followed: notes were no longer redeemable by value at date of issue but according to the face value, which would change along with coins if the currency was devalued: the principle that underpinned public confidence in paper had been discarded and one of Law’s most basic tenets breached. But as the eminent eighteenth-century economist Sir James Steuart later incredulously remarked, “nobody seemed dissatisfied: the nation was rather pleased; so familiar were the variations of the coin in those days, that nobody ever considered anything with regard to coin or money, but its denomination… this appears wonderful; and yet it is a fact.” [16]

Once the bank was established, phase two was to create a joint-stock company to acquire, manage, and ultimately retire, the state’s debt. It would also take over tax collection and the management of state monopolies.

The growing success of the General Bank enabled Law to address the second crisis, management of the national debt. A new radical plan was necessary to restructure France’s financial situation. Law decided that the best way to accomplish this was to convert the government debt into the equity of a huge conglomerate trading company. To do so he needed to establish a trading company along the lines of British trading companies such as the East India Company and the South Sea Company. [17]

While the monarchy was cash poor, it did possess one major asset whose value was almost limitless—a huge chunk of the North American continent. Law’s solution for the debt problem was to use that to create a monopoly company with exclusive rights over the settlement and development of North America, and have investors trade their debt for equity in that company; what today is called a “debt for equity swap.” Instead of unpayable debt, investors could trade that in for shares in a company that offered seemingly unlimited potential. Once again Law and the royal court would be early investors, prompting everyone else to jump on the bandwagon. To make the shares more attractive, Law initiated a “buy now pay later’ scheme—only 10% down would get you a share. Even the general public could buy in, and an informal stock market in trading Mississippi Company shares sprang up on the Rue Quincampoix in Paris outside Law’s apartment.

The company went on a mergers-and-acquisitions spree, buying up all the rival trading companies. It also bought the rights to collect the taxes from the rival financiers. It gained permission to run several state monopolies.

Law was granted a charter to create the Compagnie de la Louisiane ou d’Occident (Company of Louisiana and the West). This company was given a twenty-five year exclusive lease to develop the vast French territories along the Mississippi in North America. This meant exploitation of the Mississippi region, which in the French point of view, represented all of North America watered by the Mississippi River and its tributaries. As part of the deal, Law was required to settle 6,000 French citizens and 3,000 slaves in the territory. To sweeten the transaction the company was awarded a monopoly for the growing and selling of tobacco. [18]

In May 1719 [the Company of the West] took over the East India and China companies, to form the Company of the Indies (Compagnie des Indes), butter known as the Mississippi company. In July Law secured the profits of the royal mint for a nine-year term. In August he wrested the lease of the indirect tax farms from a rival financier, who had been granted it a year before. In September the Company agreed to lend 1.2 billion livres to the crown to pay off the entire royal debt. A month later law took control of the collection (‘farm’) of direct taxes. [19]

Finally, the Banque Royale and the Mississippi Company merged. Essentially all of the French state’s finances were managed by this one huge conglomerate, owned by the government, with Law at the helm. It issued money, collected the taxes, managed the state’s debt, and owned much of North America.

In 1719, the French government allowed Law to issue 50,000 new shares in the Mississippi Company at 500 livres with just 75 livres down and the rest due in nineteen additional monthly payments of 25 livres each. The share price rose to 1,000 livres before the second installment was even due, and ordinary citizens flocked to Paris to participate. Based on this success, Law offered to pay off the national debt of 1.5 billion livres by issuing an additional 300,000 shares at 500 livres paid in ten monthly installments.

Law also purchased the right to collect taxes for 52 million livres and sought to replace various taxes with a single tax. The tax scheme was a boon to efficiency, and the price of some products fell by a third. The stock price increases and the tax efficiency gains spurred foreigners to Paris to buy stock in the Mississippi Company.

By mid-1719, the Mississippi Company had issued more than 600,000 shares and the par value of the company stood at 300 million livres. That summer, the share price skyrocketed from 1,000 to 5,000 livres and it continued to rise through year-end, ultimately reaching dizzying heights of 15,000 livres per share. [20]

Law’s System reached its apex, and the price of the Company’s share peaked, at the beginning of 1720. Two main elements crowned the system. The first was a virtual takeover of the French government, by which the Company substituted the liabilities (shares) for the national debt. The second was the substitution of the Company’s other liabilities (notes) for metallic currency. At the end of the operation, the Company, owned by the former creditors of the State, collected all the taxes, owned or managed most overseas colonies, monopolized all overseas trade, and freely issued fiat money which was sole legal tender. Its CEO also became minister of finance on January 5, 1720. [21]

The government debt was retired, the money supply was expanded, and interest rates fell. But there was a problem.

