A BRIEF HISTORY OF MONEY
-- AND WHY THE HISTORY MATTERS TO YOU
The evolution of money has been a long and often
difficult process as societies searched for ways to
develop reliable and lasting systems of commerce and
finance.
Over the course of history, money has changed its
physical appearance as people refined its shapes and
sizes into convenient and practical forms. At the same
time, money's nature has changed. From the days of the
Roman gold aureus to the original U. S. silver dollar,
money's intrinsic worth -- meaning its precious metal
content -- was a paramount measure of its value. Today,
money's value is measured not by its material worth but
by what it can buy -- its purchasing power.
The long and colorful history of money began when
people in ancient civilizations learned they could trade
for things they needed, rather than produce them.
However, trade was often complicated, with people not
able to compare the value of different goods. And,
finding an appropriate trading partner was difficult --
for example, a fisherman couldn't get wheat from a farmer
who didn't want fish, and a candle maker couldn't get
bread from a baker who didn't need candles.
People learned to use prized ornaments or
agricultural products as standards by which the values of
different things could be compared. From time to time,
beads, shells, rocks, fish, hooks, grain and cattle were
used as money.
Most types of early money were made from metal
because it was durable and easy to carry. About 2,500
B.C. the Egyptians produced one of the first types of
metal money in the form of rings. The Chinese used gold
cubes about 400 years later.
The first metal coins were struck in Lydia (now
western Turkey) in about 700 B.C. Made from an alloy of
gold and silver called electrum, the coins -- known as
"staters" -- were actually bean-shaped pellets stamped by
the government with their weight and purity. Because
these coins were made of precious metal, they had
"intrinsic" value, meaning that they had value in and of
themselves, apart from their official designation as
money.
The ancient Greeks also minted coins, which replaced
the handfuls of iron spits that they had been using. In
fact, the word "drachma" -- which is the base unit of
currency in Greece today -- is a derivative of the Greek
word for handful. A number of numismatic innovations are
credited to the Greeks, among them the first coin with
designs on both sides; the first series of coins issued
in different denominations; the first coin with a human
representation -- the goddess Athena -- and the first
commemorative coin, celebrating a military victory.
Greek coins were also the first "international" currency,
being widely used in trade throughout the Mediterranean.
Another major development was in about 300 B.C. when
the Romans issued their first coin -- the "as," which was
made of bronze. Traditionally, 100 of these were equal
to one cow. In later years, Julius Caesar authorized the
minting of the gold "aureus," which became one of the
most widely used coins in the ancient world for more than
300 years. Smaller denominations of Roman coins that did
not contain gold or silver were struck with "sc," the
seal of the Roman Senate, to bolster their acceptability.
While these smaller denomination coins had no value
in and of themselves, they were widely accepted because
of the prestige of the gold aureus. This was one of the
first successful examples of the circulation of "fiat"
currency -- currency that is valuable because of its
purchasing power rather than because of its precious
metal content.
This early attempt at using fiat currency failed in
the fourth century when the Romans began issuing ever-
increasing amounts of fiat coins to compensate for
insufficient quantities of gold needed to mint the
aureus, which was in demand throughout the empire. Huge
budget deficits in the Roman government and a loss of
confidence in coins caused catastrophic inflation that
eventually destroyed the Roman monetary system.
Ironically, it was during the post-Roman era that
the Roman "solidus" became the most enduring coin in
history, circulating throughout Europe and the Near East
for more than 700 years. The solidus owes its incredible
longevity to its largely unchanged appearance and gold
content over time, which helped to maintain public
confidence in the coin.
While coins remained the primary medium of exchange
for centuries, during the Crusades people sought
alternatives as travel become more common. The precursor
to European paper money was born in the form of "letters
of credit" -- promissory notes between two parties that
generally could not be cashed by anyone else. The use of
these letters was aimed at thwarting highway bandits who
wanted coins, not paper, which was impossible for them to
cash.
The Europeans were not the first people to discover
the advantages of using paper money. Its ancient
ancestor can be traced back to about 2,500 B.C. to the
clay tablets on which the Babylonians wrote bills and
receipts. The Tang Dynasty in China issued the first
known paper money in 650, and the earliest piece of
currency that exists today -- a Chinese 10-kuan note --
dates back to this time.
Centuries later, in 1273, Marco Polo reported that
the Mongol Emperor Kublai Khan issued mulberry bark paper
notes in China bearing his seal and the signature of his
treasurers. Marco Polo described the monetary system:
"All these pieces of paper are issued with as much
solemnity and authority as if they were pure gold and
silver...and the Khan causes every year to be made such
a vast quantity of this money, which costs him nothing,
that it must be equal in amount to all the treasure in
the world." With an overabundance of fiat currency in
circulation, it is not surprising to learn that the
Mongol-imposed monetary system suffered terrible
inflation; eventually the Mongols left China.
