Money Through the Ages
The origins of money are forever hidden in the shrouds of prehistory. As new archeological discoveries are made, it is always possible we may revise our narrative of those millennia that lay buried beneath our feet.
What we do know is that no evidence exists for the myth that money arose from barter. Rather than an organic and spontaneous process, money seems to have sprung from the minds of early social engineers. The Sumerians had a monetary system. Money is anything accepted as a medium of exchange of goods, as well as a unit of account and store of value. For the Sumerians, it was the shekel.
Ancient times and the beginning of money
Ancient Sumer is credited with the invention of accountancy. Most of the cuneiform tablets we have are transaction records. Shekels were first clay tokens, but around 3000 BC the currency was replaced by silver. The Laws of Eshnunna is the first surviving example of money with specific valuations when compared with commodities like oil, cattle, etc. Furthermore, wages and legal fines were also measured in shekels.
However, shekels were not widely circulated, as they were solely a means of accounting. The physical coins were stored in guarded vaults and the governing class was responsible for their safekeeping. In this highly stratified society, most daily transactions involved commodities, but their value was denominated in shekels.
Other ancient civilizations used a variety of goods as money. For the Egyptians, it was grain. Their currency was called the Deben. The system was similar to Sumer’s, with wheat centrally stored instead of silver. In China, there was less organization. Cowries, the shells of sea snails, were the most commonly used currency. Later, money made a tremendous leap when the Kingdom of Lydia invented the stamped coin.
The currency was referred to as a στατήρ (stater), meaning “weight”, and consisted of a gold-silver alloy called electrum. It was stamped with a lion and a bull. They were first issued by King Croesus. Some dispute this and claim that the silver Staters minted by King Pheidon of Argos came earlier. In either case, we know metallic coins came from somewhere in the eastern Mediterranean.
Staters were very valuable, even the most common had significant purchasing power. For this reason, they were not used for small transactions. Their use contributed to the rise of banking services like loans and deposits, and operated as salary for soldiers. The extensive use of coins permitted an easier way to supply the military, levy taxes on vassal cities, and repay debts.
As the stater, and later the drachma, became entrenched in Greece, it influenced society. New markets and institutions arose. The birth of banking and currency exchange occurred alongside the advent of democracy and philosophy, alongside new artistic and literary forms.
The theory of money and the new monetary system ushered into the world by the Greeks suffused far and wide thanks to the conquests and ensuing cultural exchange that came in the wake of Alexander the Great.
However, it was not until the rise of Rome that the industriousness of these pragmatic people was brought to bear upon money. Students of the classical civilizations will recall that while the Romans lifted religion and art from Greece, their innovations in technology and practical matters were largely their own.
Roman coins were used in much the same ways as Greek drachmas. Coins were minted with valuations that allowed for smaller transactions. New financial services blossomed. The Forum hosted a variety of services, including an early credit-rating system. The Roman financial system was so successful that it outlived the empire itself.
Economic issues contributed to the fall of the Roman Empire. Over time, Rome debased their most popular coin, the denarius. As new foreign conquest decreased and precious metal supplies waned, the silver content in coins gradually diminished and inflation soon followed. By the reign of Claudius Gothicus, the silver content in a denarius was .02%. In the year 274 AD alone, prices increased one-hundred fold. Rampant inflation lasted from the late Third Century to the early Fourth Century.
After the collapse of the Roman Empire, the dwindling supply of precious metals forced the luminaries of the Middle Ages to reimagine the dynamics of money. This revision of money touched upon its use as an object of accounting, its abstract role signifying debt, and as a physical object possessing intrinsic value.
The new money of the Middle Ages
In the Middle Ages, money was again, as it was in distant antiquity, seen as a means of account. Although recent evidence suggests the use of coins remained pervasive, money was again largely a way of signifying credits and debits on a ledger.
The Medieval Islamic world put to use negative numbers — originally discovered by the Indian mathematician Brahmagupta. Islamic finance made use of a paper promissory note known as a sakk. These were not the first instances of checks in history, yet they represented a sweeping advancement in banking, being internationally valid. Merchants could conveniently cash them out in other countries.
