[1] THE INVENTION OF MONEY

* The ancestor of the monetary system is of course the barter system. A farmer could exchange his produce for the fish obtained by a fisherman or the cloth produced by a weaver. Even today the barter system tends to come back into style in places suffering from tremendous social disorder, or as an informal sideline activity in more harmonious lands.

However, dickering over the relative value of different things tends to be time-consuming and troublesome, and so societies tended to converge towards a common medium of exchange. Pacific islanders used cowrie shells; Aztecs used cacao beans, the main ingredient of chocolate, though it seems a bit unlikely that this was the origin of the modern term of "bean-counter" for an accountant; livestock was common among herding cultures; slaves were sometimes used, too, but they were much harder to control than cattle and so not as popular; and many cultures used salt, including the Romans for a time, leading to the modern term "salary". Incidentally, after World War II cigarettes were used as a medium of exchange in many countries then in very poor condition, and it is said that in Italy "penny candy" was commonly used as "small change" even into the 1970s.

The medium that gradually gained widespread acceptance was precious metals such as gold and silver. Ancient Egypt was one of the first lands to establish transactions using precious metals, though their forms were variable -- rings, bars, wafers, and so on. Coins are said to have been invented by the Lydians, a people of Asia Minor, sometime after 640 BC, using stamped ingots of "electrum", a naturally occurring amalgam of silver and gold. The scheme was refined by King Croesus, ruler of Lydia from 560 to 546 BC, who introduced coins of true gold. He became identified with wealth in the antique expression "rich as Croesus".

Introduction of coinage was a great boost to commerce, simplifying transactions and allowing them to be conducted more rationally over long distances. The Greeks picked up the idea of coins from the Lydians; since the Greeks had a colonial and trading empire that ringed the Mediterranean, they spread their coinage, such as the "stater" and various multiples of the "drachma", along all the shores of the sea. When Alexander the Great engaged in a campaign of conquest in the 4th century BC that took him to the borders of India, he kept his troops loyal by paying them in coin, and also helped spread the idea further.

The Roman Empire was built on silver and gold coins, as well as legions. The primary coins were the "aureus" and later the "solidus", which were mostly gold alloyed with some silver. As the empire expanded, the expenditures of the state led to the debasement of the coins, beginning with an act of the Emperor Nero in 64 AD. By the end of his reign, the silver content of Roman coins had shrunk by 10%. Other emperors followed his example, and over 200 years from the start of the process, the content shrank to 5%. The buying power of the currency fell accordingly.

The Byzantine Empire came up with a successor to the solidus known as the "nomisa" or "bezant", but it eventually was degraded into near worthlessness. By the end of the 7th century a new coin named the "dinar" appeared and gradually became the predominant coin of the Middle East. By the time of the Renaissance, European states were producing new coins of their own, including the "ducat", "florin", "nobel", "grosh", "zloty", "guinea", and the Spanish "escudos" -- better known as the "dobloon". Others would follow.

Coins are still with us, though they are now little more than tokens made of non-precious metals. The US gave up minting silver dollars in 1935, and in 1965 eliminated silver in American coins completely, using copper plated with cupro-nickel. Few countries still use silver or gold coins as anything other than collector's items. The American science-fiction writer Larry Niven once proposed that coins be made out of radioactive waste. He reasoned that this would solve the nuclear waste disposal problem, ensure that money circulated rapidly, and lend a new meaning to the expression "money burning a hole in your pocket."

Chinese paper money did work well enough for a time; Marco Polo was impressed by the system during his visit to the Middle Kingdom. However, if there was a tendency to debase coins, the temptation to simply print more paper money regardless of the consequences was often irresistible, and public confidence in paper money was weak anyway. In 1294, paper money was forcibly introduced in Persia, but led to economic disaster. Even in China, paper money had been more or less abandoned by the 15th century.

In the meantime, the first modern banks had been evolving. Moneylending and similar activities were essentially as old as money itself, and there were banks in Roman times, but they were more or less local affairs. The idea of a formal bureaucratic organization that spanned borders to handle savings, investment, and loans didn't start in earnest until the 13th century. There were difficulties at first, with some early bankers burned at the stake, but by the 14th century Italian entrepreneurs were starting to make a go of the concept, the Medici family becoming the most famous of the lot. They used conventional metal currency, but conducted financial transactions using "bills of exchange", which were documents obtained at a given price that specified a particular payment when presented.

