The History of Money by Jack Weatherford

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Intellectual Humiliation

Confront your own ignorance.

The History of Money by Jack Weatherford

Money done sets all the world in motion
Publilius Syrus

Cannibals, Chocolate, and Cash

Chocolate Cash

The Aztecs used chocolate for money, or more precisely, cacao beans to buy fruits, vegetables, jewelry made from gold, silver and jade, manufactured goods and specialty good such as alcohol and slaves. 

The market place was placed next to the main government building so that the exchange of goods could be heavily supervised by government officials. Markets like the one in central Tenochtitlán were especially regulated to encompass a single area in the city, essentially forbidding any exchange outside of this delimited zone. Government officials regulated prices and sales, and oversaw every exchange taking place, ready to execute anyone violating the law of the market. The government gave special permission and exception to this rule to a heridetary caste of long distance merchants called the pochteca who had special privileges to import certain goods. In addition to this, the Aztecs sent out official tribute collectors to all parts of the empire to bring back good for the central administration in the highland valley of Mexico.

The empire operated primarily on the basis of tribute. The markets functioned as a subsidiary part of the political structure, and many different standardized commodities served as forms of near-money. 

The vast goods that moved through the empire served as tribute to its capital. This was not uncommon at the time since most empires function as a tribute system rather than a market system. Within this system, the market played a small role in distributing goods, but cacao had a major role within the smaller sphere of activity. 

Cacao became so important as tool for exchange that it produce its own counterfeiting industry. Criminals would take the small husk of cacao bean and empty it, filling it up with mud, mixing real cacao beans with fake ones to obscure them. 

Commodity money in this case operated more on a system of barter than as means of exchange. People would barter an iguana for a load of firewood or a basket for a rope of chilies. Since these two items wouldn’t necessarily have the same value, the Aztecs would use cacao beans as means to even out the price of these two things. 

For large purchases, merchants calculated values in terms of bags of approximately 24,000 beans, but despite it being the primary means of money, it wasn’t an exclusive commodity to standardize exchange. In addition to cacao beans, they used quachtli, cotton cloaks, the value of which varied from 60 to 300 cacao beans. The quachtli served for larger financial transfer such as the purchase of slaves or sacrificial victims, for which the cacao bags would be too bulky. 

Commodity money has the great advantage of being an item of consumption as well as a means of exchange. Unlike paper money and cheap coins that can easily lose their face value, commodity money has a value in and of itself and thus can always be consumed no matter what the statues of the market. 

It has to be made clear, though, in order for something to have value, people have to want it and know how to use it. 

Commodity Money

Throughout the world, commodities from salt to tobacco, from logs to dried fish, and from rice to cloth have been used as money at various times in history. Native parts in India use almonds. Guatemala used corn; Babylonians and Assyrians used barley. Mongolians prized bricks of tea, while Southeastern Asia like Philippines and Burma used rice to serve as commodity money. 

In China, North Africa, and the Mediterranean people used salt as a commodity money. 

The modern English word salary and the Italian, Spanish, and Portuguese word salario are derived form the Latin word sal, meaning “salt”. It is thought that the Roman soldiers were paid in salt or that they received money for the purpose of buying salt to flavor their otherwise bland food. 

Pastoral people often used live animals as a type of money in which the value of everything else is calculated. The Siberian tribes used reindeer, the people of Borneo used buffaloes, the ancient Hittites measured value in sheep, and the Greeks of Homer’s time used oxen. 

In ancient Ireland, slave girls became the common value against which items such as cows, boats, lands, and houses were measured. Viking raiders and merchants sold the young women to slave trader in the Mediterranean, where they were highly valued because of their red or blond hair. Irish men had far less value as slaves. 

Modern Commodities

The use of commodity money has never disappeared, and it rises again whenever the normal flow of commerce and economic life is interrupted. Cigarettes, chocolate, and chewing gum filled temporary monetary gaps throughout Europe at the end of the Second World War. 

During the tyrannical reign of President Nicolae Ceausescu in Romania, the country had an ample supply of paper money and coins, but the value was virtually zero since the dictator and his wife exported almost everything produce in the country. They rationed food, allowing fewer than 2,000 calories a day for each citizen and the temperature of homes and offices couldn’t be raised above 55 degrees Fahrenheit (12 degrees Celsius). Cigarettes, particularly Kents, functioned as the real currency of the nation. Anything could be bought of cigarettes: food, electronic goods, sex, or alcohol.

Consumable commodities, like chocolate and tobacco, serve as a menas of exchange, but they cannot perform all the functions of money. For starters, they make for poor store of value. In order to store their wealth for use in the future, people need more durable items such as cloth, fur, feathers, whale teeth, boar tusks, or shells. These commodities last longer than food, yet eventually they deteriorate and loose their value too. They also have the handicap of being culturally relevant. No many people today would accept fur as a means of payment. Or anything other than fine metals or paper money. 

Throughout history, commodities and valued articles sometimes created an economic system that superficially resembled money system, but such systems were invariably limited in utility. 

The desires for rare and valuable objects often induced entrepreneurial individuals to make risky journeys.

Durable commodities such as shells, stone, and teeth provide a long term store of value, but because they occur naturally, their seize, texture, color, and quality varies, and that fact keeps them from being entirely fungible. Some items may be too common in certain areas to serve as money, like shells in coastal cities, or too rare to serve as general money, like in mountain communities. 

Money never exists in a cultural or social vacuum. It is not a mere object but a social institution. To function completely as money, a material cannot exist simply as an object; it requires a particular social and cultural system. Once the system is in place, many different objects can serve as money. Often these uses arise form within the political or prestige sphere of social life rather than the commercial or subsistence sphere. 

The Love of Gold

Next to food, humans seem to value metal as the most popular commodity of exchange. Of all the substances that can be used to make money, metal has more practical applications and has held its value over a longer time and a wider distance than any other, because of it’s long-lasting, it serves a good store of value. Since it can be made into smaller and larger pieces, it serves as a good means of exchange. Unlike food, which disappears when used, metal can be converted into something useful at any time and yet retain its value. It can be jewelry or a spear tip one day and serves as money the next. 

As techonology developed, the type of desired objects became more sophisticated and made great advances with the discovery of different metals. Of all the metals, gold has been the most universally valued. Unlike copper, which turns green; iron, which rust; and silver, which tarnishes, pure gold remains pure and unchanged. 


The people of Mesopotamia (the end of the third millennia B.C.) began using ingots of precious metals in exchange of goods. Inscribed clay tablets mentioned the use of silver as payment. An entire warehouse of olive oil, beer, or wheat could be reduced in value to an easily transported ingot of gold or silver. 

Once human technology and social organizations developed to the point of using standardized amounts of gold and silver in exchange, it became only a matter of time before smaller coins appeared. 

Money, like language, is uniquely human. Money constituted a new ways of thinking or acting. 

The Fifth Element

It was very near the walls of Troy that money was born. It was here in the little-known kingdom of Lydia that humans first produced coins, and it was here that the first great revolution began.

As Rich as Croesus

The Lydians (south of Italy) spoke European languages and lived in Anatolia after about 2,000 B.C. They formed a small kingdom under the Mermnadae dynasty, beginning in the seventh century B.C., but at its height, the Lydian kingdom was little more than an overgrown city-state spread from the Sardis. The Lydian kings were not celebrated in myth or song, and the dynasties and kings are known to us through the books of Greek historian Herodotus, except for one name – “Croesus.” 

Croesus ascended to the Lydian throne in 560 B.C. to rule a kingdom that was already rich. His ancestors made a firm economic basis for the kingdom’s wealth by manufacturing some of the best perfumes and comestics of the ancient world; but this alone didn’t raise him to the levels of wealth that myth accords him. For that he depended on another invention of his ancestors: coins.

The Lydian kings can be seen in their recognition of the need for very small and easily transported ingots worth no more than a few day’s work or a small part of a farmer’s harvest. By making these ingots a standardized size and weight, and by stamping on them an emblem that verified their worth to even the illiterate, the kings of Lydia exponentially expanded the possibilities of commercial enterprise. 

The Lydians made the first coin of electrum, a naturally occurring mixture of gold and silver. They made the electrum oval, about the same size, and to ensure its authenticity, the king had each one stamped with the emblem of a lion’s head. 

By making the coins the same weight and thus approximately the same size, the king eliminated one of the most time-consuming steps in commerce, the need to weigh the gold each time a transaction was made. Now merchants could asses the value by tale, or by simply counting the number of coins. 

The wealth of Croesus and his ancestors arose not from conquest but form trade. During his reign Coroesus created new coins of pure gold and silver rather than electrum. Using their newly invented coins as standardized medium of exchange, the Lydian traded in the daily necessities of life – grain, oil, beer, wine, leather, pottery, and wood. 

The variety and abundance of commercial goods quickly led to another innovation: the retail market. Rather than leaving buyers to seek out the home of someone who might have oil or jewelry to sell, the kings of Sardis set up an innovative new system in which anyone, even a stranger, with something to sell, could come to a central market. They had changed mere trade and barter into true commerce. 

The commercial revolution in the city of Sardis provoked widespread changes throughout the Lydian society; one of them allowing women to choose their own husbands. Throughout the accumulation of coins, women became free to make their own dowries and thus had greater freedom in selecting a husband. 

Sadly, this economic richness wouldn’t last, for Croesus used his vast-wealth into ostentatious projects such as: buildings and soldiers.

