The First Coins
As you read, consider the benefits and risks of a precious metal coin-based monetary system.
I and my companions suff er 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 for-
ever. 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 trans-
formed 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 trans-
actions. Coins were perfect for divisibility: they each rep-
resented a small amount of value and could be used in the
smallest transactions whilst also easily amassed for larger
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 world- wide 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
98% 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.
Source: Nik Bhatia: Layered Money
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