The Origins of Money

Money, Currency and Crisis: In Search of Trust, 2000 BC to AD 2000 (2018)

The origins of money

This quest for ‘trust’ has to start from the creation of money in ancient times. Scholars have often sought for the origin of money, but we need not assume that money was invented in one place. Money probably had different sources in different cultures. In many societies, this origin is related to the acceptance of silver (or other commodities) as money. Silver was used as a medium of exchange, unit of account and store of value in the third millennium BC in Mesopotamia, and it remained so for millennia. We observe that in many languages the words for silver and money were interchangeable. In Sumerian logograms, it is written as KÙ.BABBAR. The sign KÙ (or: KU3) was used in the late fourth millennium BC in documents from Uruk, southern Mesopotamia. The meaning of the word is both ‘shining’ and, as substantive, ‘shining metal’. BABBAR means ‘white’. ‘Gold’ is rendered as KÙ.GI = ‘yellow shining metal’ (Krispijn 2016). In Akkadian (the Semitic language that emerged in Mesopotamia next to Sumerian and was the language of the Old-Akkadian Empire, Assyria and Babylonia), the word for money and silver was kaspu.

This can be observed in many expressions, such as ana kaspi nadānu, ‘to give for silver; to sell’ and ana kaspi mahāru, ‘to receive for silver; to buy’. In ancient and modern Hebrew, it is kesep or kesef. The word kesef is translated as both ‘silver’ and ‘money’.

In Ancient Greek, there are several words for money, some of them related to ‘silver’. The word ho argyros (from argos, ‘shining’) means both silver and money. Greek to argyrion means 1) coin; 2) money. Argyrion katharon = ‘hard cash’, lit. ‘pure silver’ (Theocritus 15.36). Other words reveal another attitude to silver: money is also indicated as chrēmata, ‘things that are needed (from chrāsthai, ‘to need, to be in want of, to use’); assets, things, money’. It appears that money was seen as a commodity. But there is also an abstract term: nomisma, referring to coinage. It means ‘anything sanctioned by current of established usage, custom’. The word is explained by Aristotle as follows: ‘but money has become by convention a sort of representative of demand; and this is why it has the name ‘money’ (nomisma), because it exists not by nature but by law (nomos) and it is in our power to change it and make it useless’ (Aristotle, Nicomachean Ethics 1133b 1).

Latin has two words for money: pecunia, possibly derived from pecus (genitive pecoris, ‘cattle’, thus originally property in cattle, apparently an important indicator of wealth in early Rome 2 ). But the Romans also used argentum (silver) as a term for money, although in Rome the earliest specie was bronze, at first in uncoined form, aes rude (rude bronze). The bronze was weighed; stipendium (military pay) is derived from the Latin verb pendere, ‘to weigh’. The name of the later coin as is probably derived from aes, ‘bronze’. In the third century, Rome introduced silver coinage, the denarius (derived from plural tantum deni, ‘together ten’ asses). The denarius, which was the main silver coin of Rome for over four centuries, was probably introduced in 211 BC and produced in enormous quantity from the silver looted in the sack of Syracuse the year before. The coin represented 10 asses, hence the word denarius (from deni, ‘tenfold’). 3

In China, the word for money, qian (钱), referred in ancient times to farming tools, which were used for monetary exchange in much the same way as cattle was used in the Roman Empire. When the first money was created, it was cast in the form of these tools (cf. Von Glahn, Chapter 12). This use of the object for primitive exchange can also be seen in the word for shell (bei, 贝). These shells were used from the Shang dynasty (1600–1046 BC) to the Spring and Autumn Period ca. 500 BC. Afterwards, the character was added to all kinds of concepts related to value, such as wealth (财) and capital (资) (if you look closely, the character bei is part of the characters for wealth [see left side] and capital [see bottom side]).

So in many cases the word ‘money’ refers to the commodity used in exchange. But this is not always the case. The word money in Germanic languages has a completely different origin. The German and Dutch Geld, related to English yield, literally means ‘recompense’, for instance, in the context of repayment as penalty for injuries. We see the term in composite terms, such as wergeld, ‘compensation for man (wer) slaughter’. The German vergelten and Dutch vergelden both mean ‘to requit’, ‘to retaliate’. So, paying something back, i.e. some sort of loan or debt.