The Market Revolution

Persia conquered Lydia and many of the Greek states, but the highly centralized Persian system could not compete effectively with the revolutionary new mercantile system of markets based on the use of money. In time, these new markets based on money spread through the Mediterranean, and they continued to clash with the authority of traditional tributary states. 

The great struggle at the time, was the clash between the market cities of Greece and the empire of Persia, which represented the clash between the old and the new systems of creating wealth. 

Enriched by their newly emerging markets, the Greeks displaced conservative Phoenicians as the great traders of Easter Mediterranean. The monetary revolution sparked by the kings of Lydia ended the heroic Greek tradition and set in motion the evolution of the Greeks into a nation based on trade. With the spread of coins and the Ionian alphabet, a new civilization arose in the Greek islands and along the adjacent mainland. 

Coinage gave a great momentum to comerece by providing it with a stability it had previously lacked. Coins became a base-line against which other commodities and services could be more easily measured and exchanged. 

Money made possible the organization of society on a scale much greater and far more complex than either kinship or force had previously achieved. King-ship based communities tend to be quite small. The power of tributary systems and the state to organize humans proved far greater than mere kinship. A tributary system could easily include millions of people divided into provinces and classes and administered by a bureaucracy with a well-established system of keeping records. 

Money connected humans in a more extensive and more efficient way than any other known medium.

Money also became the medium for the expression of more values, making a great leap forward when its use was expanded from commodities to something as abstract as work. 

Work and human labor itself became a commodity with a value that could be fixed in money according to its importance, the amount of skill or strength it required, and the time it took. As money become the standard value for work, it was also becoming the standard of value for time itself. 

The Greek Genius

The introduction of coined money had an immediate and tremendous impact on political systems and the distribution of power. 

Democracy arose primarily in city-states like Athens, which had a strong market based on solid currency. Of all the Greek cities, Sparta was the one that most resisted democracy, coinage, and the rise of a market system. Legend maintains that the rulers of Sparta allowed only iron bars and spear tips to be used as money; this permitted some internal commerce but effectively minimized private commerce outside the city-state. Not unit the third century B.C., did Sparta begin to mint its own coins. 

Every great civilization prior to Greece had been based on political union and force, backed by a military. Greece, arose from the marketplace and commerce. They had essentially created a new kind of civilization. 

The wealth created by this commerce expanded the leisure time of the Greek elite, allowing them to create a rich civil life and to pursue social luxuries including politics, philosophy, sports and the arts, as well as good food and festive celebrations. 

The use of counting and numbers, of calculation and figuring, pushed a tendency toward rationalization in human thought that shows in no traditional culture without the use of money. Money did not make people smarter; it made the think in new ways, in numbers and their equivalencies. It made thinking far less personalized and much more abstract.  

The Premature Death of Money

An Empire Financed by Conquest

Rome was the first empire that organized itself around money, whereas the previous great empires relied on the use of government as their main organizing principle.

The Roman Empire reached its economic height around the reign of Marcus Aurelius. For the first time, all the Mediterranean was under a singular political ruler. This in term, made lands safer, encouraging trade and prosperity around the empire, and forced the standardization of products and measurements and increase the kinds of quality products that were traded in the empire. 

Most of the commercial growth of Rome occurred during its Republican era, prior to the rise of Julius Caesar and the long line of emperors that followed. Ceasar and the previous emperor understood the value of commerce and markets for their imperial power, so they improved upon it. Later emperors, on the other hand, showed little interest in commerce, since their riches came from the conquering of lands and the strength of the military. As long as the empire continued to expand, the emperor could continue to appropriate the wealth of the newly conquered lands to finance his army, pay for government, and support whatever other project he dreamt of. Every conquest brought a new surge of gold, silver and slaves, and a new wave of soldiers which he could train to turn against the next enemy. 

Unlike Athens and Sardis, Rome produced very little of anything, nor did it serve as a mercantile road. Rome was simply an importer of wealth. 

Roman emperors did not operate on a budget; a few saved but most spent whatever they could get on ego driven projects or the conquering of new lands to add to the Roman treasury. Every new province that was added to the empire produced a temporary jump in imperial Roman income, and subsequently in expenditures; but this surge was temporary, for the wealth would be quickly spent. 

The cost of conquest soon surpassed the value of riches it brought into the empire. The conquest of British Isles and Mesopotamia proved too costly for the natural resources and goods generated by the area, and the cost of occupying and guarding it quickly doubled. 

Rome produced little, and once it had looted the lands around it, the empire developed a growing imbalance of trade as it continued to import goods from Asia. Unable to offer quality manufactured goods, Rome had to pay its debts in silver and gold, causing a drain in its treasury.  

The Government Glut

Even thought the bureaucracy of the empire wasn’t as large as the army, the executive branch grew steadily despite the continuous decline of the empire. During the reign of Augustus, the government became a paid institution, a job that was previously voluntary, but again the income to the empire didn’t.

The emperors looked and re-arranged desperately the regions of the empire, creating ever more smaller and smaller provinces, but this only helped to grow another layer of bureaucracy which needed funding. Despite the constant change of organization reforms, officials were constantly added to the payroll and rarely cut.  

With the increase of government expenses, emperors searched for new revenue and new ways to make the existing revenue stretch further, which lead to the tampering of the coins. It started when Nero (64 A.D.) decreased the silver content in the coins, making both silver and gold coins slightly smaller, giving Nero almost a 15% “profit.” This didn’t stop with him, though, and following emperors followed his strategy and continued the debasement of the nation’s money supply. This allowed the emperor to get his hands on more money without raising taxes, but it did not increase the amount of money. 

So long as the Emperors had complete control of the army, there was no other empire or force that could take over or challenge them. The growing greed from following emperors pushed them toward adquisition of ever greater riches, through the conquering of neighboring kingdoms and seizing the riches generated by agriculture and commerce within their own empire. 

From the reign of August, the income of the empire was derived form two primary sources: the tributum capitis a poll tax paid ever year by each adult between ages of 12 and 65 and tributum soli an annual property tax on all land, from forest to crop lands, as well as ships, slaves, animals, and other movable property. Since this tax fell much more on agriculture than on commerce, more people gave up production and started trading. 

Most of these taxes went into the treasury of the central government located in Rome, so cities and provinces created their own taxes to cover city projects and salaries.

These taxes were reduced only when the army brought sufficient loot from their conquests, but the cost of conquering and maintaining new land proved to be too costly for the riches they brought. Emperors, in a desperate attempt to bring more revenue, increased taxes on land, forcing farmers to abandone less productive fields increasing the decline of production. The emperors in turn, increased their attention to commerce and inheritance, going so far as to create a sales tax. 

The small traders and merchants bore an increasingly larger tax burden from the tax on manufacture goods and retail business. Although this tax brought very little to the national treasury, it did great damage to the artisans and small traders throughout the empire. In order to meet their tax assessments, citizens were forced to sell their animals, tools, or even their own children and themselves into slavery to pay their taxes.

Finding no more ways to squeeze more revenue from an increasingly low production empire, the Emperor found more ways to seize on property, like seizing the property of anyone judged a traitor to Rome. Sadly, this new law of treason was used to confiscate the property of anyone rich enough to attract the attention of the emperor but not close enough to him to maintain his favor. 

As taxes increased, the emperor and his favorites were exempt form taxes and enjoyed an ever more luxurious life while farmers, tradesmen, and craftsmen who created abundance lived in poverty. The entire economy focused on maintaining the government. 

Money changed hands many times through these years of decline of the empire, but the money eventually left the Roman Empire in order to pay for the goods imported from China, India, Africa, and the Baltics. The desire for luxury goods consumed almost all the gold and silver from Europe, something that would continue until the 19th century. 

Because the Roman’s produced comparatively little, they had little to offer the world market other than gold and silver in exchange for luxury goods produce in Asia. This enriched the ruling Adhra dynasty in South India and the Hand dynasty of China. 

The First Welfare State

In the beginning days of the republic, Roman politicians found that they could often increase their power by bribing the masses with bread and circuses. The free citizens of the city of Rome were exempt from taxation and were given heavily subsidize or even free wheat, paid for by the taxes and tribute seized from the hinterland of the empire. This welfare program was often accompanied by the often brutal entertainments that were staged in the Colosseum. This practice quickly became institutionalized as a public dole.

In addition to wheat, Emperor Severus gave the people of Rome olive oil; from time to time, emperors gave cash payments as part of the dole. Emperor Aurelian changed the allotment of wheat to a ration of bread so as to spare the masses from having to bake it. He also subsidized the price of wine, salt, and pork for the masses in the city of Rome.

Like people anywhere, once taxes became too high in comparison to the benefits offered by the government, the Roman subjects found ways to avoid the taxation. Commerce declined. People started to produce more of what they needed for themselves and less on the open market. Many peasants abandoned their land and moved to the tax-free estates where they were they at least had a steady supply of essential goods produce on the estate itself. 

As people left the small farms and towns, the large estates grew and without commerce to keep the alive and functioning, the great cities began to decline and to fall prey to tribes. 

Diocletian, who ruled form 284 until 305, ordered a freeze on all prices and wages. In practice, however, rather than freezing prices, the law prompted merchants and farmers to withdraw their goods from the market. Production declined. Diocletian then ordered all male citizens to follow the occupation of their fathers, essentially freezing the innovation that was previously seen. He also forbade the heavily burdened farmers form selling their land, thus tying them to the same plot of land, practically foreshadowing the age of feudalism.