In the dawning years of the thirteenth century, Italian mathematician Leonardo Fibonacci popularized the Arabic system of numbers and brought progress to European accounting — although it would take over a century for the rediscovery of double-entry bookkeeping. This accounting method allows the seamless recording of debits and credits for two or more parties while creating an audit trail in a general ledger.
Our understanding of money’s role in Medieval Europe has grown with the archeological record. Although feudalism was the economic model and the premium was on land, evidence suggests industrious serfs could buy their freedom if they acquired enough wealth. There were other avenues for advancement, like military valor or intellectual aptitude, but money played a critical role in fostering mobility in a mostly rigid class system.
During the Crusades, the Knights Templar operated an international banking service. One of the services they provided included depositing money at one location for a letter of credit, and then cashing it at another location. The wealth they accrued was eventually pillaged by destitute despots.
Financial innovations did not stop with the Templars. Bankers and goldsmiths issued promissory notes backed by gold that could be traded, and the bill of exchange was also born. The bill of exchange allowed for international business transactions without the need for coins.
The Jewish community eventually became the major providers of financial services in Christian Europe. The reason for this is two-fold: they were barred by the guilds to engage in trades or crafts, and money lending at interest (or usury) was strictly forbidden by the doctrine of the Church. Hence, the European aristocracy pushed the Jewish community into the unenviable position of money lending. Often, powerful aristocrats unable or unwilling to pay debts incited antisemitism and pogroms throughout European history.
Age of discovery, the return of metal coins and the new meaning of money
Moving from the Middle Ages to the Age of Exploration we see a further change of the money-system. With the discovery of new lands and rich supplies of precious metals, the increased use of metal coins and slave labor took effect. In many respects, it was an economic system that mirrored the Greek and Roman models.
Money itself had evolved from an instrument of the state to a universal instrument of wealth and power. The theory of money also changed as thinkers like Copernicus brought their understanding to bear upon it. Currency devaluation was understood as caused not only by debasing the content of precious metals, but also from overexpanding the circulating supply of money.
This was understood very well by observing Spain, which massively increased its money supply but ultimately remained a debtor nation, as productivity lagged behind what was needed to bolster the economy.
The sixteenth century was the beginning of a new era for Europe, as it was not only an age of exploration and colonization but an age of mercantilism. Feudal society was replaced by powerful nationstates that sought to increase trade to acquire wealth, the idea was that exports increased power and opulence. Meanwhile, nations clamored to accumulate massive amounts of bullion.
One of the consequences of this fervor was the formation of the East India Companies of Britain and the Netherlands. The British incarnation was a joint-stock company with a royal charter for a trade monopoly. However, the shares in the company were owned by private investors.
The Dutch version was the first corporation tradeable on a stock exchange. This seventeenth century financial innovation opened up an investment market to the general public that included the issuing of bonds, shares of stock, and derivatives, including options and repos.
Yet the stock market was not the only financial breakthrough of the seventeenth century, as it was also witness to the birth of the European banknote. Goldsmith bankers would issue these notes as payable to the bearer rather than the depositor. They also permitted the bankers to increase circulating money by issuing more gold-backed banknotes than what the vaults reflected, as they would not all be immediately redeemed for gold.
Perhaps the most stunning aspect of the seventeenth century revolutions in finance is the transfer of monetary control from the sovereign to private citizens. The birth of the central bank was a landmark event.
The Swedish Riksbank was initially established as a joint-stock bank to lend the government money, The Bank of England, to buy government debt. Because of their size and the abundance of their reserves, they became the bankers of smaller banks, lending services to private citizens. The power they came to wield can hardly be exaggerated.
The new ideas of the Age of Enlightenment
From this point, we progress into the Age of Enlightenment, where new ideas came forth for existing monetary problems. Arbitrage became a pressing issue in England, where the value of silver coins was less than the metal’s intrinsic value. Clipping coins became widespread and merchants esteemed the money by weight rather than face value.
The philosopher John Locke argued against the idea that money should be rated by the sovereign stamp. The government was not to determine value, but the metal content of the money. The economy was free from the reigns of state power, and money would be tied to intrinsic value over the resolutions of the government. Locke’s ideas won the day.