Pop Go The Bubbles

John Law’s newly nationalized state bank was extending credit in order to buy Mississippi Company shares far in excess of the amount of gold and silver it had stashed in its vaults, and his enemies knew it. The excess money from all the shares floating around began to leak into the wider financial system, causing inflation. The value of the banknotes was no longer fixed but allowed to float. Confidence in the system was always thin.

The old guard sensed their opportunity. They demanded the gold and silver back in return for their paper money, causing a run on the bank. When faith in the Bank disintegrated, so too did faith in Mississippi Company stock (since both were now one in the same institution).

Some early investors, realizing that their hopes of getting rich in Mississippi were greatly exaggerated, began to sell their shares and exchange their paper currency for gold, silver and land. As share prices soared throughout the summer of 1719 some of the more level-headed realized that the bull market was based on little more than “smoke and mirrors” and the ever increasing production of paper notes. Feeling that a crash would sooner or later be inevitable, they cashed in.

… When in early 1720 two royal princes decided to cash in their shares of the Mississippi Company, others followed their example. The downward spiral had begun. Law had to print 1,500,000 livres in paper money to try to stem the tide. By late 1720 a sudden decline in confidence occurred which sent share prices down as rapidly as they had risen. When panic set in, investors sought to redeem their bank and promissory notes en masse and convert them into specie. The “bubble” burst when the Banque Royale could no longer redeem their notes for lack of gold and silver coin. Bankruptcy followed. Political intrigue and the actions of rival bankers contributed to the downfall of the scheme. Those not quick enough to redeem their shares were ruined.

In an effort to slow the run on the Bank Royale, officials resorted to various nefarious schemes. These included counting the money out slowly and only in small denomination coins, inserting clerks in the line who would return the money they withdrew, and by shortening banking hours. At one point the bank refused to accept anything but 10 livre notes. None of these expedients were able to build confidence or to slow the panic-stricken investors for long. In a last-ditch effort to restore confidence in the bank, Law ordered the public burning of bank notes as they came in for redemption. This was meant to convince the public, that because of their growing scarcity, they would be worth more. A huge enclosure was set up outside the bank for this purpose. Several times a day, with great ceremony, the notes were consigned to the flames. This went on during the months of July and August 1720 while paper money continued to lose its value throughout the Summer.

The general public turned on Law and would have lynched him if they could. He was burned in effigy and the mere mentioning of his name could arouse a fury. In October, a coachman was slapped by a passenger during an argument over a disputed fare. The cabbie had the wit to denounce his fare as John Law, whereupon the crowd pounced upon the passenger. The poor man barely saved himself by hiding from his pursuers in a church. [22]

The fall of the company managing the government’s finances caused massive damage to the French economy. Money went back to being metal.

By June 1720 the note issue of the Banque Royale had reached a staggering 2,696,000,000 livres. This sum was approximately twice the money in circulation before Law’s bank opened its doors. The increase in the money in circulation created an inflationary spiral which could not be reversed once the population became leery of Law’s Mississippi Scheme. The entire complex development of the bank’s other schemes for colonial companies, monopolies and tax collection came into question. Law’s plan for his bank and the issue of paper money was sound in and of itself; however, the issue was carried to tremendous sums that Law had never anticipated.

At the end in 1721 the notes had ceased to circulate and specie gradually took their place. The country painfully returned to a specie footing as in years past. This severe lesson in paper money inflation had permanent and long lasting effects upon France. The popular distrust of paper money and big banks kept France financially backward for many years thereafter. France was not to see circulating paper money again until the French Revolution of 1789-1795 necessitated it. [24]

Because France’s finances were not on a firm foundation, it could no longer borrow to expand the money supply. The only remaining option was to raise taxes. But in order to do this, they needed to call a meeting of France’s “parliament,”–a body which did not meet on a regular basis. While English nobility remained primarily in their own estates in the countryside, most of the French nobility was in the French court, totally segregated from the commoners. They had no idea what they were unleashing:

“The immediate precipitating cause of the French Revolution is a lot of political grandstanding around the monarchy’s debt and deficit. This is very much like the debt ceiling crisis that we saw in 2011. The issue was less about whether the monarchy’s finances were actually viable, and more about people using the subject of money to push their political point.”