For example, in 1317 the Italian banking firm of Peruzzi and Bardi arranged the transfer of the monies collected from the churches of England to the Pope in Italy. The London office of Peruzzi and Bardi obtained the coinage and sent a bill of exchange to Rome, which was then redeemed to the Pope in coinage by the Rome office of the bank. The money changed hands without having to be carted from England to Italy. Bills of exchange could also be transferred through many hands before they were redeemed. They weren't exactly paper money, being something more like a modern money order, but they were close to paper money, and did much to grease the wheels of commerce.

The Italian bankers also invented modern double-entry bookkeeping and the notion of a check -- a document that authorized the withdrawal of a specified amount of money to the bearer. The idea of a check was fairly obvious, but there was the perpetual threat of forgery, and it didn't become a reality until late in the 14th century, after adequate safeguards had been developed.

* The notion of paper money began to reemerge in Europe at the end of the 17th century. According to tradition, the first European to introduce paper money was a Swedish banker named Johan Palmstruch, whose Stockholm Banco began to issue the stuff in 1661. The offering went well enough at first, but success led to the bank's overextension. Palmstruch, like any good modern banker, called to the government for financial help. Unlike a modern banker, he was taken to trial for mismanagement and sentenced to death, though the sentence was commuted to life imprisonment.

Despite the unhappy ending to Palmstruch's scheme, the idea was one whose time had come, and paper money was adopted by other European countries. One of the rationales behind the establishment of the Bank of England in 1694 was to issue banknotes, and it has been doing it ever since. The Bank of England, incidentally, wasn't a government bureaucracy, being instead founded as a private institution under a government charter; in 1844, it would be given an effectively monopolistic charter to issue bank notes. Other nations established such "central banks" to control the manufacture and distribution of currency.

* Generally, the original idea behind European paper money was to simply provide what amounted to a token that was redeemable in gold or silver. The paper was more convenient in many ways, and as long as it was regarded as equivalent to precious metals, users were confident in it.

There was, as always, a tendency to cheat. In 1716 a Scotsman named John Law persuaded the Duke of Orleans, then the French regent for the young Louis XV, to allow him to start a bank and issue paper currency. Law's bank, which was formalized as the "Banque Royale" in 1718, was another roaring success, but unfortunately a little accounting showed that the bank had issued twice as much paper money as there was gold and silver in France to back it up. The bank and the scheme collapsed, and Law fled the country.

France did not turn back to paper money until the 1790s, when the new revolutionary government began to issue "assignats", and this scheme went worse than Law's. Like many shaky governments, they simply printed more banknotes to cover their debts, ultimately driving the currency down into worthlessness. It is said to this day that the French are somewhat more suspicious than other folk of paper money.

The Americans showed an interest in paper money even before independence. The concept was heavily promoted by Benjamin Franklin, whose popular journal POOR RICHARD'S ALMANAC gave him an influential forum for spreading his ideas. Printing currency was also a natural extension of his printing business, and he printed paper banknotes for the colony of Pennsylvania.

Many colonies enthusiastically printed their own currencies in the mid-18th century. As it turned out, they were too enthusiastic, and in 1764 the British Crown banned further issues of banknotes by the colonies. This was no doubt prudent, but it was also done in a high-handed fashion. Furthermore, the colonists had also been pushed to printing banknotes by Crown policies that worked to keep gold and silver in Britain, starving the colonies for currency so badly that Spanish coins were in widespread use among them. This is why America doesn't use the pound as the national currency; the colonials generally traded in "dollars", the English name for Spanish "reals", with both the English name and the Spanish coin derived from the Central European "thaler".

In any case, the issue of money was one of the thousand little cuts that drove the Americans, almost against their instincts, to revolt against Britain. The colonies declared themselves as independent states and printed money on their own again, as did the Continental Congress. They all proved just as undisciplined as they had been before, and the results were exactly the same. A popular phrase of the time, "not worth a Continental", described what the citizens thought of Continental banknotes. Section 10 of the American Constitution established in 1789, providing a central Federal government above the squabbling states, expressly prohibited the states from printing their own money. That right was reserved for the Federal government, though the first national mint wasn't opened until 1794 and currency wasn't issued until 1797.