A major step in the development of paper money took
place in 1661 when the Stockholm Banco of Sweden issued
the first bank notes, which were private obligations of
the bank and could be redeemed there in gold or silver by
the bearer. Because redemption in precious metals was
guaranteed, many people had enough confidence in the
value of the notes to exchange them for goods and
services. However, Swedish merchants feared that the
notes would be bought up by foreigners who would redeem
them and eventually deplete Sweden's gold and silver
reserves. The issue lasted only one year.
In the 17th century, colonists settling in North
America brought coins with them, but most of these were
quickly returned to Europe to pay for goods that were not
produced in the colonies. This led to a shortage of
coins, so Indian wampum -- beads of polished shells
strung in strands -- was widely used as money throughout
the colonies. However, when settlers learned to
counterfeit wampum, it lost its value.
In addition to wampum, the colonists also used as
money those items that were staples of the local
economies because they were always in demand. For
example, in Virginia it was tobacco, and in Massachusetts
it was grain and fish. Nails and bullets frequently were
used for small change.
After trade between the colonies and the West Indies
developed, Spanish eight-reales coins circulated widely.
These coins, known as "pieces of eight." were used until
1857. They were frequently cut to make change: Half a
coin was "four bits" and a quarter section was "two bits"
-- a slang expression for the modern American quarter.
The first coin struck in the colonies was the pine
tree shilling -- which bore a picture of a pine tree --
in a Boston mint in 1652. All issues of the coin, even
those struck in later years, claim that no additional
coins had been minted since 1652, in case the British
Crown decided to enforce its ban on the colonists
producing their own coins. Despite the efforts of the
colonists, the British shut down the mint in 1686.
During the 18th century, again contrary to British
wishes, hundreds of different types of paper notes were
printed throughout the colonies. Those notes, issued
before the American Revolution, usually were denominated
in pounds and shillings and made reference to the Crown
of England for credibility. Some colonies issued too
many bills, however, and their value quickly sank to
small fractions of their face amount, making trade
between colonies difficult. Despite the depreciation,
these bills helped offset economic slumps caused by a
scarcity of metallic money in an expanding economy.
Before the start of the American Revolution, the
Continental Congress, facing huge expenses without
adequate taxing power, authorized a limited issue of
currency in 1775 -- the first paper currency issued by
what was to become the United States. These notes,
called continentals, were printed from plates engraved by
Paul Revere to read "The United Colonies" and sometimes
even depicted colonial minutemen. They had no backing in
gold or silver and could be redeemed only if and when the
colonies became independent.
In January, 1776, the Continental Congress made it
treason for people not to accept continentals or to
discourage their circulation in any way. In 1777, after
the Declaration of Independence, the first notes bearing
"The United State" were issued. However, because people
were reluctant to accept paper money, well-known
revolutionary figures were asked to sign the notes to
give them credibility.
For about a year and a half, continentals changed
hands at close to face value, but this stability was
short-lived. People hoarded goods and coins during the
war, which caused inflation. As a result, continentals
became basically worthless. As George Washington
commented: "A wagon-load of money will scarcely purchase
a wagon-load of provisions." The currency's vanishing
value led to the expression for worthlessness that
remains today -- "not worth a continental." The failure
of continentals produced a deep mistrust of paper money
throughout the colonies.
However, the brief period when continentals
circulated successfully was significant because it marked
the first time that the worth of U.S. currency lay in its
purchasing power, as it does today, and not in its
intrinsic value.
After the failure of continentals, more than 70
years passed before the federal government would issue
paper money again. However, until then, state-chartered
banks made up for the lack of a national currency by
issuing their own paper notes, which were obligations of
individual banks. These state-bank notes became the
dominant form of currency used between the time of the
American Revolution and the Civil War.
Each bank designed its own notes, so they differed
in size, color, and appearance. By 1860, an estimated
8,000 different state-banks were circulating what were
sometimes called "wildcat" or "broken" bank notes in
denominations from $1 to $13.
The nickname wildcat came about because some of the
less reputable banks were located in low-population areas
and were said to attract more wildcats than customers.
People also called the notes broken bank notes because of
the frequency with which some of the banks failed, or
went broke.
Because these notes had varying degrees of
acceptability and were not always redeemable in gold or
silver on demand, they often circulated at substantial
discounts from face value. These conditions made
counterfeiting relatively easy and bogus notes abounded.
In 1861, in an effort to finance the Civil War, the
federal government issued the first paper money since
continentals. The demand notes of 1861 were popularly
called "greenbacks" because of the color on their reverse
side.
In 1862, Congress issued $150 million of legal
tender notes, more commonly known as United States notes,
and retired the greenbacks. These new notes were the
first that were made legal tender for all debts, except
import duties and interest on the public debt.
Confidence in U. S. notes began to decline when the
Treasury stopped redeeming them in coins during the Civil
War to save gold and silver. However, redemption resumed
in 1879.