“So at the point at which the king basically has no money left in the coffers, and can’t persuade the establishment to verify and approve new taxes, he called the first meeting of the Estates General, a body that hasn’t met in 175 years, so that they can produce some new taxes. And that’s really generally considered to be the beginning of the French Revolution. So the French Revolution starts in a crisis about budgets and taxes.” [25]

Much of the money fleeing Paris found its way to England where it inflated the South Sea Bubble. Like the Mississippi Company, it was also the use of a joint-stock company to consolidate, and ultimately retire, the state’s debt. Instead of taxes, it was backed by exclusive contracts from the government to conduct trade in the South Seas. It met a similar fate:

…after the re-coinage, silver continued to flow out of Britain to Amsterdam, where bankers and merchants exchanged the silver coin in the commodity markets, issuing promissory notes in return. The promissory notes in effect served as a form of paper currency and paved the way for banknotes to circulate widely in Britain. So when panicked depositors flocked to exchange banknotes for gold coin from the Sword Blade Bank (the South Sea Company’s bank), the bank was unable to meet demand and closed its doors on September 24. The panic turned to contagion and spread to other banks, many of which also failed. [26]

It’s shares also cratered in value, yet the bubble had “only” seen a tenfold rise in share prices instead of the twentyfold rise in France. Because the South Sea company remained separate from the Bank of England and the Treasury (unlike in France, where they were all one in the same), the damage to the British Economy was limited:

When stock prices finally came back to earth in London, there was no lasting systemic damage to the financial system, aside from the constraint on future joint-stock company formation represented by the Bubble Act. The South Sea Company itself continued to exist; the government debt conversion was not reverse; foreign investors did not turn away from English securities. Whereas all France was affected by the inflationary crisis Law had unleashed, provincial England seems to have been little affected by the South Sea crash. [24]

The Bank of England acquired the South Sea Company’s stock. Unlike France, Britain’s currency held its value, and it was able to pay back its debts. Money flowed into England, including from overseas. British debt was widely marketed and held both domestically and internationally:

Finally, between 1749 and 1752, the chancellor of the exchequer…began to convert all outstanding debt and annuity issues – those not held by the Bank of England, the East India Company, and the reconstituted South Sea Company – into the Consolidated Stock of the Nation, popularly known as Consols…

Consols were fully transferable and negotiable, marketed on both the London Stock Exchange and the Amsterdam bourse; along with Bank of England and East India Company stock, they were the major securities traded on the London Stock Exchange in the late eighteenth and early nineteenth centuries. Though Consols were both perpetual but redeemable annuities, thus identical to Dutch losrenten, their instant and longenduring popular success was attributable to the firmly held belief, abroad as well as at home, that the government would not exercise its option to redeem them…Unchanged to this day, they continue to trade on the London Stock Exchange…

The result of the financial revolution was a remarkably stable and continuously effective form of public finance, which achieved an unprecedented reduction in the costs of government borrowing: from 14 per cent in 1693 to 3 per cent in 1757. [25]

The Aftermath

Two things ensured Britain’s predominance in financial affairs: the last major pitched battle fought on British soil was the Battle of Culloden in 1746. Britain was peaceful, unified, and politically stable far longer than just about anywhere else on earth at the time. The second was the invention of the heat engine and the exploitation of England’s vast coal reserves. The triangular trade and vast amount of cotton allowed Britain to set up factories and industrialize. In fact, government debt may have funded the Industrial Revolution:

Only twice in the period from 1717 to 1931, did the British suspend the convertibility of their currency. Each time they needed more money to fight a war than the tight hand of convertibility would permit. They suspended the convertibility to fight Napoleon and to fight the Kaiser. Each war produced paper money and inflation, as wars tend to do.

After Waterloo, sterling met every test of a key currency. The government was stable, the institutions honored and intact. The Royal Navy sailed the world: trade followed the flag. Britain was first into the industrial revolution, so its manufactured goods spread over the world. The battles were always at the fringes of the empire.

Every time there was a small crisis about the pound, the monetary authorities would raise the interest rates sharply. That might depress the domestic economy, but the high interest rates would draw in foreign exchange, and the pound would retain its value. Britain bought the raw materials, the commodities. and sent back the manufactured goods; and since the price of raw materials gradually declined. The pound increased in value.

The British government issued “consols,” perpetual bonds. Fathers gave them to their sons, and those sons gave them to their sons, and the bonds actually increased in value as time went on. “Never sell consols,’ said Soames Forsyte, Galsworthy’s man of property.