During this period a transition led to the gold-standard. One of the men Locke advised was Sir Isaac Newton. Newton was Master of the Royal Mint, and in 1717, he decreed a mint ratio between silver and gold. The consequences were the waning use of silver and the rise of gold.
Students of political history will know the immense influence Locke had on the political framework of America. When it came to the financial sphere, the Founding Fathers decided to take a page from England. They did this by ushering in the private sector to monetize the massive debt accrued during the Revolutionary War.
The first attempt at a central bank in the US failed, though the production of banknotes from a multitude of private banks proliferated. Eventually a few major banks gained a monopoly over banking reserves.
Several presidents attempted to combat the growth of money power, as it was seen as a threat to true democracy. Lincoln attempted to neutralize the bankers by issuing greenbacks (not backed by precious metals), but they were ultimately eliminated from circulation.
Modern Age, the beginning of the Federal Reserve’s reign
Eventually the government and financiers joined hands in founding the Federal Reserve. The Federal Reserve became responsible for printing the nation’s money and controlling supply. However, the Fed is not controlled by the government nor collectively by the American people.
Despite who owns the Fed, one thing was clear: the gold-standard remained both in the US and abroad. It was briefly abandoned during the First World War. However, influential Keynesian economists argued the gold-standard worsened the Great Depression.
The problem with having gold as the standard was further exacerbated by its volatility. Then, in 1971 President Richard Nixon dropped the convertibility of the US Dollar to gold. Instead of backing it by anything with intrinsic value it was backed by government decree alone. In a word, it became fiat money.
The transition to fiat has resulted in huge repercussions. Since 1971 the cumulative inflation for the US Dollar has been 542.9 percent.
With fiat money becoming the status quo things seemed very bleak, especially after a major financial crisis in 2007 and 2008. Yet technology intervened in 2008, when the idea of a workable, decentralized, digital currency was brought to the world.
The digital age, the new revolution
What the brilliant pseudonymous creator of Bitcoin, Satoshi Nakamoto, ushered forth was a decentralized peer-to-peer, distributed ledger network that entirely eliminated the need for intermediary agencies like central banks to manage supply. It permits the individual to control their money with a cryptographically secure wallet.
It was endowed with intrinsic scarcity. Only 21 million could ever be produced. Moreover, it was capable of being divided into many fractions of the asset, giving it utility if widespread adoption occurs.
Bitcoin has been a massive success, although global adoption for everyday use is not yet here. As a type of money, or digital asset, its value has increased exponentially with a volatile yet upward trend.
Since Bitcoin’s inception, many new digital currencies have populated the cryptocurrency scene. Some have brought unique features to the idea of a new money, with new utility underlying them. One leading innovator is Ethereum.
Ethereum added the idea of smart contracts to the distributed ledger protocol, which allows for new financial applications in cryptocurrency. One of the results of this has been the birth of Decentralized Finance (DeFi), which allows users to engage with instruments that mimic the multitude of traditional transactions.
This has afforded the world with services advantageous to the banked and unbanked alike. Combining the intrinsic advantages of cryptocurrency with a powerful means of accruing wealth only found in legacy finance, new financial instruments have emerged that promise to change the economic landscape.
This has given rise to projects that seek to solve the weak points of both fiat money and cryptocurrency assets. Conspicuous among them is Stable Unit DAO, a decentralized autonomous organization (DAO), providing a stablecoin eliminating volatility and ensuring wealth appreciation.
Considering the intrinsic scalability, security, and stability of the platform, and the multiple avenues of generating yield, whether through minting fees, liquidations, lending services and also through farming yield on other reputable protocols such as Yearn, Compound, Curve, etc.
This stablecoin, unparalleled in its facility of use, is a choice candidate for a new and better money.
Bearing all of this in mind, as history progresses and money evolves, it is easy to envisage that emerging technologies connected with cryptocurrencies will play a leading role in the financial system of the future.
Although cryptocurrencies are newcomers on the grand stage of history and applications are even more recent, the most illustrious examples of decentralized stablecoins prognosticate a massive improvement for the future of finance.