Even though U. S. notes were generally accepted,
most paper currency circulating between the Civil War and
the First World War consisted of national bank notes.
This currency, uniform in size and general appearance,
was issued by thousands of banks across the country. The
federal government granted charters to these banks under
the National Bank Acts of 1863 and 1864, allowing the
banks to issue notes using U. S. government securities as
backing. From 1863 to 1877, the notes were printed
privately, but in 1877, the Bureau of Engraving and
Printing -- a division of the U. S. Department of the
Treasury -- assumed responsibility for printing all
notes.
During the late 19th century, the U. S. government
increased its reserve of precious metals by offering
certificates in exchange for deposits of gold and silver.
In the late 1950s, rising world demand for silver as
an industrial metal began pushing up its price. To avoid
the possibility that the value of silver in coins might
exceed the face value, the Treasury began selling silver
from its stockpile in the open market to keep the price
of silver low. However, demand continued to be high and
soon threatened the Treasury's silver inventory, so
Congress took steps to reduce the amount of silver in
American coins.
In 1964, the silver content of half dollars was
reduced from 90 percent to 40 percent and, in 1970, was
eliminated entirely. Silver also was eliminated from
quarters and dimes in 1965.
The elimination of silver from all U. S. coins
completed the transition of American currency from money
of intrinsic value to fiat money, the value of which lies
in its wide acceptability and purchasing power.
In 1971 the United States made a decision that
marked the beginning of the end of the international
system of fixed exchange rates. America closed its "gold
window". Foreign central banks were thus prevented from
converting their holdings of dollars into gold at the
official price. For the first time in history, the
world's principal currencies were shorn of all links to
the value of any real commodity. Henceforth the value of
money - that is, the stability of prices - was entirely
at the discretion of governments. Before long, inflation
was raging almost everywhere.
Governments throughout history have tampered with
the link between currencies and underlying measures of
value. Whenever wars or other emergencies required it,
they have become monetary cheats -- fiddling with the
convertibility of their currencies and at times
suspending it altogether, raising revenue either by
depreciating their coins (explicitly reducing their
weight) or debasing them (secretly reducing the
proportion of precious metal).
Since ancient times, whenever private mints found
that the fees (or seignorage) for weighing, certifying
and coining their customers' precious metal was earning
them a nice profit, governments began to monopolize the
business for themselves. That way, they found, the
currency could be more conveniently debased whenever
their battles for territory demanded extra money. This
technology of expropriation (monetary policy, as it is
now known) took its greatest leap forward with the advent
of fiat currency. Governments printed intrinsically
worthless bits of paper, called them legal tender, and
required their subjects on pain of imprisonment to give
them goods and labor in exchange.
For governments, the idea was understandably
attractive. They surrounded the process with the
mystique of sovereignty to make the confidence trick more
plausible. In many countries counterfeiting was not
merely fraud but treason. Similarly, in the present
debate over European monetary union, it is said that the
creation of a European central bank would be an attack on
the sovereignty of the member states. Viewed in a
historical perspective, that warrants a hollow laugh: the
sovereignty in question is the right of a government to
steal from its citizens.
The only check on these otherwise excellent
opportunities for theft was the promise to redeem paper
money for an asset of intrinsic value, such as gold. For
a long time that was a serious inconvenience, because
until around the middle of this century people thought
the promise ought to be kept. By 1971 it had already
been badly undermined; the closing of the gold window
finished the job. The power of the state took another
large and possibly irreversible step forward.
The world will not return to the gold standard. As
history has shown, modern governments are now big enough
to rig the gold market, or the market for any other
single commodity, without much trouble. The dropping of
the gold standard by governments means that they have now
lost interest in manipulating the price of gold, since it
no longer has a relation to their currencies. This is
important to investors in gold, which now takes on a
private significance as a hedge of value.
The history of money has been given here at length
for a very important reason. It is important to not only
have a feeling that something is wrong, and that United
States currency and investments are at risk, but to
understand fully the reasons why this is so. It is very
important to realize that these patterns of history
constantly repeat, and have done so for centuries. The
current political rhetoric of a new administration in
Washington cannot change the inevitable course of
history, nor can it reverse the downhill slide that is
well under way.
All governments and a fiat monies have their
problems, but some are better than others, and looking at
the comparative strengths and values is important to
preserving your wealth.
The Swiss franc is more than a paper currency -- it
is backed by gold -- the only currency left in the world
that still is backed by gold. Swiss law requires a
minimum 40% gold reserve for the Swiss franc, and the
actual reserves are about 56%. But this is very
misleading, because the gold is carried on the Swiss
central bank's books at the old "official" purchase price
of US$42 per ounce. So with the current prices of gold,
the gold backing per Swiss franc is actually many, many
times its face value. No other currency is in this
position.
To protect wealth properly, an investor must act on
his own, know why he is doing so, and not drift along
waiting for a political solution that history has shown
is impossible.