The world brought its money to London and changed it into sterling. London banked it and insured it. Cartographers colored Britain pink on world maps, and the world was half pink, from the Cape to Cairo, from Suez to Australia, In 1897, at Victoria’s Diamond Jubilee, the fleet formed five lines, each five miles long, and it took. four hours for it to pass in review at Spithead.

British capital went everywhere. It financed American railroads and great ranches in the western United States. British investors held not only American ranches. but Argentine ones, too. Their companies mined gold in South Africa and tin in Malaya, grew hemp in Tanganyika and apples in Tasmania, drilled for oil in Mexico, and ran the trolley lines in Shanghai and the’ Moscow Power and Light Company. [26]

Carroll Quigley saw the Napoleonic Wars as a battle of the old mercantile, bullion-based monetary system, based around agriculture and handicrafts, versus the British system of commercial bank credit money and industrial manufacturing. With the final defeat of Napoleon, the British money system became the basis for all the money in the world today:

This new technique of monetary manipulation became one of the basic factors in the Age of Expansion in the nineteenth century and made the fluctuations of economic activity less responsive to the rate of bullion production from mines, by making it more responsive to new factors reflecting the demand for money (such as the interest rate). This new technique spread relatively slowly in the century between the founding of the Bank of England and Napoleon’s creation of the Bank of France in 1803. The Napoleonic Wars, because of the backward, specie-based, financial ideas of Napoleon were, on their fiscal side, a struggle between the older, bullionist, obsolete system favored by Napoleon and the new fractional-reserve banknote system of England. [27]

In order to facilitate international trade, Britain instituted the gold standard. The gold standard was an agreement among nations to convert their currencies to gold at fixed rates, thus ensuring money earned overseas would hold its value relative to domestic currencies. The idea was that shipping gold bars from trade deficit countries to trade surplus countries would allow domestic money supplies to “self-adjust.” Trade deficits would be settled by shipping gold from deficit countries to surplus ones. Since the amount of money in your economy was based on how much gold you had, countries shipping gold out would have less money circulating, leading to deflation. This would make their exports more attractive. On the other hand, countries gaining gold reserves would issue more money causing inflation making their exports less attractive relative to the deficit counties on the world market. Over time, everything would just sort of balance out. That was the theory, anyway:

Britain adopted the gold standard in 1844 and it became the common system regulating domestic economies and trade between them up until World War I. In this period, the leading economies of the world ran a pure gold standard and expressed their exchange rates accordingly. As an example, say the Australian Pound was worth 30 grains of gold and the USD was worth 15 grains, then the 2 USDs would be required for every AUD in trading exchanges.

The monetary authority agreed to maintain the “mint price” of gold fixed by standing ready to buy or sell gold to meet any supply or demand imbalance. Further, the central bank (or equivalent in those days) had to maintain stores of gold sufficient to back the circulating currency (at the agreed convertibility rate).

Gold was also considered to be the principle method of making international payments. Accordingly, as trade unfolded, imbalances in trade (imports and exports) arose and this necessitated that gold be transferred between nations (in boats) to fund these imbalances. Trade deficit countries had to ship gold to trade surplus countries. For example, assume Australia was exporting more than it was importing from New Zealand. In net terms, the demand for AUD (to buy the our exports) would thus be higher relative to supply (to buy NZD to purchase imports from NZ) and this would necessitate New Zealand shipping gold to us to fund the trade imbalance (their deficit with Australia).

This inflow of gold would allow the Australian government to expand the money supply (issue more notes) because they had more gold to back the currency. This expansion was in strict proportion to the set value of the AUD in terms of grains of gold. The rising money supply would push against the inflation barrier (given no increase in the real capacity of the economy) which would ultimately render exports less attractive to foreigners and the external deficit would decline.

From the New Zealand perspective, the loss of gold reserves to Australia forced their Government to withdraw paper currency which was deflationary – rising unemployment and falling output and prices. The latter improved the competitiveness of their economy which also helped resolve the trade imbalance. But it remains that the deficit nations were forced to bear rising unemployment and vice versa as the trade imbalances resolved.

The proponents of the gold standard focus on the way it prevents the government from issuing paper currency as a means of stimulating their economies. Under the gold standard, the government could not expand base money if the economy was in trade deficit. It was considered that the gold standard acted as a means to control the money supply and generate price levels in different trading countries which were consistent with trade balance. The domestic economy however was forced to make the adjustments to the trade imbalances.