The government forbade its citizens to pay taxes in the debased money they still issued; instead they demanded payment in goods, crops, or labor. But the continuation of the burdening tax on production made it increasingly difficult to supply their armies and bureaucracy with the equipment and goods necessary to rule the diminishing empire. This led to the government, in a desperate attempt to increase production, to seize and create the industries it had killed. 

An increasingly greater portion of the economy fell under direct control of the bureaucracy which consumed ever more of the national output of agriculture and manufactured goods. By its last decades, Rome had become another state-administered economy, and empire without money or markets. 

Profits from Persecution

As the economy of the Roman Empire continued to deteriorate, desperate emperors searched for more radical solutions to fix it. One such solution was the prosecution of Christians whose property was seized and provided plenty of victims for the shows of in the Colosseum. This was a practice that was stopped by Constantine, but not entirely. 

The prosecution of religious groups to seize their property by the government is a practice that is still in use today, but at the time, was a practice that was abused by Constantine when he looted the temples of his own empire in order to finance the construction of his own capital: Constantinople. This cut off the money supply to Rome and further damaged the concomio condition of the Roman lands.

The western Mediterranean and Europe fell into chaos, as barbarian tribe conquest were welcomed by citizens since they allowed for more freedom than they had experienced by the Roman Empire.

In the 4th century, Rome stopped all production of its debased currency, and the conquest of Italy by the Ostrogoths forced a new type of coin. Byzantine ruler Justinian I used the coins that the Roman Empire had minted in order to create his own currency, but the days of Rome making their own coins came to an end, and with it, the classical economy.

The Road to Feudalism

The medieval era parted ways from the classical Mediterranean culture when the classical culture focused on the city, medieval culture focused on the country. Whereas classical culture emphasized commerce, medieval culture emphasized self-sufficiency; and whereas classical economy focused on money, medieval economy focused on hereditary services and payment. The medieval culture parter most radically form the of the classical era when it gave up on the use of money. Taxes and other services were paid either through bartering products or in products produced by the peasants like crops and services. Rather than manufacture goods, each manor sought to be as self-sufficient as possible by producing its own food and clothing and even by making its own tools. No longer able to sell their services, people became serfs who were bound to the land. 

Despite the death of the currency system in Western Europe, a system of coinage survived in the Easter Mediterranean under the Byzantine emperors at Constantinople. 

After centuries, the coinage system gradually returned to life during the era of the Crusades, when Western Europeans invaded the Muslim lands of the East. Money, finally, acquired and important role in financing the extension trade routes opened between East and West and in financing the large military expeditions that were launched over great distances for long periods of time.

The Knights of Commerce

The Virgin Bankers 

The Templars were the first banking institution recorded. Founded in Jerusalem around 1118 by Crusaders, the Military Order of the Knights of the Temple of Solomon dedicated their lives to serving the church, and to liberating the Holy Land from the Infidels. 

Recruited largely from among the younger sons of nobility who didn’t inherit either titles or riches, the knights pledge themselves to a life of devotion to the church. They undertook the special obligation of maintaining the safety of the highways for pilgrims coming to the Holy Land. 

Though they had a pledge to poverty, papal bulls gave the order the right to keep all the spoils and treasures of the Muslims they exiled form their land during the Crusades and like all religious orders, they also accepted gifts and estates form the faithful. 

Through the years, the Templars acquired more land and valuables, all designated to support the work of the order in Palestine. The knights regularly transported the profits of their European estates to their headquarters in Jerusalem.

Due to the ownership, by the Templars, of some of the mightiest castles in the world and because they constitute one of the fiercest fighting forces at the time, their castles serves as ideal places in which to deposit money and other valuables. 

A French knight could deposit money or take out a mortgage through the Templars in Paris, but received the money in the form of gold coins when needed in Jerusalem. 

In addition to serving as depository for and transporter of treasure, the Templars administered the funds gathered from religious and secular sources to finance the Crusades. 

Knights who were not members, usually stored their valuables in a fortress of the Templars, and the order frequently held and supervised mortgages and other financial affairs for kings during their absence, as when Philip II of France left the Templars in charge of the revenue from his lands when he marched away in the Crusade of 1190. The Templar’s castles soon became full-service banks, offering many financial services to the nobility. 

Over the course of the 13th century, this grew into an institution somewhat like a modern treasury department, except they did not collect taxes. 

The Dangers of Success

Despite the poverty of its individual members, the order grew rich and fat, but seemingly beyond the control of any one nation or king. This major weakness was to be exploited by a sufficiently strong and greedy monarch to tackle them and take all their riches. 

King Philip IV of France would be the one to do so. 

In 1295, Philip took the management of his finances out of the hands of the Templars and established the royal treasure at the Louvre in Paris. He then began a campaign aimed at taking over both Templar’s extensive properties and treasure. 

Philip’s desperate need for money arose when he tried to do what Nero did a thousand years before: he debased the silver currency of his realm in order to produce more coins by minting the old ones with less silver. The problem arose when his peasants started paying taxes in the new coins, giving Philip less purchasing power. He sought to reform the French currency by returning it to its original value, but every year he would altered the value of the currency the alteration would hurt him in the end. He needed a constant supply of gold and silver in order to restore the adulterated currency. 

Philip turned to the Lombard merchants, whose goods he seized. He attempted to tax the clergy, and then exiled the Jews after seizing their property, but even their vast wealth didn’t meet the needs of his growing government and thirst for power. He needed massive amounts of money. 

Rather than wage war directly on the Templars, Philip IV coordinated a surprise attack on the leaders and started a public relations war against the sect by accusing them of devil worship, heresy, apostasy, sexual perversion and a whole catalog of the worst offenses against the medieval code of morality. 

Bowing to the pressure of the French king, Pope Clement V abolished the order on March 22, 1312. The pope found it more prudent to sacrifice the knights of his church than to defy the will of the French king. He was also hoping that by abolishing them, the church would take control of the Templar’s property, which he transferred to other religious groups. 

The Pope and King Philip IV quarreled over the money and property of the order, but not for long. Within the same year, 1314, both the pope and the king laid dead. 

The total triumph of King Philip over the Knights Templars marked a clear increase in the power of a national government that would not tolerate an international financial rival as powerful as the Templars. For the first time since the fall of Rome, a government in western Europe had successfully reasserted its authority and power to control financial institutions, and it had broken the commercial power of the church. Never again did the church exert so much power over the financial activities of Western Europe.

The Rise of the Italian Banking Family

The families of north Italian city-states of Pisa, Florece, Venice, Verona, and Genoa began to offer the same services as the Templars had offered, only on a much smaller scale at first. These families created a new set of banking institutions outside the immediate control of church and state, but with close ties to both.

A new system of private, family banks, arose in northern Italy. They weren’t confined with strict Christian doctrine, and dealt readily with Muslims, Jews, Pagans, Tartars, and Catholic Christians. The banking network of the Italian merchant families soon stretched form England to the Caspian Sea, and financed trading missions through the know world from China to Sudan and from India to Scandinavia. They offered a steady supply of credit at rates lower than most financiers, and they controlled more money and lent it at consistent low rates. 

The Italian families differed in other important ways from religious knights. They did not operate from well-fortified castles, nor did they travel in heavily armed convoys. The lived and operated in the market place and catered to the financial needs of both nobility and church to the common merchant. 

Like the other merchants, they set up tables or large benches from which they not only traded their goods but also exchanged money, made loans, arranged to take money as payment for a debt for someone in the next town, and performed other related financial services. 

One thing that prevented them from falling from grace from the public eye was the distinction of making loans. The Italian banking families never made loans, they traded bills of exchange in which a certain person at a certain time and place promised to make a payment. This sale was one kind of money for another kind that would be paid in another currency at a specified future date. 

The Magic of Bank Money

The use of bill of exchange had another beneficial effect on commerce: it helped the hassle of having to deal with coins en bulk.

The new Italian bank money boosted commerce by making it faster and easier. A bill of exchange could be sent in a mere eight days, as opposed to the three weeks it took to transport gold and silver form one town to another. If the bill was stolen, the thief could not redeem it, therefore protecting the exchange. Despite the extra cost of 8 % to 12%, it was cheaper than hiring an armed escort for shipment. 

Another innovation, and one we take for granted today, is the idea of loans given to multiple people with only one set of money. One hundred Florins deposited by a Nobel could be loaned to and circulated to multiple people across the continent. This new banking money opened vast new commercial avenues for merchants, manufacturers, and investors. Everyone had more money. 

Bills of exchange provoked a boom in European markets by helping overcome the vastly insufficient supplies of gold and silver coins. By making the system work much faster and more efficiently, they increased the amount of money in circulation. 

With the spread of Italian banking through Europe, the currencies of Florece and Venice became two of the standards of the Continent. 

The new forms of banking money circulating throughout Europe necessitated new ways to keep account of the money’s movements across so many jurisdictions and in so many currencies. Innovations in Florence produced double-entry book-keeping’s and a new invention: the check. 

In the earliest forms of banking, the person could only withdrawal and deposit money by appearing in person before the banker. Written statements were considered too risky, since such a request might be easily forced unless the person appeared in person before the bank clerk. Not until the end of 14th century did the first written withdrawal appear in the records of the Medici Bank. These first checks furthered increased the speed and flexibility of the banking system. 

Even thought baking emerged during the Italian Renaissance, it acquired little respect. Their work as money changers was barely distinguished from moneylenders, and they were thought out as barely above pimps, gamblers, and other criminals. In the aristocracy of Europe, based on land and title, the possession of mere wealth had practical importance but lacked prestige. 