This discrepancy between the meaning of money we can also find back in the modern languages. Besides the German Geld and the Dutch geld being derived from Germanic languages, the French words for ‘money’ and ‘silver’ are the same: argent. The English ‘money’ and ‘mint’ are both derived from Moneta, the epithet of the Roman Goddess Juno Moneta, in whose temple the mint was established (monēta). Nummus is the word for ‘coin’, derived from Greek nomos. Italian and Spanish words for money (Sp. dinero, it. denero or soldi) are derived from Roman coins, from the silver denarius and the late Roman gold solidus.

It is clear from the above that, even though in many cases the meaning of the word ‘money’ was derived from silver or other precious goods, in other cases, like in Germanic languages, it may be more like a debt (or credit). This links directly to a debate on the nature of money in which two approaches come to the fore. The traditional idea is that money was a commodity which replaced or facilitated barter. This is the orthodox view advocated by Adam Smith, Heichelheim and others. Since the beginning of the twentieth century, this idea has been under attack. Some, such as Mitchell-Innes (1913; 1914) and Goodhart (1989; 1998), have argued that there is no evidence for a society where trade was simply barter exchange, and that debt was the origin of money. 4 Hence, it was not the value of the money (e.g. silver) that mattered, but the right of the creditor to receive payment, or the requirement of the debtor to pay. This latter view is advocated in this book by Dirk Bezemer (Chapter 3), who argues that debt notes and tallies preceded coinage by far. It is true indeed that money as a unit of account was present from the earliest times in Mesopotamia, especially in an institutional context. Debts (or credits) held in the institutional books were owed from/to individuals with entitlements from or obligations to the institutions, as well as by other institutions, and these debts and credits were transferable. Yet various authors (e.g. Coggan 2011) have also taken a less hardline stance, actually arguing that money can only be considered credit in fiat money systems where the intrinsic value of the money is lower than the nominal (i.e. metal) value. Dennis Flynn (Chapter 2) advocates a new approach by disaggregating ‘tangible’ (commodity based) and ‘intangible’ monies.

Even though the question whether money is a commodity or not in itself is not an issue (in the end, all monies are commodities to a certain extent), this discussion is nevertheless more than just an academic debate, as it affects the trust in money as well as monetary policy measures (see the following sections).

Trust

It is clear that the difference between intrinsic and nominal value has increased over time. An interesting question is thus where money derives its value from. Basically, it is a mental construct by which everyone accepts money. As pointed out by (Harari 2014), ‘[t]rust is the raw material from which all types of money are minted’. Yet it is equally clear that commodity-type monies are in a better position than debt/credit types. Indeed, possession of silver or cash gives more confidence, and thus pleasure, than debt notes because of the intrinsic value. In times of crisis, people go to the bank to get cash money instead of leaving their money in bank accounts. One might imagine that in times of famine, people who run to the bank to demand their bank deposit would even prefer grain to cash money or silver. So intrinsic value can create confidence, but even silver or grain can, at times, lose value, while debt notes and the like can gain trust in various ways, such as by government backing. Roselli (Chapter 15, this volume) maintains that government backing is a precondition for any money.

But rather than generating new ways to gain trust, over time one witnesses an increase of financial instruments, such as cash, shares or bonds, often related to monetary easing. Since these instruments relied less and less on an intrinsic content, this created an increasing quest for trust. Some authors (among others, Udovitch 1979) have argued that the rise of financial instruments was caused in response to increasing financial demand caused by economic growth, while others have argued that these financial inventions were the ones causing economic growth (e.g. Tracy 1985). But no matter the causal relationship, in all cases the argument is that the aim of inventing new financial instruments was related to an improvement of the three functions of money (a medium of exchange, unit of account and store of value).