Gold standard and fixed exchange rates – myths that still prevail (billy blog)

The gold standard, the self-regulating market, and haute finance were the foundations of the Hundred Year’s Peace lasting up until the First World War.The Hundred Year’s Peace ushered in the final transition from civil society to a fully-fledged market society. Rather than being a sideshow, all of society’s relations now became coordinated by the market. The moral economy was crushed (by force if necessary), and the market and money based capitalist one replaced it. Millions died in this transition, whitewashed from history as “moral failures” even as the suffering under Communism is constantly referred to. Money and banking were at the center of the nexus. Controlling the money supply became absolutely necessary to the smooth functioning of this system. Unfortunately, it was not managed well.

The prevention of providing adequate currency caused panics and depressions throughout the nineteenth century. However, it did engender a hundred years’ of relative peace between the great powers. Nations broke into trading spheres, and the violence was the violence of empire, as well as the institutional violence imposed by the market system itself (hunger, homelessness, starvation, poverty, prisons, jails, alienation, conscription, etc.). In wartime and depressions, however, the gold standard tended to be abandoned. It always rested on peaceful international relations and government agreements; in no was was gold ever “natural” money.

Nineteenth-century civilization rested on four institutions. The first was the balance-of-power system which for a century prevented the occurrence of any long and devastating war between the Great Powers. The second was the international gold standard which symbolized a unique organization of world economy. The third was the self-regulating market which produced an unheard-of material welfare. The fourth was the liberal state. Classified in one way, two of these institutions were economic, two political. Classified in another way, two of them were national, two international. Between them they determined the characteristic outlines of the history of our civilization.

Of these institutions the gold standard proved crucial; its fall was the proximate cause of the catastrophe. By the time it failed, most of the other institutions had been sacrificed in a vain effort to save it. [28]

Mismanagement of the “new” market society was the proximate cause of two World Wars and the Cold War, killing millions. Once again, it threatens to tear the world apart. But that’s a story for another time.

Next: Concluding notes.

[1] Wray, et. al.; Credit and State Theory of Money, p. 209

[2] ibid.

[3] ibid.

[4] In Our Time – The South Sea Bubble (BBC)

[5] Wray, et. al.; Credit and State Theory of Money, p. 210

[6] How a creative legal leap helped create vast wealth (BBC)

[7] In Our Time – The South Sea Bubble (BBC)

[8] Felix Martin; Money, the Unauthorized Biography, pp. 116-117

[9] Felix Martin; Money, the Unauthorized Biography, pp. pp. 117-118

[10] Felix Martin; Money, the Unauthorized Biography, p. 120

[11] Wray, et. al.; Credit and State Theory of Money, p. 211

[12] William N. Goetzmann and K. Geert Rouwenhorst, eds. The Origins of Value: The Financial Innovations that Created Modern Capital Markets, pp. 230-231

[13] John Flynn’s Biography of John Law, pp. 5-7

[14] Janet Gleeson; Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance, p. 113

[15] Janet Gleeson; Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance, p. 116-117

[16] Janet Gleeson; Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance,  pp. 132-133

[17] William N. Goetzmann and K. Geert Rouwenhorst, eds. The Origins of Value: The Financial Innovations that Created Modern Capital Markets, p. 231

[18] John Flynn’s Biography of John Law, p. 5-6

[19] Niall Ferguson; The Ascent of Money, p. 141

[20] Crisis Chronicles: The Mississippi Bubble of 1720 and the European Debt Crisis (Liberty Street)

[21] Francois R. Velde; Government Equity and Money: John Law’s System in 1720 France, p. 21

[22] John E. Sandrock; John Law’s Banque Royale and the Mississippi Bubble, pp. 8-9

[23] Niall Ferguson; The Ascent of Money, p. 157

[24] John E. Sandrock; John Law’s Banque Royale and the Mississippi Bubble, p. 13

[25] Rebecca Spang: Stuff and Money in the Time of the French Revolution – MR Live – 2/21/17 (YouTube)

[26] Adam Smith; Paper Money, pp. 116-117

[27] Carroll Quigley; The Evolution of Civlizations, p. 377

[28] Karl Polanyi; The Great Transformation, chapter one.

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 previously, 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] Francois R. Velde; Government Equity and Money: John Law’s System in 1720 France, p. 5-6
[17] Francois R. Velde; Government Equity and Money: John Law’s System in 1720 France, p. 5-6
[18] Francois R. Velde; Government Equity and Money: John Law’s System in 1720 France, p. 8
[19] Niall Ferguson; The Ascent of Money, pp. 73-74
[20] Francois R. Velde; Government Equity and Money: John Law’s System in 1720 France, p. 8
[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.