In order to become respectable after becoming wealthy, the bankers needed to acquire land estates, urban palaces, aristocratic titles, and high church offices. In their efforts to produce these trappings, the rich banking families of Europe created the Renaissance, and no family succeeded in it like the late Medici family. 

The Reinaissance began not as a movement in arts and letters but as a practical, mathematical revival to help bankers and merchants tackle the increasingly difficult tasks of converting money, calculating interest, and determining profit and loss. 

The Golden Curse

Treasures of the Americas

It only took the Spaniards fifty years after the discovery of the americas to locate all the treasures the Indians had accumulated. 

First they looted the great Aztec capital Tenochtitlán in 1521, soon after they raided Central America and conquered the Chibcha people of Colombia, where the myth of El Dorado, a golden city, was born before moving south to fight the Incas in 1530s.

After half a century of constant looting, the Spaniards ran out of rich Indian nations to conquer. In need of new resources, they turned their attention to the source of silver and gold: the mines. In Mexico and Peru they found more deposits of silver then in the mines of Bohemia and other European sites had ever produced. This turned Spain into the richest nation on earth, but this would come at a very high price of the Spanish society and culture. 

Under the laws of Catstile, during the reign of Alfonso X and Alfonso XI, the monarch could grand ownership of land to individuals, but that only applied to the surface rights, anything of mineral source continued to be owned by the Crown who demanded 50% of any buried treasure discovered in Indian tombs, pyramid, and temples. 

The monarch owned many of the mines outright, but for a high enough fee, the Crown could lease, grant or even sell to individuals and groups the right to mine the resources. Still the Crown collected a fee called quinto real, or 20% of all silver and other minerals. Even though this left 80% of the minerals to be owned, the government put down restrictive laws that took away much of that as well. The miners had to buy mercury and other substances needed for mining from imported companies controlled by the Crown. The trade of salt, tobacco, gunpowder, and most minerals was also a virtual monopoly of the Crown and had high import fees. 

The Spanish Crown acquired further profits from mining through the supplies shipped from Spain. Government monopolies charged colonies exeptionally high prices for the shipping of gold and other goods that were controlled by the government, on government ships, and government convoys. On every transaction in Spain, there was a sales tax or gift tax that gradually increased over time form 2% to 6%. 

In 1572, the government extended the alcabala to include all the Spanish territories in America. In addition to paying the same taxes as people in Spain, the Americas had to pay the almojarifazgo, 7.5% import tax on all goods shipped from Europe. They also collected a diezmo, a tax for the church, which didn’t include any production for the mines, but it was implemented on all agricultural products, including those used to supply and feed the miners. Indians, were forced to pay special tributes taxes in the form of silver coins.

To keep the production of silver, the Spanish government re-organized the societies of the new colony to revolve around mining. Agriculture and farming were only important in that it produced horses, mules and oxen to transport the gold and just enough food to feed the miners. Roads were created for the simply purpose of transporting the gold and silver to the coasts for shipment across the sea. 

The Bridge of Silver

The wars and struggles among the European powers from the 16th to the 18th century focused solely on the control of the wealth of the Americas and trade with Asia. First Spain struggled against Portugal, and then they both struggled against England, France, and the Netherlands. 

So much gold and silver was being mined by Spain that some claim a bridge could have been constructed between the Americas and Spain. 

Historians calculate that from European discovery until 1800, between 145,000 and 165,000 tons of silver were shipped out in addition to 2,739 to 2,846 tons of gold. At the price of $400 per once, the total gold production would have a value of approximately $36 billion dollars.   

Portugal, on the other hand, never cared much for Brazil as the Spaniards cared for Mexico and Peru. Mostly because Portugal had a lucrative spice trade with India and the Spice Islands. But this indifference ended in 1695 with the first of a series of Brazilian gold booms. Some found that some sections of the flat soil in Brazil harbored rich deposits of gold flecks and nuggets, the extraction of which required much work but relatively simple technology. 

The production in colonial Brazil climbed to its peak between 1741 to 1760 when it averaged 16 tons a year. The mining and transport required approximately some 150,000 slaves. 

The further inland they explored, the more precious gems and gold deposits they found. 

The Price Revolution: From Riches to Rags

The wealth of the Americas turned out to be a blessing and a curse to the kingdoms of Southern Europe. The influx of gold and silver without the appropriate adjustment of production caused tremendous inflations. The quantity of goods could not keep up with the volume of silver shipped from America, increasing the inflation and thus eating away the value of silver and gold. The influx of precious metals cause the price and value to crash to a third of what it was before the importation. It is estimated that between 1500 to 1600 the prices in Spain rose by 400%, and by this reason it was known as the price revolution.

The Spanish farmers, ranchers, craftsmen, and manufactures produced few goods, so they had to be imported from other countries, hastening the flow of silver out of the country as soon as it arrived. Italy sold them glassware, Hungary sold them copper, England offered woolens, and the Netherlands offered weapons. 

The Spanish monarchs had made their financial situation even worse by expelling the Muslims and Jews in 1492. Most Christian Spaniards at the time worked as peasants, tiling the soil, growing wheat and olives, and raising cows and goats, or else they served as soldiers. It didn’t matter the education, Spanish subjects had little education; they could not read and write, nor could they work with numbers. The Jews and the Arabs had constituted the educated class of administrators and merchants, without them, the Spaniards proved highly ineffective in managing their financial and commercial affairs. 

People of many nations rushed in to help the Spaniards. Italian merchants, German moneylenders, and Dutch manufacturers quickly moved to fill the mercantile void left by the Jews and Arabs, but they took their profits back to their home countries. Without a native merchant class, the Spaniards watched their silver flow through their hands and into the coffers of the other Christian nations of Europe.

Silver only arrived once a year, but the kings usually spent their portion before it arrived. To do this, they had to borrow money in advance of the ships’ arrival. At first the kings borrowed from their subjects, but since they felt no obligation to pay it back, the already over taxed subjects hid their money and quit lending it. 

The kings then turned to foreign creditors. Although the Spanish monarchs ruled over one of the largest and richest empires in the world, they were constantly at the mercy of their bankers and creditors in Italy, Germany, and the Netherlands. 

By the 1640s, many of the Spanish Princes themselves had risen up in rebellion against the harsh taxation and repressive government of the Hapsburg monarchs. In some years, the Crown’s expenditures surpassed three times its income. Aristocrats and commoners also borrowed but in lesser amounts, making Spain on the world’s greatest debtor nations and eventually resulting in national bankruptcy. 

The Money Culture

Even though Spain and Portugal had a hard time managing their gold, the rest of the world profited from their misfortune. The spread of American gold and silver across the Atlantic and Pacific oceans opened the modern commercial era. During the 16th and 17th century silver and gold coins became more readily accesible than at any prior time in history. No longer would their use be limited to wealthy individuals. 

Just as the banking revolution had increased the amount of money in circulation and brought merchants from all over Western Europe into a single commercial and financial system, the increase of silver coins brought the lower classes into the system. 

Professions that had traditionally depended upon money such as soldiers, artists, musicians, and tutors, now became even more focused on payment rather than on exchange of services such as room and board and rations paid in bread, alcohol, and salt. 

Particularly in 17th century, the new allocation of wealth gave rise to a middle class of merchants. This in turn created entirely new professions centered on money. As banking expanded, brokers appeared who specialized in the buying and selling of anything form real estate to shares in a trading voyage to China. 

All these new profession created new sources of wealth. In feudal society, wealth had been derived form titles, privileges, and land bestowed by the monarch or taken by force during war. Now men without title, grant, or land had more money to spend than had the old aristocrats.

The greater supply of coins also facilitated international commerce and financial ties that gradually began to unite the regional economies of the world. Merchants outside Europe would not accept the bankers’ bill of exchange, but they would accept the new silver coins minted in Peru and Mexico. 

Very quickly, Africa became a part of the triangular trade with Europe and America. African slaves went to Caribbean plantations. American silver and Caribbean sugar went to Europe. Much of silver and European manufactured goods then went to Africa to buy more slaves to ship to America. 

The network expanded from the slave trade to include the spice trade with South Asia, the silk and porcelain trade with China, the opium trade with India, and the fur trade with Siberia, Canada, and Alaska. 

The Birth of the Dollar

At the beginning of the 16h century, Jachymov came under German administration when Bohemia became part of the Holy Roman Empire. Miners discovered silver deposits in approximately 1516, but silver mining was not new to Bohemia. Farther east, in the center of the country, major silver mines had been in operation in Kutna Hora for centuries.

Rather than merely mining the silver and selling it to others, Count Schlick surreptitiously began minting silver coins called groschen. According to local tradition, he made the very first coin in 1519 in his castle, even thought he did not receive official permission for such minting until January 9, 1520. 

In the century between 1519 and 1617, when talers were minted in Jachymov, production began with about 250,000 talers in the first year. At maximum production, from 1529 to 1545, the mines supplied enough silver to mint 5 million talers. It is estimated that by the end of the century, Jachymov had put nearly 12 million talers into circulation in addition to the many smaller coins produced by its mints. 

The Spread of the Dollar

The coins of Jachymov spread around the world, influencing the names of many different European coins. Initially, for example, the talers was a large silver coin worth three German marks, but it eventually gave its name to any large silver coin. 

“Taler” became a common name for currency because so many German states and municipalities picked it up.

The most famous and widely circulated of all the talers became known as the Maria Teresa taler, struck in honor of the Austrian empress o the Gunzburg Mint in 1773.

