Course Textbook


I and my companions suffer from a disease of the heart which can be cured only with gold. - Hernán Cortés

Before layered money, there was simply money. For our species, money is a tool that allowed us to progress away from reciprocal altruism, wherein animals swap favors, like when monkeys groom each other. Some prefer to call money a shared illusion, although the word illusion implies that all forms of money lack basis in reality. It's better to say, instead, that some forms of money are shared illusions, and others might prove to be real over a long enough time horizon.

Humans used seashells, animal teeth, jewelry, livestock, and iron tools as tokens of barter for tens of thousands of years, but eventually settled on gold and silver in the past few millennia as globally accepted forms of currency. Something about these two chemical elements exuded preciousness, and humans anointed them as the quintessential money. This anointment was responsible for a tremendous advance in the globalization of human civilization, as precious metals provided improved ways to preserve generational wealth and facilitate trade between complete strangers in different corners of the planet.

Selecting what was to be used as money wasn't always easy. Shells might have been perfect for trade a thousand miles from the ocean but were plentiful by the seashore for others and thus not a great tool for storing value across generations and continents. Iron tools were highly valuable for hunting and weaponry and could hold value for centuries but weren't necessarily the best circulating medium because they lacked portability and divisibility, unlike shells. Precious metals worked well in both capacities and gradually became universally agreed upon as the best form of money.

Money isn't only used as a medium of exchange and a store of value; it's also a counting system. It's a way of listing prices, tallying revenue, calculating profits, and bringing the entire array of economic activity under one accounting denomination. The Latin root of the word denomination is nomin, or name. Religious denominations are a way for people to name their particular religious beliefs, just as accounting denominations are a way for people to name their revenues, expenses, and profits. When people come together to agree on a unified accounting denomination, pricing goods and services becomes easier because everybody is on the same page as to what is considered money. When everybody can name their price in the same terms, economic activity flourishes.

Denominating merely in gold wasn't enough though. Trade using gold jewelry, bars, and nuggets stipulated constant measurement of weight and purity, making an unspecified gold denomination not very useful. This chapter will show how coins solved this problem by introducing weights, purities, and trustworthiness.

The First Coins

The father of history, Greek historian Herodotus, traced the first signs of gold and silver coins to Lydia, modern-day Turkey, around 700 BC. Evidence of gold and silver jewelry being used as money goes back tens of thousands of years, but the arrival of the coin transformed these precious metals into proper accounting denominations. The coins of Lydia were embossed with an image of a roaring lion and weighed 126 grains, which is about 8 grams. Because all coins had a precise amount of gold, they could then be used as a unit of account. Today, uniformly weighted coins might seem like the obvious form of gold and silver money, but precious metals carried a global aura of currency for thousands of years before the first Lydian coin was created. With consistent weights, coins were a revolution in simplicity and changed money forever. They eliminated the need to weigh and test the purity of every piece of metal before two parties could transact, and this seemingly straightforward adaptation ultimately transformed the world of trade.

What were some of the most important characteristics of coins, and why were they so revolutionary as a form of money? First and most importantly, coins were made with metals that were considered precious, durable, and rare. Gold and silver had a proven track record of thousands of years as money, so having coins struck from these two metals assured that they would have natural demand. If the coins were made of stone, for example, they would have no such demand, because common rocks aren't precious or rare.

The next characteristic of coins that truly brought a leap forward in both money and human civilization was the idea of fungible, or interchangeable, money. When two things are fungible, they have equal and undifferentiated value between them, like how we think of a one-dollar bill as being equal to any other one-dollar bill. Coins coming from the same mint were all identical, eliminating the burdensome measurement process from everyday transactions. Coins were a huge advancement in the measurability of money, especially when compared to gold bricks of non-uniform weights and gold jewelry with unspecified purities. Coin uniformity and fungibility made them perfect accounting denominations, allowing societies the powerful tool of being able to measure everything in one unit.

Money should also be divisible: for example, livestock being used as currency dates back thousands of years, but cattle aren't divisible and therefore are useless in small transactions. Coins were perfect for divisibility: they each represented a small amount of value and could be used in the smallest transactions whilst also easily amassed for larger ones.

Lastly, the best coins were the ones that were difficult to forge. Counterfeiting could seriously undermine the value of a currency, so mints had to create coins with difficult- to-mimic engravings. If coins circulating were thought to be real, and people believed that counterfeits were unlikely to exist, this would allow people to transact with each other without the burden of auditing every coin for authenticity.

Government Influence Over Money

Worldwide demand for coins boomed due to their economic advancement, and governments became the largest supplier. Rulers found it impossible to resist immortalizing themselves, minting coins in their names engraved with their faces to circulate as money within their borders. This wasn't, however, purely a form of regal vanity. Coin mints gave governments the power to use money to their own benefit, leading to lasting societal impact and the rise and fall of empires.

The Roman Empire gives us a perfect example of how coins led to government influence over currency. In the first century AD, shortly after the beginning of the Roman Empire, coins called denarii (plural for denarius) were minted by the government in Rome, and due to the empire's worldwide expanse were used across Europe, Asia, and Africa. For the first time, global monetary standards evolved based on precious metal coins minted by a single entity. The influence of the powerful Roman Empire's currency denomination stemmed from its imperial dominance and reverberated throughout the world. Coins named dinar would surface from India to Egypt to Spain for centuries thereafter.

