Money, Currency and Crisis

In Search of Trust, 2000 BC to AD 2000

R.J. van der Spek, Bas van Leeuwen, R.J. van der Spek, Bas van Leeuwen

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351810500
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

Money is a core feature in all discussions of economic crisis, as is clear from the debates about the responses of the European Central Bank and the Federal Reserve Bank of the United States to the 2008 economic crisis.

This volume explores the role of money in economic performance, and focuses on how monetary systems have affected economic crises for the last 4, 000 years. Recent events have confirmed that money is only a useful tool in economic exchange if it is trusted, and this is a concept that this text explores in depth. The international panel of experts assembled here offers a long-range perspective, from ancient Assyria to modern societies in Europe, China and the US.

This book will be of interest to students and researchers of economic history, and to anyone who seeks to understand the economic crises of recent decades, and place them in a wider historical context.

1 Money and trust

R.J. van der Spek and Bas van Leeuwen

Feasts are made for laughter; wine gladdens life, and silver (money) meets every need.

Ecclesiastes 10: 19

Introduction

The idea for this book was born during the time that our Vrije Universiteit Amsterdam research team on Market Performance from Ancient Babylonia to the Modern World (see Van der Spek, Van Leeuwen, Van Zanden [eds.] [2015]) was studying the prices of many different periods and regions. Nearly all these prices were recorded in silver, from Ancient Mesopotamia and China to modern Europe. That raised several questions. First: why does humankind put so much trust in a commodity (it is, after all, a commodity) that may shine finely, but that cannot feed, clothe or house anyone. The answer is most often sought in it being considered beautiful, shining, rare and durable. It can be fractioned, and it can be used for luxury goods, an important feature in a society in which gift exchange is important (apart from exchange through trade). It should be noted that the first coins (fine objects with some distinguishing mark) had that function. But the fact remains that people put their trust in a nice and shiny but ultimately useless material.

It remains fascinating that people accepted silver for products such as grain. This applies also to the modern economy. Even though financial intermediaries (such as states) used people’s trust to expand the stock of money by issuing more coins, debasing these coins or issuing money in paper or digital form, the role of silver and gold remains important, even following the abolishment of gold and silver standards. Until 1967, gulden coins (guilders) in the Netherlands were struck in silver. Furthermore, in the face of the economic crisis, in December of 2014 Dutch newspaper readers learned that the Netherlands kept a reserve of 612 tonnes of gold, of which only 11% is in the Netherlands and 61% is in the US. In a secret operation, the Dutch National Bank shipped 130 tonnes of gold from the Unites States to Amsterdam. By this operation, the reserve in Holland has since grown to 31%. A similar measure was taken recently by Germany. The Islamic State has now issued their own coinage: coins in gold, silver and bronze.

It is clear from the above that even though (precious) metals played an important role in the stock of money, this role nonetheless declined over time. First, because the intrinsic value of coins and specie started to differ from their nominal value, e.g. because of debasements (Zuijderduijn, Chapter 10), introduction of banknotes, etc. Second, in the course of history, other types of money, such as ledgers from merchants and bank deposits, were introduced. This distinction between cash and other, more complex, types of money is also reflected in the various definitions of the stock of money. For example, M0 consists of notes and coins, M1 consists of the former plus demand deposits and M2 consists of the former plus saving deposits. Obviously, M0 and, to a lesser extent, M1 have dominated throughout history until our present centuries, and they are the types mostly discussed in the following chapters in this volume.

This brought us to the second question: what is the actual role of money in the economy? The straightforward answer given in many textbooks is that money fulfils three functions, serving as a store of wealth, unit of account and means of exchange. ¹ As is discussed later in this book, the first two functions are the ones that caused a rise in the use of currency, but they were also the ones that suffered first once trust in that currency got lost. In the same way, throughout history governments as well as private institutions have tried to use monetary expansion to finance less than economically beneficial activities, something that at times could also undermine trust in the currency. Indeed, trust in financial intermediaries, or even in precious commodities, is not evident. The state may follow a policy of monetary expansion by bringing more silver (or silver coins) into circulation, or by printing more money; silver coins may be debased by the state or other intermediaries, be of low quality, become abundant on occasion and scarce on another or they may easily be stolen. There are well-known periods in history when the trust in silver decreased, as in the later Roman Empire after Constantine the Great introduced a gold coin, the solidus. The solidus remained the standard coin far into the Middle Ages, when the silver coinage lost trust and the market economy was at a low ebb. Yet silver is usually the basic means of exchange, and when a society goes over to gold as the standard, this is usually a sign of weakness of economic performance (see Kleber, Chapter 5; Butcher, Chapter 7; Xu and Van Leeuwen, Chapter 13).

Yet trust is not necessarily based on the intrinsic value of the money substance or guarantees by the state. Some people have proposed to leave it instead to the market. In this vein, we see the introduction of e-coins, such as the bitcoin. The system on which the original bitcoin was based was introduced online in a paper written by Satoshi Nakamoto (presumably a pseudonym) in 2008. In this paper, titled ‘Bitcoin: a peer-to-peer electronic cash system’, it was stated that one of the main reasons for introducing a bitcoin system was to enhance trust. With such a system, financial mediators would be no longer necessary. More importantly, since any payment was guaranteed to be unique, double spending would become impossible. Or, as put forward by Nakamato (2008), the bitcoin is ‘an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party’.