The coin not only survived it namesake but outlived the empire that had credited it. In 1805, when Napoleon abolished the Holy Roman Empire, the mint Gunzburg closed, but the mint in Vienna continued to produce the coins exactly as they had been with the same date, 1780. The Austro-Hungarian government continued to mint the taler throughout the nineteenth century until that empire collapsed at the end of World War I. The new Austrian Republic continued to make the Maria Teresa taler until Hitler seized the country in 1937.

The name dollar penetrated the English language via Scotland. The Scots used the name dollar to distinguish their currency, and thereby their country and themselves more clearly from their domineering English neighbors to the south. Thus, from very early usage, the word dollar carried with it a certain anti-English or anti authoritarian basis that many Scottish settlers took with them to their new homes in the Americas and other British colonies.  

Despite the widespread use of the word, no country adopted it as it official currency until the creation of the United States. As a British colony, one would be right to think that the original thirteen colonies would use the British currency of pounds, crowns, shillings, and pence, but the mercantile policies in Britain sought to increase the amount of gold and silver money preventing their currency from being exported to its own colonies. As a results, the American colonies were forced to use foreign silver coins rather than British pounds. Thankfully they found the greatest supply of coins in the neighboring Spanish colony of Mexico, which operated one the worlds largest mints. 

The American colonists became so accustomed to using the dollars as their primary monetary unit that, after independence, they adopted it as their official currency. Not until April 2, 1792, however, did Congress pass a law to create an American mint, and only in 1794 did the United States began minting its first silver dollar.

With virtually no access to gold or silver, the U.S. government lacked the ability to mint coins other than by melting the silver coins of other nations and re-minting them as American; rather than go to such effort, U.S. authorities allowed the Spanish dollar to continue as the de facto currency of the new nation. After Mexico gained its independence from Spain in 1821, the New Mexican government issued its own pesos with a slightly higher silver content that the old Spanish reales. The New Mexican peso immediately became legal tender in the United Sates and remained so throughout most of the nineteenth century. 

In 1787 the United States issued its first coins. The copper coins worth one cent bore the motto “Mind your business.”

The Last Silver Dollar

After reaching its maximum usage around the beginning of the 20th century, the American silver dollar coin began to die. In 1935, during the Great Depression, the U.S. Treasure ended the minting of silver dollars, and with the passage of the Coinage Act of 1965, they ceased using silver in American coins, replacing it with copper covered in cupronickel. 

The Devil’s Mint

“The trouble with paper money is that it rewards the minority that can manipulate money and makes fools of the generation that has worked and saved.” 
– Adam Smith 

The 20th century became the era of paper money. Never before had so much of it been manufactured in so many countries in so many denominations. Behind the perpetually operating machines in the U.S. treasury lay a long process whereby paper money won the confidence of ordinary people.

Mulberry Money

The Chinese economic has always operated by its own monetary rules, which were created and enforced by a powerful state with a large bureaucracy and a strong army. Commerce has always been controlled by states forces rather than market forces. For much of Chinese history, the emperor forced his subjects to use copper tokens for money instead of the silver and gold that most of Europe used for money at the time. It was only a matter of time until people simply drew a picture of the cash on a piece of paper in leu of the coins. 

The invention and dissemination of paper money in China marked a major step forward in government control of the money supply, something that could only occur in an empire that was powerful enough to impose the will of the state on the economy. 

The invention of paper money had to wait the invention of paper and printing. 

Chinese bureaucrats made paper bills from the mulberry bark paper. Once stamped with the vermilion seal of the emperor, these bills carried the full value of gold or silver. Despite its lack of actual usage outside of the empire, the bill represented great improvement over the coins, since they were easier to transport. 

The use of paper money in China reached its peak under the Mongol emperors. They needed to administer the largest empire in the world, and like any bureaucracy, they found paper an invaluable asset. The paper bills made collecting taxes and administering the empire much easier than having to transport tons of gold and silver across extended locations. 

In 1273, Kublai Khan issued a new series of state-sponsored and controlled bills. He confiscated everyone’s gold and silver and instead issued paper money compelling everyone to accept it in payment under penalty of great punishment. Even merchants arriving from abroad had to surrender their gold, silver, gems, and pearls to the government at prices set by the council of merchant bureaucrats. The traders then received government-issued notes in exchange. 

Muhammad ibn-Batuta, a Moroccan traveler who visited China in 1345, observed the same thing when he said that every foreigner in China had to deposit all of his money with an official who then paid all his expenses, until the end of his visit, only then the council return the remaining money on his departure day. He described China as the safest country in the world for merchants. It didn’t matter how far one traveled or how much money one carried, they were never robbed. 

To create this level of safety the government operated a police state in a surprisingly modern sense. Bureaucrats sketched detailed portraits of all entering foreigners so that their picture could be quickly circulated if they committed a crime. At each stop the merchant had to register with the police, and his name was forwarded to authorities at the next stop before he could leave. At each stop, an army official inspected foreign merchant each morning and night, and locked them up in hosterly for the night.  

By using paper money and brass or copper token instead of gold or silver coins, the Chinese authorities never had to worry about the purity of their coins. The purpose of paper money was to allow the government a monopoly over silver and gold. Paper flowed from the capital to the provinces while gold and silver flowed from the provinces to the capital, acting as tributary system and stagnating any kind of market that might be created.

The Duke of Arkansa

During the time of the Gutenberg, the technology for printing and superior paper making spread through Europe. 

In July 1661, Sweden’s Stockholm Bank issued the first bank note in Europe to compensate for a shortage of silver coins. Although Sweden lacked silver, it posed bountiful copper resources, and the government of Queen Christina issued large copper sheets. To avoid having to carry such heave coins, merchants willingly accepted the paper bills in denominations of one hundred dealers. One such bill could be substituted for 500 pounds of copper plates. 

The first national experiment for paper money was in France. 

By royal decree on May 5, 1716, the French chose a Scotsman, John Law, to head a bank name Law and Company, but quickly renamed Banque Genérale. He allegedly claimed that he found the true philosopher’s stone to make wealth from paper: by printing money. 

Law and Company was to be a private bank that would help raise and manage the public debt. In keeping with his theories on the benefits of paper money, Law immediately began issuing paper notes representing the supposedly guaranteed holdings on the bank in gold coins.

Law was also responsible in establishing the Compagnie d’Occident in 1717, generally known as the Misisipi Company and formed to bring home the great wealth of France’s holdings in Louisiana. The Bank Royale printed paper money, which investors could borrow in order to buy stocks in the Mississippi Company; the company then used the new notes to pay out it fake profits. The bank had soon issued twice as much paper money as there was specie in the whole country and could obviously not guarantee that each paper note would be redeemed in gold. The Mississippi Company collapsed when it became obvious that the wealth would never materialize, and the bank fell with it. By the end of 1720, the Banque Royale lay devastated with a trail of worthless paper notes behind it. 

The Father of Paper Money

Benjamin Franklin holds the honor of being the father of paper money. In 1729, Benjamin Franklin published a Modest Enquiry into the Nature and Necessity of a Paper Currency. 

Colonial authorities in London, however, saw the issuing of paper money as an imprudent usurpation of power by the colonists. In 1751 the British Parliament outlawed the use of paper money in New England and, in 1764, extended the ban to other American colonies. In response to this ban, Franklin himself went to London in 1766 to petition Parliament to allow more money to be printed. 

A Continental Experiment

The foundation of the United Sates of America offered the chance to put many of Franklin’s ideas about paper money into practice. The new country provided the first experiment with paper money on a national scale, and the American Revolution was the first war to be financed with paper money.

The Second Continental Congress created paper money before it had declared independence from Britain. To claim its independence, the new country needed to raise an army to fight, but lacking the funds they issued paper money supposedly backed by gold and silver with a stiff penalty to any traitor who refused to accept the mass currency. In 1777, Congress issued $13 million worth of paper bills called Treasure notes but dubbed “continentals.” 

The continentals began with a nominal value of one Spanish milled silver dollar, but they quickly traded at two continentals for one silver dollar. As Congress issued more continentals to pay for its prolonged war, their value declined proportionally. A year later the value of the bills had dropped to seventy-five continental to one silver dollar. 

The American Congress stopped issuing the virtually worthless paper money in 1780, but most of the states continued to issue their own paper money. By 1781, the continental had lost so much value that it gave rise to a new cliche: “not worth a continental.” Fortunately for the United States, Britain was giving up its struggle to hold on to the colonies and was directing its commercial attention elsewhere in its search for profits. 

The whole experiment with a paper money so disgusted most Americans and provoked such a deep mistrust of paper currency that the United States printed almost no paper money for nearly a century. 

The Gold Bug

In the city of London in the 19th century, bankers created a monetary system of paper money based on gold. This system spread around the world and became the first complete global money system in the world. 

The Old Lady of Threadneedle Street

The commercial district of London rose around the Bank of England, which still stands as the most important financial institution in the City. The bank emerged when in 1688, known as the Glorious Revolution, the Whigs and the Tories in Parliment agreed to remove King James II and input his daughter Protestant Mary and her Dutch Husband, William III. Since the crown was bankrupt, the new monarchs tried to find a way to fund the rebellion and the ongoing war with France at the same time. 

In his search for funds, William agreed to charter a national bank that would raise money from private sources and lend it to the government. The Scottish financier, William Paterson and his associates organized it, and immediately lent the King $1.2 million at 8% annual interest. The investors received stock in the bank in proportion to their investments. 