The question of how these instruments developed and how this impacted trust is dealt with in various chapters. For example, in Chapter 12, Von Glahn shows that during the Mongol Yuan dynasty in China (1271–1368), the integration of fiscal units and currency lent trust to the system, which allowed the state to issue paper notes. But whereas this system broke down in China in the early Ming dynasty, in Holland an opposite trend is witnessed, with money being created by borrowing from private lenders by cities in Holland (Zuijderduijn, Chapter 10). The resulting money stock was artificially increased by setting repayment in silver coins and subsequent debasements of these coins by the sovereign. Consequently, it was generally held that these debasements became a standard policy by the government until the moment this system broke down. But Gelderblom and Jonker show in Chapter 11 that these events also occurred in private society in subsequent centuries. They document that, among other things, new bookkeeping practices resulted in more trust, and hence opened up the possibility of an expansion of the settlement of debts and payment by ‘ghost money’, which in turn resulted in an expansion of the money stock. Hence, trust followed from different sources in China and Western Europe, leading to very different development paths.

Monetary institutions

Obviously, with the rise of more complex financial instruments, the role of institutions also grew in importance. This has three reasons. First, the institution (mostly the state) can help to provide confidence in a money, as was the case in China during the Yuan dynasty. Second, the state can use the money for stimulating the (real) economy. Third, via money, institutions are capable of gaining control and profit.

The first point is best illustrated by the State Theory of Money (Knapp 1905). This theory argues that money comes into existence thanks to the fact that it is issued and guaranteed by the state. What Knapp called ‘the state money stage’ begins when the state chooses the unit and names the substance accepted in payment of obligations to itself. The final step occurs when the state actually issues the money material it accepts. In (almost) all modern developed nations, the state accepts the currency issued by the treasury (in the US, coins), plus notes issued by the central bank (in the US, Federal Reserve notes), plus bank reserves (again, liabilities of the central bank). The material from which the money issued by the state is produced is not important (whether it is gold, base metal, paper or even digitized numbers at the central bank). No matter what it is made of, the state must announce its nominal value (that is to say, the value at which the money-thing is accepted in meeting obligations to the state) (Wray 2004a).

The State Theory of Money certainly has value, but it is not universally true. As we refer to coinage, in most cases coins were issued by some government authority: Lydian kings (but possibly also local warlords), Greek city-states, Persian kings and satraps, the Roman senate. But there are also examples of private persons minting coins themselves (see for China, Peng 2015). Likewise, in China and parts of the Near East, bullion was also used in exchange. In addition, in economies of the Near East where silver bullion was used as currency, the state (or similar authority) did not issue currency. Silver circulated and was an object of trade, and it was used as means of payment. Yet the state (or, in some cases, the temple) had a role in stabilizing the currency market both in China and the Near East. In the latter region, for example, the state tried to obtain silver by conquest, booty, tribute and trade, and they brought it into circulation by payments to labourers. Merchants acted in co-operation with the state. The Assyrian kārum (commercial office) in Kanesh played a role in obtaining good conditions for trade (see Dercksen in Chapter 5, this volume). Old Babylonian merchants went on expeditions backed by investments by the king (Leemans 1960; Stol 2004). Debt notes were accepted as money, though probably on a limited scale (cf. Jursa in Chapter 5, this volume). But the most important point is: who set the standard measures? Who decided that 8.3 grams of silver constituted a shekel? Though we do not possess proclamations of the sort, it is clear that the metrology was set by the authorities (temple or king) (cf. Hudson 2004 5 ). There were several different standards in the beginning, but the standard set at the end of the third millennium BC (empire of Akkad, king Naram-Sin) was still valid at the end of the first millennium (Powell 1989–1990). There was a standard in the Old Babylonian period (and after) that equated 1 shekel of silver to 1 GUR (kurru = 300 litres, later 180 litres) of grain = 1 monthly wage (see Chapter 5 6 ).

Whatever the case, the government plays some, or perhaps a decisive, role. We know expressions as ‘the measure of the king’ or ‘the cubit of the king’, but apparently competing systems existed within one society. In Assyria, after 714 BC silver was measured ‘in the mina of Carchemish’. We see this in the Bible as well. In Genesis 23:16, Abraham buys a tract of land for ‘four hundred shekels of silver, according to the weights current among the merchants’. A shekel of the sanctuary we find in Exodus 30:13, Exodus 38:25 and Numbers 7:13 and 85, all regarding payments due to the temple. Finally, a shekel is mentioned in II Samuel 14:26 ‘by the weight-stone of the king’ (be ‘even ha-melek) in the hilarious description of the hair of the handsome prince Absalom, son of Solomon, that was so beautiful and heavy that he had to cut it every year (!), and which weighed 200 shekels by the weight-stone of the king.