In the second century under the rule of Marcus Aurelius, the denarius coin weighed about 3.4 grams and contained about 80% silver, which was already a reduction from its purity when Augustus Caesar declared himself the first Emperor of Rome three centuries prior. Throughout the ages, currencies have ceased to exist because of one rudimentary fact: governments are unable to resist the temptation to create free money for themselves. The case of Roman currency devaluation was no exception. When the Roman Empire reduced the precious metal content of the denarius while leaving its name and value unchanged, it essentially had created money for itself; each denarius had a higher purity than its successor. This act of cheapening money by the government reduces trust in the currency and leads to unstable prices and societal vulnerability. By the end of the third century, the denarius had been devalued so frequently that its purity was down to only 5% silver, corresponding with the Crisis of the Third Century, a period in which several Emperors were assassinated and the Roman Empire almost collapsed. Currency devaluation was a trend that persisted throughout the world, making what happened in thirteenth century Florence so remarkable.

The Florin

The northern Italian cities of Florence, Venice, Genoa, and Pisa established themselves as city-republics after breaking free from their feudal overlords during the eleventh century, and their newfound independence was later followed by the coinage of their own money. In the year 1252, when the Florentine mint struck the first Fiorino d'Oro, or gold florin, nothing novel had necessarily been accomplished. It was merely another coin. However, as decades and centuries passed without a change in the coin's gold weight and purity, the florin earned a reputation that eventually drove all those surrounding it into its denomination. Historically, precious metal coins were durable, divisible, and portable, but with governments constantly reducing the purity of their coins, no coin existed with multigenerational credibility. The Florentine mint changed that. The florin maintained an unchanged weight and purity, about 3.5 grams of pure gold, spanning an astounding four centuries. By the time the florin denomination was one hundred years old, it had evolved into the international monetary standard for pan-European finance. High salaries, jewelry, real estate, and capital investment were all priced in florin. It also found popularity amongst working people as a way to literally carry their entire life's savings in their pocket. Florins proved to be exemplary collateral and could easily be pawned to borrow silver coins for smaller transactions. The florin as a unit of account disseminated throughout Europe and beyond as the world's most trusted and stable monetary denomination. The extraordinary stability of the florin alone didn't drive monetary innovation during the Renaissance, but its multi-century popularity coincided with simultaneous advancements in mathematics, accounting, and banking that resulted in a prodigious transformation of the human experience with money. Before detailing these progressions, we first have to understand the flaws in coin-money they addressed.

Coin Multiplicity

Coinage alone did not make a monetary system. Coin-money presented two enormous problems for the global economy, which in that period consisted of cities in Europe, northern Africa, and the Middle East connected by the Mediterranean Sea. There were simply too many different currencies, and this problem of coin multiplicity severely hampered money velocity.

Money velocity measures how quickly money changes hands. It's the speed at which money moves from one owner to the next, and only with sufficient speed can money help human beings trade to their fullest potential. Gold and silver coins accelerated money velocity relative to more primitive ages when precious metal bars and nuggets of non-standardized weights were used as mediums of exchange. But a world of coin multiplicity where thousands of competing coins were used meant that an equivalency conversion had to occur alongside practically every single transaction between people of different geographies. This presented major challenges to unlocking the next levels of money velocity and international trade, because standards for weights and purities varied wildly across the world.

Money changers specialized in this requisite conversion and became integral to all trade. They were tasked with trafficking between hundreds or even thousands of different coins in order to facilitate every type of international exchange. A lack of coin uniformity throughout the world allowed money changers to profit any instance a merchant or customer needed conversion from one currency to another. This profession still exists today in the form of foreign exchange brokers, or those that convert Mexican pesos to Brazilian real, for example.

Compounding the coin multiplicity problem was the issue of bimetallism, which allows for two separate metals to be used as money. Silver is a more abundant metal in the Earth's crust than gold is and has historically served as the money of common people and daily transactions. Gold, on the contrary, is the more desired precious metal and sought- after form of wealth, but it didn't suffice for daily use: a single florin was worth more than a week of labor from the average worker. The gold and silver dichotomy complicated the formation of a unified monetary system until the end of the nineteenth century.

Risks of Physical Transfer

The second major challenge of a coin-money system was the risk associated with the physical transfer of coins. Sending coins across land and sea was perilous and a logistical nightmare during the medieval era. Shipwrecks were often the unfriendly collateral damage of trying to settle international debts. Part of the reason precious metals were deemed precious was their indestructibility, so it would seem apt that an entire industry of shipwreck hunting exists today to find gold and silver coins that were lost during this era.

The solution to these problems was the idea of deferred settlement. As an alternative to the physical transfer of metal, deferred settlement takes place when one party unambiguously promises to pay another at a later time. At that time, final settlement occurs, and the owed party receives ultimate payment, historically gold and silver. These promises, or credits, were made as a way for merchants to reduce the risk of international coin transfer. These types of deferred settlement arrangements existed long before the thirteenth century but didn't have any systemic qualities. Financial promises lacked uniformity, and a formal system of credits didn't yet exist. A stable florin was a monumental building block, but forming a monetary system was incumbent on more than just an unwaveringly consistent coin purity. It demanded a culture of promises.