Depositors brought their coins to the Bank of England and received a receipt for the deposit. These receipts circulated as money and were thus the first bank notes designated in British pounds. At the time, the bank issued notes in ten and twenty-pound denominations, but back in the day, twenty pounds had the purchasing power of one thousand modern dollars, so these notes were mostly used by big business or financiers, leaving the coins of much smaller value for daily transactions. 

During the financial crisis of the Napoleonic wars, the bank started issuing one and two pound notes to compensate for the lack of coins and to pay for the materials and soldiers used in the wars; but even then, these notes had a purchasing power of the equivalent of $50 dollars and weren’t widely used by regular people. 

In 1844, Parliament passed the Bank Charter Act, which gave monopoly to the bank to issue bank notes in the United Kingdom. Some banks in Scotland were given the rights to keep their independence and issue notes too, but they had to be backed by bank notes form the Bank of England. The Bank of England in turn had to guarantee the convertibility of all its paper notes in gold on demand, making paper money the equivalence value of gold. 

Most of the world operated on a gold standards, but a few countries, including Mexico and China, continued on a silver standard. Despite variations in the prices of the two metals and some difficulties in synchronizing the two, they essentially function as part of a single world monetary system in which all currencies had the backing of either gold or silver. 

After the defeat of Napoleon, Britain dominated as the greatest empire in the world with the support of the world’s most powerful navy. The Bank of England became the prototype of the centralized national bank, emulated by national banks around the world. The era from the beginning of Queen Victoria’s reign until the outbreak of World War I was one of the most stable periods in monetary history, and it produce the greatest general prosperity know in history to that time. Under the leadership of the Bank of England, the world operated on a single monetary system based on common adherence to the gold principle. In effect, gold was the world currency. 

The Tale of Two Cities

Under the Bank of England, Britain prospered. With a solid pound sterling, industrialization and trade grew steadily and prices for most commodities dropped just as steadily throughout the century. Gold provided the supported that peace and prosperity, mostly because the gold standard acted as a huge restraint on governments; countries could use paper money so long as it was backed by ingots of gold. This simple policy gave governments a restrain in their spending. 

Thanks to this, the 19th century brought with it new systems of railroads, steamships, telegraph and telephone lines, and electricity, as well as architectural wonders from the Brooklyn Bridge and the Eiffel Tower to the Suez Canal. More good were produce for more people that ever before, and the era culminated in the Gilded Age, an era of great excess marked by conspicuous consumption. 

Gold Discipline

Throughout the 19th century, the European governments found themselves severely limited by the gold system around them. Unable to give away land or grants or print money in order to fund reckless transgression, the governments had to find a way to enrich themselves through the conquest and plunder of gold. They sent out armies around the world to find it in South Africa, Australia, Siberia and the Yukon. Even the United States funded the colonization of the west, seizing it form the Mexican government. 

This also lead to the British control of most of the trade routes around the world. They controle the Caribbean with their military bases in Belize, Jamaica, Bahamas, and Guinea. Their control and oversee of the Mediterranean entrance through their base in Gilbraltar and their control for Egypt which gave them virtual monopoly to the Suez Canal. The pacific soon followed with their colonization of Australia, New Zealand, Tonga, Fiji, the Cook Island, and New Hebrides. Yet, this was not exclusive to the English, nor was it long lasting since most of these colonies would seek independence from their colonial powers, especially those under the control of France, Portugal and Spain. 

In the process of the conquering the world in order to find more gold, the expenditures of these campaigns rapidly became to eat away the gold reserves of most of these countries, forcing them to create new taxes to fund them. 

World War I was a great excuse for the governments to increase their power over the economy and its citizens and impose new taxes and government control over their expenditure. One such measures was the printing of money when they simply lacked the gold to finance their new undertakings, essentially taking away the gold standard that had for centuries kept government expenditure in check. 

The first casualty of this new unrestrained policy, was the Bank of England whose independence was eroded away when the First World War ended. The need of the British government to finance its army once again took precedence over the discipline of the gold standard, and the bank printed far more money than it could convert into gold. Once the government had seen how easy it was to get money without the discipline of the gold standard, it was reluctant to return to its restraints. 

With the collapse of that system, the governments of Europe and North America searched for new systems to replace it, mostly because they did not want to return to the gold standard and thereby surrender the power that had been so newly won by the politicians. Instead, they tried to created international political systems, beginning with the League of Nations and later the United Nations, and dozens of other political entities such as the International Monetary Fund and the World Bank. 

With the old monetary and economic order in ruins at the conclusion of the war, many politicians and political theories came forward with new systems, all of which increased government power. The communist came to power in Russia with their extreme plan of ending capitalism, destroying all markets, and having a unified economic and political system administered solely by the government in a form of internal socialism. Opposed to international socialism, the followers of Hitler imposed a system of national socialism, a name that would be abbreviated to Nazism, which imposed an equally harsh governmental control over the economy, even to the point of allowing a revival of slave labor so long as it met the political ends of the state. 

The liberal democracies of Western Europe and North America settled for less extreme ideologies and measures, but they greatly increase the power of the governments over the economy. In each country, political and bureaucratic coalitions formed with certain parts of the economy. One such coalition formed around military production and deployment, but later in the century, this would be mostly replaced, especially in Europe, with the formation of new set of alliances to created massive social service network in the welfare-industrial complex. Both needed substantial amounts of government money, which had to be derived from the part of the economy that was neither welfare nor military.

The Yellow Brick Road

From Wildcats to Greenbacks

From the beginning of its history, the United States has been a nation built around money and commerce more than around its army, government, or ruling class. American society rested, in essence, around a solid basis of monetary relationships. 

The current system of paper money in the United States is very much a product of the Civil War. Following their first disastrous foray into printed money, the United Sates printed no more money for nearly a century, with one exception for a brief period during the war of 1812.

The country had a long struggle of monetary policy since its independence from England. It charted and uncharted its national bank twice. The Supreme Court ruled that the individual and sovereign states could authorize state banks to issue their own notes, and consequently almost all of the paper money in circulation came in the form of state and private bank notes.  

In the 19th century the federal government issued all coins of silver, gold, and copper but not paper money. Since there were federal laws or charters, all paper money was issued by banks operating under state law but backed by gold. From the beginning of the Republic, however, there was a strong political faction that lead a campaign to try and paint the local banks with stories about “wildcats bankers” who printed money and then went bankrupt or of unscrupulous bankers whose chest of gold coins turned out to be filled mostly with nails and lad ingots. This, with the sole purpose to push federal chartering of banks, and thereby to increase federal power over the paper notes that the banks issued. 

The era of free banking ended in the United States when Congress passed the National Bank Act in 1863 and thereby place a tax on notes issued by state banks beginning in 1866. This act established a truly national currency controlled by the federal government and federal charted banks; but in the next few years, the federal government abused that monopoly by over issuing greenbacks.

By the first Legal Tender Act, signed by president Lincoln on February 25, 1862, the government printed $150 million worth of notes in denominations of five dollars and higher. This created a multi-tiered currency system in which the United States demanded import taxes paid in silver and gold coins and agreed to pay interest in all government bonds in coins, but it would pay its soldiers creditors in second-class greenbacks and backed by nothing but promises. 

The was a second Legal Tender Act followed on July 11, 1862, authorizing an additional $150 million to be printed; and third one was passed March 3, 1863, authorizing yet another $150 million in greenbacks, their value declined until June 1864, when one hundred greenbacks had the value of only $35.09, slightly more than a third of their value. 

The hope that the greenbacks would one day be redeemed for something of value never came, even though the government won the war, and had been able to amount $114 million in gold reserves. 

The federal government emerged from the Civil War as the victor, not merely because it had defeated the South, but also because it had finally managed to assert control over all the states and over the nation’s money. It had destroyed the states’ power to regulate the issuance of notes through state-charted banks; it had defeated the many banks that issued their own money and around the country; and it had defeated the South militarily, politically, and economically. 

The Golden Playpen of Politics

The dollar is neither a silver dollar nor a gold one. The government will not redeem a dollar bill with anything else that another dollar bill. The dollar is simply fiat currency. The dollar rests on the power of the government and the faith of the people who us it – faith that it will be able to buy something tomorrow, faith that the U.S. government will continue to exist and to accept dollars in payment of taxes and pay them in expenses, and faith that other people will continue to believe in it. Aside from faith, nothing backs up the dollar. 

The Nationalization of Gold 

The problem with a gold based currency is that it is limited by the amount of gold in the world, and that amount fluctuates with each new find and each new developing technology. At times, newly discovered gold floods the market unexpectedly. Other times, it trickles down slowly, even though the economy may be in desperate need an infusion of money. 

The necessity of converting the money to gold on demand prevents the government for making too many loans or issuing too much money in order to satisfy a temporary political problem. As long as the citizens can turn their paper money to gold, they hold the vote on how the monetary system works and how much faith they have in their politicians. As soon as they lose confidence in the paper, they can convert to gold and abandon the paper. 

The United States detached its money from bullion and other commodities under two major steps. The first one taken by President Franklin Roosevelt in 1933. 

After the stock market crash in 1929, people ran to the banks in order to exchange their paper money for gold like the government had promised. One of his first acts as president was to take the U.S. dollar off the gold standard in order to stimulate the economy by allowing the government to increase the ability to borrow money to finance his economic and social policies. 