The issue definitely did not include paper money, though it was progressive in adopting a "decimal" currency scheme, organized in nice neat multiples of ten. The idea had been pioneered by the Russians, though other states retained their more irregular systems. In Britain, for example, four farthings made a pence, 12 pence made a shilling, and 20 shillings made a pound. There was also a "guinea", which was a pound and a shilling. The British would more or less retain this scheme until 1971, when a pound became a hundred pence.

Incidentally, the motto on the first American pennies was "Mind Your Business", though this would make saying "a penny for your thoughts" a bit contradictory. There was a push to put George Washington's profile on the coins, but Washington himself, though instinctively methodical in cultivating his public image, had a very clear and disciplined idea of where to draw the line, and the independent Americans by and large thought the idea smelled of elitism and class distinction. Faces would not appear on any sort of American currency for a century.

American paper money did appear for a short time during the War of 1812 as an emergency measure, but it was abandoned as soon as possible. For decades after that, the only paper currency in the United States was issued by banks themselves. These commercial banknotes remain interesting collector's items, but at the time they were regarded with much suspicion, since they were used by many banks to put over frauds.

Both the North and South finally turned back to paper money during the Civil War. Confederate currency became one of the most notorious examples of a bogus currency in history. The South printed twice as much paper currency as the North, and Confederate money faded into extinction before the Confederacy did, suffering devaluation by a factor of almost a thousand. Of course, the restored Union did not recognize the currency of a rebel government as legitimate, and those Southerners who had piles of it found it little better than wallpaper.

Union "greenbacks" were issued beginning in 1862 by the Federal government through the "Legal Tender Act", pushed through by Treasury Secretary Salmon P. Chase because the government was effectively out of money. The banknotes were not redeemable on demand for gold or silver, but the government did agree that they would be redeemable at some unspecified time after the war. They were effectively something like zero-interest bonds. When all coinage began to become scarce in the North due to hoarding, Congress first authorized the use of postage stamps as "small change", but they proved impractical because they had to be kept dry. After issuing a special "postal currency" that didn't have glue on the back, in the fall of 1863 the Union began to print miniature banknotes in denominations that would ultimately range from 3 to 50 cents. They proved popular and would continue to be issued into 1876.

The value of the Federal greenback declined steadily until late 1864, then rebounded since by that time it was obvious that the Union would win the war and presumably make good on its debts. By that time, Union greenbacks were also in fairly common use in the Confederacy, and after the war they would be retained as the popular currency of the reunited America. Ironically, in 1870 Salmon Chase, who had become Chief Justice of the Supreme Court, presided over a decision to declare greenbacks unconstitutional -- Chase had never liked the idea and had only backed the Legal Tender Act out of dire necessity. President Ulysses Grant ignored the court, and thanks to two new justices placed by the president, within two years the decision had been reversed.

The US government finally announced in 1879 that greenbacks could be exchanged for gold, but relatively few people did so, since paper money had become well established and secure by that time. The disreputable commercial banknotes were long gone, having been killed off by a 10% tax passed in 1866 that made them uncompetitive.

There still was a hot debate over money policies, which figured prominently in presidential elections in the 1890s. There are some who believe that Frank L. Baum's fantasy novel WIZARD OF OZ, published in 1900, was at least partly intended as a satire or parable on the issue, with its references to yellow brick roads and green glasses. Although this might be stretching things a bit, it should be noted that in the book Dorothy wore silver instead of ruby slippers; the moviemakers felt that Judy Garland would be more photogenic wearing ruby slippers.

* By the early 20th century, paper currency was in widespread use all over the world. The failures in paper currency were not really due to the fact that the paper money wasn't adequately backed by gold or silver. Although many nations clung to the gold standard well into the 20th century, all money amounts to is a medium of exchange, allowing the citizens of a country to engage in transactions. The US finally completely abandoned the gold standard in 1971. All nations now use "fiat currencies", money which has no intrinsic value and is not backed by precious metals.

