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Page Contents

  • The monetary cycle
  • Ionia - Riches without strength [700 BC]
  • Sparta - Gold prohibition in a collapsing economy [600 BC]
  • The Carthaginian national state lottery [450 BC]
  • Byzantium - Early fiscal indiscipline [410 BC]
  • Athens - Housing the Gods (on borrowed money) [500 - 300 BC]
  • Rome - Monetary expansion & republican militarism [200 BC]
  • Chinese credit derivatives after Genghis Khan [1200 AD]
  • Highly valued wooden sticks in England [1670 AD]
  • John Law - The Royal Bank of France [1716 AD]
  • Why Sweden’s central banker was beheaded [1719 AD]
  • The US Continental Currency [1776 AD]
  • The US greenback [1870 AD]
  • The Weimar inflation in Germany [1923 AD]
  • What can we learn ?
  • Gold at the junction of monetary systems
  • Gold as a money of choice
  • The monetary cycle

    There is no permanent ideal basis for a monetary system.  The optimal solution is cyclical because it depends on economic conditions. 

    Token money systems are best when there is useful productive work to be done, because it is easier to arrange a supply of capital to get such projects underway. Conversely gold is best when getting projects underway should be avoided because of the poor economic outlook.  Gold's limited supply rations capital.  It cannot expand into all the crackpot schemes and phantom opportunities offered by an advanced but creaking economy.

    Because the ideal money system is cyclical any attempt to resolve it once-and-for-all will fail.  Working systems are destined to continue oscillating - expanding and contracting, succeeding and failing. 

    The easiest way to get a flavour of them - and the position of gold within them - is to look back through a variety of episodes in the history of money, many of which are both educational and entertaining.  [Readers seeking entertainment are recommended to skip to here immediately.  The first few stories are historically interesting, but a bit dry.]

    Alexander Del Mar

    A fine "History of Monetary Systems" was written by Alexander Del Mar in 1886 [footnote]. The book was important enough to still be in print in 1983, and it is equally telling that for 20 years it has not sold.

    It describes countless varieties of token - or 'numerary' - money systems involving paper money, silk money, copper money, iron money, rice money, mystery leather bag money [footnote], fish money, clay money, porcelain money and many others.

    Del Mar was an apparently rigorous historian who was distinctly hostile to a central monetary role for gold.

    "Gold standard ... double standard ... are terms derived from the legislation of the sixteenth and seventeenth centuries, when ... private individuals were permitted to coin money, or, what is the same thing, they were accorded the right to require the government to turn their bullion into money, free of taxation, loss, or expense. This idiotic legislation ... deprived government of that control over money ... necessary for the maintenance of opportunities to facilitate a just distribution of wealth."

    His arguments for state controlled money are lucid and founded upon historical observation. But even then, if any words appear throughout the length of his history with close to the same regularity as 'numerary' then those words are "gold" and "silver". The regularity of the cyclical re-appearance of the precious metals as money is an established monetary fact, diligently documented by someone who would rather it was not so.

    Substantially drawn from Del Mar's book the following are examples which illustrate some of the variety of revolutions of the cycle through episodes of representative money to precious metals and back again.  In places they seem comical now, but they were not meant to be.  In fact more striking than the absurdity of 'mystery leather bags' is how similar are the monetary issues of today, and how closely we have mimicked the ancient solutions.

    Ionian iron coinage - About 700 BC - modern day western Turkey

    This ancient Greek state's money was described by Aristotle. It seems to have been an early attempt, centred on Clazomenae, one of the 12 Ionic cities, at a wholly representative (numerary) money system. It consisted of iron discs which were stamped rather roughly by the state and deemed to pass as value for gold (or possibly silver).

    The important point of this early attempt is that it showed the necessity of using advanced technologies in the manufacture of money. The iron discs were widely faked - frequently overseas. And as there was a facility for redemption in gold that is what increasingly happened, causing iron to fall out of favour and gold to return as the currency.

    Ionia was a successful maritime trading civilisation and steadily built a great national inventory of gold - which ultimately showed one of the disadvantages of owning too much of the stuff in a world where not all states can share. Through its riches Ionia became a target, and Croesus (still idiomatically famous for the colossal wealth he acquired - much of it militarily) invaded successfully from the east.