The second use of money is for stimulating the real economy. In the past, injection of money into circulation by governments has taken place, but hardly for engaging in economic politics. It was simply done to meet expenses. Nevertheless, these injections of course had impact, either for the good if these led to investments, or for the bad when they was used only for consumption or, even worse, for destruction in warfare. It also depended how it was done, i.e. with high trust money (with high intrinsic value) or with debt-notes or treasury bills.

The core areas of the Assyrian, Babylonian and Persian empires profited much from the silver imports by booty and tribute. This silver was used for the building of palaces, cities and irrigation canals. A good case in point is the economy of classical Athens (fifth century BC). A great part of the prosperity of Athens can be explained by the availability of silver, first thanks to the finding of silver in Laurium in Attica, second by the collection of tribute in silver. The silver of Laurium enabled the Athenians to build ships, with which they withstood the Persians in 480 BC at Salamis, and which provided work and a living for hundreds of carpenters, shipwrights, rope-makers, etc.; thus, the Athenians were able to create an empire, which caused the influx of more silver thanks to the contributions of the allies in the Delian League (established 477 BC). The expansion of the Roman empire benefited greatly from the influx of silver coming from the East, as the Hellenistic empires had succumbed to the Romans. When a lot of silver, some of it ultimately originating from the treasury of the Persian empire captured by Alexander the Great (cf. Van der Spek 2011), flowed into the Roman Treasury, it ended up in the pockets of rich land-owners and politicians. It is one of the explanations of the economic boom in the first two centuries of our era.

In later periods, the same is true. The imports of silver from South America in the sixteenth and seventeenth centuries had a double effect. Inflation was one of the results, but even so it led to building projects, new enterprises and all kinds of investments that stimulated growth far into China. But increasingly the monetary expansion had a lower intrinsic value, such as paper cash or digital money. In such a situation, standard classical economic theory says that money is neutral, at least in the long run. That is, a rise in the stock of money will only increase the nominal variables, such as prices and wages, but will not allow one to buy more goods or services, as people know the rise of money stock and hence will not buy more. This will be less the case if money has a high intrinsic value (e.g. silver), since that value remains more stable, suffering less inflation. It is also less likely if the money is invested in capital-generating projects that have a positive effect on the long-run structure of the economy.

In monetarist theory, neutrality of money is true only in the long run, whereas in the short run people will react since they do not know if a rise is caused by a monetary or real shock. In neoclassical economics, this last point is conceded, but since people are well aware of the policy they can distinguish between real and nominal shocks; hence, nominal shocks cancel out, even in the short run. Only in Keynesianism we see there can be both short- and long-run effects (Keynes 1930). Especially in post-Keynesianism it is argued that money today is not created by the central bank, but by borrowing from banks (either private or government). That implies that the money multiplier does not exist, and the lending by banks is directly necessary for the economy. A related argument is that of Werner (2003), who basically states that credit availability should be increased by the central bank by purchasing low-performing assets and lending directly to government and private companies. Also, the government should directly borrow from banks. Such a system is supposed to remove bad debts and bring money directly into the economy.

The third factor regarding institutional involvement in the currency is control, for example, in the form of taxation, debasements, etc. In the ancient Near East, states had the power to increase the amount of silver (money) by conquest, booty and state-supported trade. After the invention of coinage, they had the possibility to manipulate the currency by lowering the weight of the coins and decreasing the silver content by alloys with other cheaper metals. The introduction of bronze coinage was in many respects the introduction of fiat money. Coinage itself led to profit when the coins had higher value than bullion of the same weight. For example, Xuyi and Van Leeuwen (Chapter 10) show that from the seventeenth century onwards other metals were increasingly added to copper coins in China. The issuing of paper money in later periods was a major example of such debasement. Even today, with the bitcoin, we see various government attempts to control the coin which, besides regulating criminal affairs, is often related to tax matters.