March 9, 1933, Congress gave Roosevelt the power to prevent the “hoarding” of gold by private citizens and forced all U.S. citizens, foreign nationals coming into the country, a refugees and immigrants to surrender their gold in the span of three weeks, but kept the promise to redeem the U.S. dollar for gold on an international level. 

Those people who voluntarily surrender their gold to the Department of Treasury received compensation of $20.67 per ounce in paper notes. One year after confiscation the privately owned gold, on January 31, 1934, the federal government devalued the paper money from $20.67 to $35 for each ounce of gold. Thus everyone who had complied with the law, saw their gold devalued 41% but allowed the federal government $3 billion in paper currency. 

In 1934, a year after the nationalization of gold, President Roosevelt passed another law nationalizing silver in much the same way. Many U.S. coins at the time still contained silver, and Roosevelt could not seize them without drastically disrupting commerce, so instead he gradually replaced the silver with base metals. Before the law was repealed in 1963, the government acquired a total of more than $3.2 billion ounces of silver. 

Americans were not allowed to own gold coins again until December 31, 1974, according to a bill signed by President Gerald Ford. By then the dollar had no official of government fixed value in gold. 

In July 1944, one month after D-day, the United States closed for an allied conference on economics to decide what kind of economic and monetary order the world should have. This conference composed of seven hundred delegates from fourty-four nations. According to the agreement they signed on July 22, 1946, most currencies in the world would be pegged to specific values relative to the U.S. dollar, and in turn, the United States set the value of the dollar at $35 to an ounce of gold. The delegates also laid the groundwork for the establishment of the World Bank and the International Monetary Fund, and they prepared to begin the tariff reduction negotiations that would continue for the next 50 years. 

From February 1, 1934, until 1960s, the governments of the United States and other nations worked together to keep the value of the dollar fixed at $35 dollars per once of gold, but the 1960s, the increased supply of dollars and inflation made it difficult for the central banks of the world to maintain this level. 

Nikson’s Folly

President Nikson, like President Johnson, had difficulty getting the sufficient money for the war in Vietnam. Congress was unwilling to raise taxes on an unpopular war, so they were forced to finance the conflict the way past rules had done in the past: by borrowing the money. They borrowed the money, and as soon as they spent it, they increased the supply of money in the markets, creating inflation. This lead to the United States not being able to redeem its money for gold in the world market. 

In order to combat this, Nixon asked all business owners to freeze prices, wages, and rents, and he put a 10% surcharge on most imports to help improve the trade balance. He also requested that citizens report to the federal government anyone who wasn’t complying with government regulation. Nixon also closed the “gold window”, meaning that the dollar would no longer be pegged to a specific value in any commodity, it would float relative to all other currencies. 

This would end the era of stability and the period of the greatest economic prosperity and productivity in history of the American dollar. The currency never gained its historical strength, and never regained the confidence that the world had in it prior to Nixon’s move. 

In March 1972, U.S. government officials devalued the dollar to $38 per ounce and then again to $42.22 the following year. The Swiss government said in the beginning on January 24, 1973, it would no longer support the dollar with gold, and other nations quickly followed. 

Without the discipline of gold, 20th century money has steadily deteriorated in value. 

Through the 20th century, governments around the world increased the control over money tremendously. They printed, borrowed, or whatever they wished when they needed to increase spending or adjust the economy. As governments increased their spending, they also increase their power over the economy in thousands of larger and small ways. No longer constrained for each unit of money issued to have a specific amount of gold attached to it, the government simply issued more money to finance their new undertakings.

Politicians can always conjure up good reasons to tamper with the money, they often set out to combat great evil lurking over the horizon or avert some horrific disaster looming in our children’s future. 

With the financial freedom granted by the new easy money, politicians on both right and left could finance whatever pet projects would get them elected. From more highways, to food stamps, cancer research, funding of better weapons, foreign aid, and urban housing, to name a few. 

Money no longer had any independent value, it depended entirely on the people’s confidence in their political system and leaders. 

Wild Money and the Stealth Tax

4.2 Trillion Marks to the Dollar

Even though inflation existed in the past, particularly in the century following the introduction of the gold and silver taken from the Americas by Spain, it can’t comprare to the inflation and hyperinflation that was experience in the 20th century. In the days when coins were based on silver and gold, hyperinflation couldn’t happen for the amount of money in circulation was dependent on the the amount of these metals available at any given time. Inflation only happened when the amount of these metals increased, increasing the amount in circulation, which is exactly what happened in Spain and Portugal after the discovery and conquest of America. 

Unlike the paper money we used today, even smaller copper coins had inherent value as metal. If all else failed, the metal had to only be melted down and repurposed. With the arrival of paper money, thought, the only significant scarcity was the amount of bills that governments could print at a given time. 

Governments have three primary ways of financing their expenditures: taxing, borrowing, and printing more money. If government lacked credit and anything worth taxing, they resorted to printing money which increased the amount of paper bills in circulation but not the amount of goods produced, causing inflation. 

The first of the 20th century countries to see its currency collapse was Russia soon after the revolution that brought the Communists to power. The communist deliberately sabotaged their own currency by printing as much money as everyone wanted. This in turn caused inflation and eventually scarcity. Their objective was to cause such a resentment towards money that their citizens would welcome the rationing system in which coupons would be used to produce goods that seemed appropriated for each person. Within a few years though, it became clear to everyone, that even the new Soviet Union needed money to function, and in 1921 the government began a series of moves to introduced a new currency system.

Same thing happened in Germany, who after losing the war were forced to pay reparations for the damaged caused and were taxed by the west at exorbitant rates. In order to meet the payments, the newly installed German government, printed the money needed to pay for such debt, but in turn caused massive hyperinflation that eventually destroyed their economy. Stagnant wages were raised by the day and scarcity of good and services weren’t necessary the after effects of the war. Germany’s marks would eventually reach 4.2 trillion marks for a dollar. 

The birth rate plummeted and infant mortality rose to 21%. Anyone who was paid in German marks would in turn trade it for other goods and services like cement or cigarettes in order to trade for other goods.

In 1924, the United States loaned Germany $200 million in order for Germany to return to the gold standard, but the damage to the working class and middle most likely paved the way for the political rise of Adolf Hitler.

With the collapse of the Austro-Hungarian Empire in the aftermath of World War I, each newly formed country created their own currency, but each suffered the same problems to those of Germany. Austria, Hungary, Greece, Czechoslovakia, Poland, and Bulgaria were victims of inflation; the damage only exacerbated by the world depression of 1930s which fostered extremist political movements in both right and left, and led to dictatorship in each of these countries. 

The hyperinflation happening in the region seemed to erupt like a plague that ravaged to all the neighboring countries. Frank, Belgium, Italy, and Spain saw the value of their money drop to one-fifth of its prewar purchasing power. The pressure on the British pound cause a threefold rise in prices that Britain curved briefly by returning to the gold standard in 1924-1925. The resulting depression forced Britain to leave the gold standard once again though, and it has never returned.  

New Hyperinflation

In 1980 various countries of Latin America were hit by massive hyperinflation that would devaste some of their economies, paving the path to left wing governments. The reasons varied from country to country, the denominator factor was a long lasting period of financial disorder and corruption, political instability, and excessive borrowing from western banks. 

One after another, Bolivia, Peru, Brazil, Argentina, and Zaire traveled down the path of economic instability and currency destruction. The constant change of the bureaucrats economic policy and disastrous financial laws led to the constant name changes of their currency, but this never fixed the inflation. Brazil, for example, went form the crucero, to the cruzado, to finally settling on the real. 

By the 1990s the economic crisis was finally corrected, but a new form of hyperinflation hit Easter Europe with the collapse of the Soviet Union. Their economic policy of set prices and resource allocation fell with the iron curtain, but the following independent nations, who hadn’t governed themselves in 50 years, fell in the same trap that previous countries had: money printing in order to meet the growing demand of their population. 

No country was hit harder than Ukraine, who had no experience as an independent nation. In Ukraine, during the early 1990s, the politicians and bureaucrats did not even have a proper name for their currency and simply stamped paper bills that lacked the luster of even play money. 

The Hidden Tax

At a steady inflation rate of 5% a year, money loses half its value, and prices therefore double in only fourteen years. Ten perfect annual inflation would double costs in seven years. And so forth with even more inflation rates.

Inflation became shuch a common thing in the 19th and 20th century, that it was normal for prices to double or even triple in some cases in between generations. It was a strange precedent to see how the themes of the 19th and 20th centuries contradicted each other. 

On the one hand, the 19th century, the era of industrialization, prices fell and more goods became more available to more people at a lower cost. In the 20th century, on the other hand, currencies were falling, raising prices of goods that were more readily available. The 20th century witnessed a decline in all of the world’s currencies. Government after government experimented with the system and allowed the value of its currency to decline steadily in a form of a hidden taxation that brought temporary benefits to the rulers in power but at a great price to the people who were dependent on money to survive. 

In a democratic society, politicians are often unwilling to raise taxes because of the expected voter anger. For them, inflation and the devaluation of the currency serve much better because they constitute a hidden tax. The government releases more money into the system, and the politicians and bureaucrats have more money to spend on their favorite projects. The release of new money, however, makes all existing money worth a little less and thus eats away the nation’s money and commercial vitality. 

The inflation tax constitutes the most retrogressive of all forms of taxation because it hurts the poor the most. Inflation might even be called simply a tax on poverty. The poor use more cash, and they are more likely to be living on fixed income sources such as retirements, daily payments for odd jobs, and government payments that increase slowly and far behind the inflation rate. The sales tax, or the value-added tax, another form of retrogressive taxation, taxes only what an individual actually spends. By contrast, inflation taxes all money that the middle class and particularly the poorer classes posses or anticipate in the future. 