The origins of money

This quest for ‘trust’ has to start from the creation of money in ancient times. Scholars have often sought for the origin of money, but we need not assume that money was invented in one place. Money probably had different sources in different cultures. In many societies, this origin is related to the acceptance of silver (or other commodities) as money. Silver was used as a medium of exchange, unit of account and store of value in the third millennium BC in Mesopotamia, and it remained so for millennia. We observe that in many languages the words for silver and money were interchangeable. In Sumerian logograms, it is written as KÙ.BABBAR. The sign KÙ (or: KU₃) was used in the late fourth millennium BC in documents from Uruk, southern Mesopotamia. The meaning of the word is both ‘shining’ and, as substantive, ‘shining metal’. BABBAR means ‘white’. ‘Gold’ is rendered as KÙ.GI = ‘yellow shining metal’ (Krispijn 2016). In Akkadian (the Semitic language that emerged in Mesopotamia next to Sumerian and was the language of the Old-Akkadian Empire, Assyria and Babylonia), the word for money and silver was kaspu.

This can be observed in many expressions, such as ana kaspi nadānu, ‘to give for silver; to sell’ and ana kaspi mahāru, ‘to receive for silver; to buy’. In ancient and modern Hebrew, it is kesep or kesef. The word kesef is translated as both ‘silver’ and ‘money’.

In Ancient Greek, there are several words for money, some of them related to ‘silver’. The word ho argyros (from argos, ‘shining’) means both silver and money. Greek to argyrion means 1) coin; 2) money. Argyrion katharon = ‘hard cash’, lit. ‘pure silver’ (Theocritus 15.36). Other words reveal another attitude to silver: money is also indicated as chrēmata, ‘things that are needed (from chrāsthai, ‘to need, to be in want of, to use’); assets, things, money’. It appears that money was seen as a commodity. But there is also an abstract term: nomisma, referring to coinage. It means ‘anything sanctioned by current of established usage, custom’. The word is explained by Aristotle as follows: ‘but money has become by convention a sort of representative of demand; and this is why it has the name ‘money’ (nomisma), because it exists not by nature but by law (nomos) and it is in our power to change it and make it useless’ (Aristotle, Nicomachean Ethics 1133b 1).

Latin has two words for money: pecunia, possibly derived from pecus (genitive pecoris, ‘cattle’, thus originally property in cattle, apparently an important indicator of wealth in early Rome ² ). But the Romans also used argentum (silver) as a term for money, although in Rome the earliest specie was bronze, at first in uncoined form, aes rude (rude bronze). The bronze was weighed; stipendium (military pay) is derived from the Latin verb pendere, ‘to weigh’. The name of the later coin as is probably derived from aes, ‘bronze’. In the third century, Rome introduced silver coinage, the denarius (derived from plural tantum deni, ‘together ten’ asses). The denarius, which was the main silver coin of Rome for over four centuries, was probably introduced in 211 BC and produced in enormous quantity from the silver looted in the sack of Syracuse the year before. The coin represented 10 asses, hence the word denarius (from deni, ‘tenfold’). ³

In China, the word for money, qian (钱), referred in ancient times to farming tools, which were used for monetary exchange in much the same way as cattle was used in the Roman Empire. When the first money was created, it was cast in the form of these tools (cf. Von Glahn, Chapter 12). This use of the object for primitive exchange can also be seen in the word for shell (bei, 贝). These shells were used from the Shang dynasty (1600–1046 BC) to the Spring and Autumn Period ca. 500 BC. Afterwards, the character was added to all kinds of concepts related to value, such as wealth (财) and capital (资) (if you look closely, the character bei is part of the characters for wealth [see left side] and capital [see bottom side]).

So in many cases the word ‘money’ refers to the commodity used in exchange. But this is not always the case. The word money in Germanic languages has a completely different origin. The German and Dutch Geld, related to English yield, literally means ‘recompense’, for instance, in the context of repayment as penalty for injuries. We see the term in composite terms, such as wergeld, ‘compensation for man (wer) slaughter’. The German vergelten and Dutch vergelden both mean ‘to requit’, ‘to retaliate’. So, paying something back, i.e. some sort of loan or debt.

This discrepancy between the meaning of money we can also find back in the modern languages. Besides the German Geld and the Dutch geld being derived from Germanic languages, the French words for ‘money’ and ‘silver’ are the same: argent. The English ‘money’ and ‘mint’ are both derived from Moneta, the epithet of the Roman Goddess Juno Moneta, in whose temple the mint was established (monēta). Nummus is the word for ‘coin’, derived from Greek nomos. Italian and Spanish words for money (Sp. dinero, it. denero or soldi) are derived from Roman coins, from the silver denarius and the late Roman gold solidus.

It is clear from the above that, even though in many cases the meaning of the word ‘money’ was derived from silver or other precious goods, in other cases, like in Germanic languages, it may be more like a debt (or credit). This links directly to a debate on the nature of money in which two approaches come to the fore. The traditional idea is that money was a commodity which replaced or facilitated barter. This is the orthodox view advocated by Adam Smith, Heichelheim and others. Since the beginning of the twentieth century, this idea has been under attack. Some, such as Mitchell-Innes (1913; 1914) and Goodhart (1989; 1998), have argued that there is no evidence for a society where trade was simply barter exchange, and that debt was the origin of money. ⁴ Hence, it was not the value of the money (e.g. silver) that mattered, but the right of the creditor to receive payment, or the requirement of the debtor to pay. This latter view is advocated in this book by Dirk Bezemer (Chapter 3), who argues that de...