History Of Money

Money has taken many forms. Basically anything which is representative of value and can be traded for a wide range of goods can be said to be money. From beads on a string (wampum) to sea shells (cowrie shells) to tokens and coupons and lumps of metal. 

Fundamental to all of these gradually evolved or fiat currencies is the belief in the minds of buyers and sellers that they have value. Governments can dictate the value of a currency to a large extent but must make sure the integrity of their currency is maintained by avoiding circulating too much of it. If the currency is based on some content of precious metal like gold or silver, they must maintain that content to avoid “debasing” the currency. For several millennia the success of national or “fiat” currencies have depended on their consistency of precious metal content because people have viewed the value of gold and silver as much more reliable and constant than the “promises” of governments. 

Paper money has zero intrinsic value. The first bank notes were printed on paper nearly 1000 years ago in China preceding Europe by 500 years. At first they were used for exchanges between merchants but later the government began to operate the presses. This resulted in the worlds first case of hyperinflation. As a medieval Chinese historian Ma Twan-lin later remarked, “Paper should never be money but only employed as a representative sign of value existing in metals or produce.” Ie commodity based. 

“Sound as a pound” came into being as a stock phrase because of the British dedication to maintaining the integrity of their currency (the pound) by keeping the silver content constant. For several centuries, the British pound was “the gold standard” for most of the world. 

Gold has been a representation of wealth for many thousands of years and is embedded in most minds as being wealth itself. But it isn’t particularly useful. Golds practical applications are limited and almost 80% of it is used in ornamentation. If the total amount of gold mined were melted into one large cube, it would measure 20 metres on each side. It is attractive but its rarity and the effort to produce it gives it its value. 

Gold is a highly stable token of exchange, not a unit of real wealth. 

In the middle ages, there was a net outflow of gold from Europe to the Middle East and China to pay for their silk, spices and manufactured goods. This caused scarcity in Europe and continued high gold prices. It wasn’t until the Spanish plunder of the New World that there was actually a decline in the value of gold and silver. So much became available that the metals lost a great deal of their value in the late 1500's. 

In most cases of currency debasement, the percentage of precious metal in the coins was decreased and therefore their value declined over time. This “inflation” is basically a tax by the governments to deal with urgent financial shortfalls. The flooding of the gold and silver markets by the Spanish was a rare case of making the metals themselves more plentiful and therefore less precious. 

This demonstrates that precious metals are more faith than reality and so limited in supply that any currency based on them today would become highly inflated to the point of restricting the expansion of economic activity. 

Precious and rare commodities which have held prominence in peoples minds for millennia have proven to be excellent currency stabilizers. But although they command wealth, they do not constitute wealth themselves. 

COWRIE SHELL CURRENCY

As fixated as we in the west are on the enduring value of gold and silver, the cowrie shell has been used as an exchange currency longer, by more people and over a greater geographic area than precious metals. The cowrie shell is a product of the Indian Ocean (principal source was the Maldive Islands), comes in various sizes and is attractive to both the eye and the touch. Most importantly it is unique and impossible to counterfeit convincingly. That didn’t stop the Chinese from manufacturing their own cowries in metal when the supply of the real shells grew short. This underlines the concept that the representation of money plus faith equals real money. 

The cowrie has been used all over Africa and Asia and has been a staple of trade for so long that its image forms the Chinese pictograph for money. In central Africa it was still possible to pay ones taxes in cowries in the early 1900s and to purchase small items at market well into the 1950s. 

Like precious metals, the cowries had few practical uses outside of ornamentation but that and their uniqueness and rarity allowed them to form a practical currency whose use spanned over 4000 years and covered the most populous areas of the world. Their range was from China westward and even to North America as the natives accepted them in trade from European settlers. 

Most societies in the world today are used to thinking of gold as a representation of wealth. We can look back upon the cowrie shell as a quaint token used by primitive peoples in a time gone by. But at one time, in a large portion of the world only a fool would give up cowrie shells for gold. They were both rare but at different times in history in different regions one had a history of value and the other did not. 

Rare commodities such as precious metals and cowrie shells are little more than tokens of exchange, not embodiments of real wealth.

COMMODITY BASED CURRENCIES 

Egypt Wheat Currency

There are extremely few examples of a practical currency actually having intrinsic value. Nails and knives have been used and most Chinese coinage was made from base metals whose intrinsic value constituted most of their face value. But the best example of a commodity based financial system is the Egyptian use of wheat. For much of their recorded history, the ancient Egyptians used wheat and credits based on wheat as the blood of their complex banking and financial system. Because it is a staple food, wheat held high and immediate intrinsic value. There would always be a ready market for this commodity in any location and for a broad scale of transactions. 