The problem with paper currencies was not that they were often inadequately backed by precious metals. The money circulating in a society, in a sense, mirrors the material wealth of a country. It is relatively easy to print more banknotes, but not so easy to increase the overall material wealth of a nation, and so if twice the number of banknotes is printed given the same amount of wealth, the value of each banknote is more or less cut in half. This happened automatically, as if by magic, every time a weak government tried to cheat. The most famous example was the Wiemar Republic that ran post-World War I Germany, where inflation took place by a factor of trillions.

The idea that there is an "inherent" value even to gold and silver is something of an illusion. A money supply based on precious metals is not absolutely more stable than one based on paper. When the Spaniards and Portuguese conquered much of what would become Latin America in the 16th century, they seized large quantities of gold and also obtained rich gold and silver mines, with the result that the value of their gold and silver currencies plunged to about a third of their original value.

Some astrogeologists have calculated the value of the metals in a single typical metallic asteroid; if some future generation were able to nudge one into orbit around the Earth and then render it down, the haul would be so huge that it would dramatically devalue every precious metal in circulation. Even without such a monstrous kick in the teeth, the price of gold tends to fluctuate drastically, dropping or rising relative to relatively stable fiat currencies. Money, as the saying goes, "is worth what everyone thinks it's worth", and that rule applies just as much to gold as to paper bills. The real concern is discipline in the printing of money. If too much money is printed, it becomes devaluated. If too little is printed, it stifles commerce.

Mainstream economists will admit that it may be harder to cheat with a gold standard, but point to its restrictiveness as a crippling flaw; some accuse those who push the gold standard of simply trying to restore a system that would give them personal control over the money supply by hoarding gold. There is still a school of thought that believes money should at least have some hard currency backing, but it's well off the mainstream. In 1998, the highly respected US Federal Reserve chairman Alan Greenspan commented: "I am one of the rare people who still has some nostalgic view about the old gold standard ... but I must tell you I am in a very small minority among my colleagues on that issue." As for advocates of a strict gold standard, mainstream economists regarded them as pushing "the economic equivalent of leeching."

The actual amount of money printed is unsurprisingly a tricky issue, all the trickier in modern times since now maybe about 10% or less of all the money in prosperous countries is in the form of physical coins or banknotes, the rest existing only in the form of ledger entries in electronic accounting books. Not only are banknotes no longer backed by gold; the bulk of money isn't even backed by banknotes.

Control of the money supply does not really mean printing banknotes. Such control is performed by careful tweaking of interest rates to adjust the "price" of money; dictating what proportion of a commercial bank's deposits have to held in government reserve banks; and buying or selling government securities.

Even if most money is in the form of numbers in account statements, those numbers have to balance overall; no private citizen or commercial entity can legally "make up" new dollars by just inserting new values into an account statement. A government central bank can do so, however, using the "new" money to pay off debt; and in principle could also buy up securities to reduce the total amount of money in circulation. Since the primary job of a central bank is to prevent inflation, adjustment of the money supply is done very carefully, with the central bank chairman keeping a very close eye on statistics for inflation and national wealth, and making changes in monetary policy slowly and carefully.

* One of the biggest landmarks in monetary history took place at the beginning of 2002, when twelve European countries conducted one of the largest exercises in public logistics in history: the introduction of the new euro currency, which replaced the national currencies of the group nations. Roughly 14 billion nice crisp new euro banknotes were printed and put into circulation, along with 50 billion shiny new coins, while old national currencies were phased out.

Fans of banknote art found the euro dull. This was largely due to the fact that euro notes were distributed in twelve different countries that in many cases had long histories of intermittent mutual frictions, and so nothing that could cause offense was included on the notes. They not only didn't include any images of people, they didn't include any images of real scenes. Britain didn't sign up for the euro, mostly because the British didn't want to be subject to monetary policies made in Brussels, but the bland format of the euro notes also meant that the Queen would have to "lose her head". The fact that the Queen's image has only been on British banknotes since 1960 only highlights the emotional nature of this complaint, but then emotions have figured prominently in the history of currency.

Within a few years a certain backlash had set in against the euro, with advocates in some nations suggesting that it was a blunder and that the national currency be revived. A number of German localities came up with a more active response, making up their own currencies for use by citizens and businesses in the area. These local currencies were essentially promotional gimmicks, being convertible into euros and simply intended to boost local commerce. They were never intended to replace the euro and were not generally recognized outside of the localities where they were issued.