Interlude in Plastic

Democratic Debt and Socialist Risk

At the end of World War II most Americans still used cash for buying and selling. Americans, however, were eager to switch to new forms of payment, and by 1990 some $30 trillion a year was being transferred via check. By 1993 about $400 trillion was being transferred each year by various electronic means. 

In the cash era before World War II, credit remained a rich man’s perogative around the world.  Banks lent to people who had substantial property to serve as collateral or an outstanding track record of earning money to repay debts. Aside from farmers, most middle and working class people had no debt because no one would lent them money. 

In 1928, National City Bank of New York experiment with a radical new idea: it offered to make small loans to working-class people. The bank first entered the consumer loan program under great pressure from the state attorney general in an effort to clamp down on loan sharks. In the first day of the bank’s new operation, the consumer credit department took in five hundred loan applications. The bank lost less then $3 dollars for every $1,000 it loaned, and at 12% annual interest and a very low rate of default, the bank soon found consumer loans to be a wonderful new source of profit. 

During the Great Depression of 1930s, governments around the world looked for new ways to stimulate their economies. The new policy, particularly in the United States under Franklin Roosevelt, took the form of encouraging banks and other financial institution to lend more money for the purchase of worthy commodities such as modest homes and cars. To encourage this practice, the government backed and guaranteed low-interest loans. Following World War II, the U.S. government guaranteed home loans for veterans. Banks could make moderate profits from these loans, but the actual perk of this new law was the very little risk these instructions faced since the government was accepting increasing responsibility for the risk. 

Americans soon learned to borrow money not merely for homes, cars, and education but also for anything they wanted like television, appliances, boats, and vacations. Within a generation, debt became not only the norm but to be expected in the entire middle and working class. 

At the same time that banks galloped into new credit markets, the federal government found even more ways to encourage borrowing and to guarantee debts. 

The Magic Card

In the 20th century the automobile gave rise to the first credit cards. Cars transported people to new placed where they not necessarily had the relations with the merchants or carried the cash to pay for the oil, gas, and repairs that early cars needed. To created customer loyalty, and solve this problem, the oil companies began issuing their own credit cards to be used for the purchase of their products from any merchant who carried them. Soon, large store chains began to issue their own credit cards. 

In 1950, Diners Club created the fist modern charge card. The credit card was accepted at twenty-seven of the country’s finer restaurants and was used primarily by affluent businessmen as a convenient way to charge business-related travel and entertainment expenses. In 1955, Diners Club switched to plastic, thereby launching a whole new monetary trend in consumer culture. 

In 1958-1959 the American Express Company, targeted the businessmen’s market by issuing its fist plastic charge cards. By this time, banks recognized that they were losing control of the credit markets to these new nonbank companies. 

The Bank of America introduce its BankAmericard, in 1958, and because it had the whole sate of California as its base of operations, it quickly became the nation’s most widely known card. In 1977, the BankAmericard shortened its name to VISA. By the mid 1990s, VISA had become the largest credit card in use, with nearly 400 million cards in circulation worldwide for use at 12 million business locations. 

Barclay’s Bank in Britain followed its own Barclaycard in 1966 and in 1967, City Bank of New York introduced the Everything Card, a plastic credit card that allowed its elite depositors with the best financial records to charge their purchases whether or not they had enough money in the bank. Two years later the card became the MasterCharge and eventually, simply MasterCard. 

The credit card freed money from temporary constraints by allowing people to use money they had not yet earned or received, but that they expected to earn at a later date.

The credit card increased purchasing and, therefore, prediction and services, but it did so at the cost of increased individual debt and international inflation. 

The Erotic Life of Electronic Money

Invisible Money

Immediately after the invention of the telegraph, people looked for ways to move money electronically. Not until the invention of the credit card and check did the banks catch up to the new technology. As more purchases were being paid with cards and checks, banks had to come up with a new ways to move large sums of money around. 

An important step to electronic money was taken by the Federal Reserve Bank of San Francisco in 1972 when it experimented with electronic payments that bypassed paper checks for transaction between its main office and its Los Angeles branch. By 1978 this network expanded to include all Federal Reserve banks and by 1980 and the passing of the Monetary Control Act, all financial institutions connect to the FED had access to this network.

The electronic system came into wide public use in 1975 when the Social Security Administration and the federal retirement system offered to transfer people’s money directly to their bank accounts. This system soon expanded to encompass automatic payroll deductions for saving bonds, mortgages, insurance, retirement, and income tax payments. 

As various countries expanded their internal electronic nets for transferring money, the need arose for them to make such transfer between countries. In 1977 the Society for Worldwide Interbank Financial Telecommunications (SWIFT) went into operation in Brussels to coordinarte the electronic movement of money across national borders. SWIFT grew into the largest international electronic network, connecting the banking systems of nearly one hundred nations. 

The Vending Machine Holdup

In 1971, a banker in Burbank California came up with a vending machine for money, or ATM as we know it today. The idea behind it was that back in the days when people had to physical appear before a bank teller to take out cash, they were left without any services on the weekends and bank holdings, so to make this process easier and to bypass this inconvenience, the ATM was invented. In the same year, the stock market went electronic with the creation of NASDAQ, a computerized system for buying and selling stock; and at the same time, the FED began to experiment with its electronic system for the automatic deposit and clearance of money without having to write out paper checks. 

After the credit card became well established, by the 1970s, banks began to experiment with different forms of electronic payment. Money cards, usually with a magnetic stripe on the back, emerged initially as a way for bank customers to withdraw their money form cash machines, but soon expanded this function when as an experiment, the First Federal Savings and Loan of Lincoln, Nebraska, installed machines at the cash registers on the Hinky Dinky supermarket. This eliminated various steps in the form of payment: first the customers didn’t have to go to the ATM to get cash before entering the store, second the grocers and bankers eliminated the bank step, and thirdly this new way of payment effectively substituted cash and checks for electronic money. 

Despite this innovation, the biggest obstacle to the widespread adoption of electronic money has come in the form of the smallest of purchases such as those in vending machines. The rise and creating of vending machines created a tremendous surge in the need for coins, but the handling, transportation, and counting of the coins cost 2% to 6% of the value of the cash. 

Electronic Cash Wars

By the 1990s, a major struggle had begun for control of the newly emerging form of money. By entering the electronic age and transferring money over telecommunications networks, the banks were acting more like communications companies. Meanwhile, the communication companies had discovered they could perform the same services and thereby function more like banks. Whichever side could win control of the system stood to earn great profits from millions of very small cash transactions. 

The major players – computer companies, banks, credit card systems, telephone companies, cable television companies, and various retail interests – began to compete for position. With so many players thought, they were forced to negotiate and divide the profits under very specific functions.

The movement toward electronic money was not the result of public demand by people who were dissatisfied with the old forms of money. The change has been technologically driven by businesses seeking a new way to make money. They invent devices that make money easier and safer for customers and merchants to use, and if they succeed, they would in turn increase their revenue. 

The Art of Currency Terror

The 20th century opened with only a few currencies in the world, and they were all tied to gold. By the end of the century, there were nearly two hundred national currencies varying form the U.S. dollar to local currencies that had no circulation outside the area controlled by their own national governments. Each new currency provided opportunities for new speculation, but the primary currencies continued to be those of Western Europe, North America, and Japan. 

Much for the rapid currency movement is bade on intangible moods, intuitions, and prejudices. Such moves often reflect the trust that investors have in the leaders of a country at any particular moment. These intangible factors probably account for about 75% of the currency fluctuations, while only about 25% can be correlated with actual quantified economic factors and statistical indicators. 

The Age of Money

Money began as simple commodities of copper, silver, shells, and gold; but today it includes coins and notes, checks and bank accounts, numbers on ledgers and imprints on plastic cards, electronic blip on computer screens and digits stored on silicon chips. Through the course of history, various factions and institutions have controlled the production and regulation of money – the state, the church, merchant leagues and craftsmen’s guilds, banking families and private industrialist, national banks and currency traders – and each had a particular role to play at a given historical moment. Humans have fought over money, not merely because it provided wealth and luxury but, more importantly, because it confers power on its masters. 

By the final decades of the 20th century, it became clear that production no longer controlled the economy the way it had in the preceding century. The owners of the means of production were only rarely single individuals or families, and they certainly no longer constituted a specific class; the companies belonged to millions of shareholders. 

In the current system, power flows under the control of a new class of financiers who sometimes own or sometimes only control massive amounts of money through brokerage, houses, banks, pension plans, insurance agencies, or mutual fund management. They do not control spices, silks, or slaves around the world any more than they control the production of missiles, VCRS, or coffeemakers. They in turn control the flow of money or, more accurately, the form of money. 

As money grows in importance, a new struggle is beginning for the control of it in the coming century. In this quest, may contenders are struggling to become the primary money institution of the new era. 

In the global economy that is still emerging, the power of money and the institutions built on it will supersede that of any nation, combination of nations, or international organization now in existence. 

My rating:

This book in 3 key points

  1. Humans found ways to determine the value of goods and services through tokens which they called money to better facilitate the bartering.
  2. Money has been the cause of the creation of markets, kingdoms, and wars.
  3. The deviation from the gold standard was the cause of the increase of government spending, power and colonization around the world and throughout history. 

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