The wheat based financial system of the Egyptians is the closest to an energy based system in recorded history. Today, energy has a number of advantages being more ubiquitous in the economy, more easily transferable, measurable and with a wider range of scale. But wheat possessed most of the fundamentals, certainly enough to make a financial system work for hundreds and perhaps thousands of years. And there are no recorded instances of bank failures or currency inflation in this period. With fiat money, financial crises are a regular occurrence. 

The coin and precious metal currency ambivalent Egyptians had used grain for thousands of years as a crude currency but the system was elevated into a full banking network under the Ptolemies around 330BC who blended the grain base in with Greek banking. The use of grain was made practical by the (relatively) dependable harvest in the Nile valley thanks to the annual floods which replenished the soil. Outside of Asia, this kind of consistency was unknown. Wheat as a currency base was made practical by the unique and dependable soil and water cycle of the Nile Valley which eliminated severe inflationary cycles. 

This begs the question of whether there were rice based currencies in Asia. Certainly a wide range of transactions were conducted using rice in feudal Japan and Burma. Japan was clearly closest to establishing a completely rice based currency and banking system but it does not seem to have approached the sophistication of the Egyptian wheat model. 

The Egyptian wheat financial system was complete with a central reserve bank and many branches throughout the country. It featured the first use of credit notes and was not surpassed in sophistication until 2000 years later in 18th century Europe. The system could not have reached that level if it had been prone to inflation or currency crises. It was its reliability that allowed such a high degree of development of such a relatively cumbersome currency. 

Energy is the most reliable and consistent base available and it’s scalability and ease of transport make it superior to any other commodity as a currency base. It is produced and consumed in lockstep with economic activity and thus will give a true reflection of the wealth creation process. The value of energy does not change and it cannot be debased. This is not to say fraud will not occur in an energy based system but fraud will be easier to identify in system using scientifically defined units.

FIAT BASED

The first practical “coin” outside of China where and weight and purity of the new currency was accepted without question was stamped in Cappadocia around 2200BC. Since then many currencies have come and gone. Among the most stable and long lived with widespread acceptance have been the Roman solidus , the Italian florin and the British pound sterling (with 22.5 troy grains of silver) which became the most stable currency and the staple of international finance for several hundred years. 

Printed money - paper notes - freed currency and those making it from any link to inherent value in the coinage itself. This made it possible to devalue the currency in far more subtle ways so debasement became both easier and less prone to market oversight and public outcry. The results however were more extreme in terms of more regular and absolute failure. The printing press removed several large factors of discipline which had previously moderated the actions of desperate or irresponsible governments. 

In the millennia since the implementation of printed money, it has served as a method of exchange, not as a representation of total output of an economy. Until the last century, a large percentage of the real economy was non-monetized, that is, the labour and much of the material that went into real output was not paid for directly. Little of any subsistence economy or womans’ labour was paid for in cash. Trade did not constitute a dominant part of total productive activity. 

Over the past 50 years in industrialized countries however, most forms of labour have moved into the realm of the commercial economy so the flow of money is indeed widely viewed as being a full representation of the human portion of the real wealth creation process. 

After the second world war, the “almighty” American dollar supplanted the “unshakable” British pound which had been the bedrock of international finance and trade for 200 years and the most stable currency in the world for almost 1200 years. The greenback has been the most dominant currency in world history but it will also have had the shortest run of only 60 years for the usual reason of debasement by an overly creative and loose financial system underwritten by a structural trade deficit that has no end in sight. 

Should the dollar be replaced by another fiat currency of any description, the cycle of economic crises will continue. But the perfect currency is out there waiting to write the final chapter in the history of money.

SUMMARY

Barter trade was a real goods exchange system with perfect transparency and no residual effects and no distortions. 

Commodity based exchanges broadened the trade possibilities with no residual effects or distortions. It was still real goods exchange on both sides of the transaction. The transaction was totally completed at the point of and time of exchange. 

Coinage broke the system of real goods exchange on both sides of transactions and made distortions and residual effects possible. As long as the coins had a consistent level of precious metals, the distortions were slow, moderate and more easily absorbed. 

Once the coinage could simply be printed, there were no restraints on abuse and no link to real wealth. Crisis are inevitable and have been frequent. Particularly as the majority of the human wealth creation process becomes monetized. 

It is important to remember that printed money represents a claim on the real goods in a society but does not at all guarantee that real goods have been produced to meet the full claims of the currency printed. 

Energy currency restores a direct link to real goods on both sides of the transaction and minimizes abuse as well as eliminating distortions like currency debasement inflation. 

So with the move to energy based currency we will have come full circle from fully transparent real good transactions to faith based transactions and back again. Precious metal based coinage and printed currency accelerated immensely the pace of commercial development. But fiat currency based monetary systems have proven highly opaque and unstable with large cumulative delayed distortions and crisis. 

Energy currency takes us back to fully transparent, stable, real goods exchanges with unlimited scale and flexibility. The ultimate form of barter with unlimited scale and complete flexibility.