A HISTORY OF MONEY

Studium Generale WUR

Wageningen, 30 October 2018

Joost Jonker

University of Amsterdam/IISH

Contents

•Money, an introduction

•Three phases

•Conclusions

Money, an introduction

•Three requirements :

• Stable value, relative scarcity, trust

•To fulfill three functions :

• Means of exchange, gauge of value, store of value

Money, an introduction

•Money a convention

•Anything meeting requirements can serve as money if we agree on it : shells, dolphin teeth, squirrel pelts, coco beans, cigarettes...

Money, an introduction

•Trust lodged in :

• The preciousness of the material

• The social cohesion of a community

• The power of rulers

• Any two of these three

Three phases, 1: commodity standards

• From earliest times until 1914

•Oldest forms ingots of scarce metal: copper, bronze, gold, silver...

•Oldest forms scarce metal ingots : copper, bronze, gold, silver...

•Coinage appears about 3,000 years ago

• Stamped lumps of precious metal: electrum, silver, gold

• Big coins, so small circulation

Three phases, 1: commodity standards

Stater from Efesos, 6th-7th century BCE Stater from Miletos, 6th-7th century BCE

Puranas, Karshapanas or Pana from India, 6th century BCE

•Oldest forms scarce metal ingots : copper, bronze, gold, silver...

•Coinage appears about 3,000 years ago

• Stamped lumps of precious metal: electrum, silver, gold

• Big coins, small circulation

• Coining seized as sovereign right : stamped with authority

Three phases, 1: commodity standards

Roman gold aureus, 2nd Century CE

Gold dinar, India, 6th Century CE

Gold dinar minted at Damascus, 7th Century CE

•Advantages :

• Coins worth their weight in metal

• Fixed and recognizable value

• Stable exchange rates between coins and countries

Three phases, 1: commodity standards

Spanish silver dollar, 1797

British gold sovereign, 1817

Gold 10-guilder piece, Netherlands 1933

•Drawbacks :

• Cumbersome for both large and small transactions

• Clipping and counterfeiting popular pastime

Three phases, 1: commodity standards

Quinten Metsys, The money changer and his wife (1514)

•Drawbacks :

• Cumbersome for large and small transactions

• Clipping and counterfeiting popular pastime

• Monetary policy impossible

• Sovereigns untrustworty, always debase coins

Three phases, 1: commodity standards

• Solutions :

• Technology (mint presses, ribbed sides, edge lettering)

Three phases, 1: commodity standards

10 stuiverstuk, Zeeland, 1613 10 stuiverstuk, Holland, 1761

• Solutions :

• Technology (mint presses, ribbed sides, edge lettering)

• Parliamentary control over minting and money circulation

• Central banks set up to manage currency

• Licensed to issue paper money

Three phases, 1: commodity standards

Chinese Jiaozi banknote, 11th Century BCE

Swedish Riksbank note, 1666

• First forms in China, 12th-13th century

• Europe late 17th century

•Based on trust in repayment : fiduciary money

• Essentially a promise to pay backed by silver or gold

Three phases, 1: commodity standards

• From 1914 until 1971

• First World War ends Gold Standard

•Gold concentrated in central banks, no longer in circulation

Three phases, 2: fiduciary money

•Gradual acceptance of money as managed (Keynes)

•Backing rests on trust in government

• Economic mismanagement can wreck currencies

Three phases, 2: fiduciary money

Reichsmark note, July 1923

Reichsmark note, October 1923

Zimbabwe dollar, 2008

•Bretton Woods links Western currencies to gold via US dollar

•Macro-monetary flexibility boosts post-war growth

•Constraints on US economic policy ends system, 1971

Three phases, 2: fiduciary money

• From 1971 until now

• Money no longer backed by anything at all

• Strong exchange fluctuations upset international economy

• Monetary policy from technical management into politicalfootball

• Efforts to reboot economy boost inflation everywhere

Three phases, 3: fiat money

•Governments from solution to key problem

• Stable money depends on social and political balance

•Calls for a return to gold

• Suspicion against state inspires alternatives like bitcoin

Three phases, 3: fiat money

•Money is a convention

•Acceptance depends on ability to fulfill three functions

• Fiat money culmination of 5,000 years evolution

• Balance between parliament and independent central bank the best bet for stable currency

Conclusions

•A regular occurence throughout history :

• Local scarcity of coin

• Emergency situations

Alternative currencies

•Cryptocurrencies the newest manifestation :

• A world currency

• Circulating freely without governments or banks

• Trust lodged in supposed power of abstract and diffuse community to check production and use

Alternative currencies

•Must meet at least two criteria to fulfill three functions :

• Relative scarcity, stable value, trust

• Means of exchange, gauge of value, store of value

• So far, only relative scarcity possible

Alternative currencies

• Fallacies and drawbacks :

• Abstract community diverse and unable to control

• Growing use will dampen strong fluctuations

• Ideal vehicle for thieves, speculators, and money launderers

• Transactions still very slow and very expensive

• Fools and their money...

Alternative currencies