    The Ionian system shows a representative money being corrupted by counterfeiting, and supplanted by gold, with the gold system being plundered by a neighbouring state.  Both of these fates have befallen monetary systems many times since.

    Spartan iron coinage - 700 BC to 350 BC - Modern day Peloponnisos, Greece.

    This coinage was famous enough to have a classical joke made about it much later by Plutarch (in about AD 100). Assuming that its representative value ought to be its true value Plutarch believed it would require a horse and cart to transfer an amount appropriate for even the most modest transaction. The joke lasted longer than the money, perhaps because it paints an absurd picture, but only a fool would imagine the Spartans conducting their grocery transactions with armfuls of iron currency, for 300 years.

    In fact throughout that time the Spartan iron coinage was perfectly operable on a notional value both enforced by law, which declared its status as legal tender, and underwritten by state integrity. It was only the eventual breakdown of Spartan political strength which finished the money, not the over-issuance of the coinage. As Athens grew to culturally dominate Sparta in the 50 years after the apparent victory of the Spartans in the Peloponnese war Spartan merchants’ confidence in their iron coinage started to wane, and they steadily preferred to use gold and/or silver which was creeping into the system.

    As the situation deteriorated the state decreed that "no coin of gold or silver should be admitted into Sparta," and that they should "use the money that had long obtained". The decree did not pass into practice because the choice was a bleak one - no goods, or goods traded in gold.

    The Spartans either left (which they did in droves, leading to the end of Spartan power) or used gold.

    The Spartan system shows the dependence of a representative money system on the power and continuing integrity of the state.

    Carthage leather money - 450 BC - Modern day Tunis (North Africa)

    Leather bags were used as money in the ancient city of Carthage, where the idea was that rather than make all coins of small amounts of silver, they would make the significant majority completely of cheap alloy, and the occasional one of pure silver. The coins - including the duds - were then sealed by the state in a leather bag, granted a face value equivalent to silver, and deemed worthless if the seal on the bag was broken.

    This apparent curiosity is not so very different from a modern day state lottery scratchcard.

    The system lasted for about 50 years and fell into disuse at the end of the 5th century BC when the increased military success of the Carthaginians - who had invaded Spain - allowed an increased supply of gold and silver from Spanish mines, which became the practical currency probably because it felt real. Not unlike the Ionians who preceded them - the Carthaginian empire collapsed through Romans attacking them at least in part for their gold. The resulting Punic wars ended with Carthage being totally destroyed for ever.

    Byzantine iron sheets - 410 BC - Modern day Istanbul

    Through its perfect strategic situation for trade and defence Byzantium/Constantinople has been a natural trading centre for 2,500 years. After its foundation it rapidly assumed the high level of economic sophistication necessary for ancient civilisations to adopt representative money systems.

    It learnt from Ionia and made sure its iron based currency was at the forefront of the technology of the time - which made it difficult to counterfeit. However the central authority of Byzantium as a city state decayed amid an unwillingness to generate public resources through taxes, and public belief in the value of these iron tokens evaporated as they were issued in large numbers to pay for public works.

    The state later privatised its monetary operations by granting a statutory monopoly on money production to a bank. This bank used gold in its coins, which limited the problem, but they were still overvalued, and although an increasing gold content was deployed it failed to stop counterfeiting and smuggling until monetary circulation returned to a gold base as an intrinsically valuable money.

    The iron tokens faded away into valueless disrepute through their own lack of creditworthiness, a result of state sponsored fiscal indiscipline.

    Athens - 500 BC to 300 BC

    Ancient Athens eventually became a democracy (albeit one dependent on a large slave class) and showed some of the features of a modern democratic state. It was the cultural birthplace of modern western philosophy, culture and systems of government. It was also the creative powerhouse of Mediterranean antiquity, with change and ideas being embraced all around.

    It stood in stark contrast to the overlapping but slightly older civilisation of Sparta. In some ways the two were a forerunner of the confrontation between modern capitalism and communism - with a dynamic and creative culture running in parallel with an austere neighbour with a tendency to collective approaches, unchanging institutions and severe treatment of dissenting individuals.

    Athens was developing maritime technologies, and building wealth by trading. Its empire - founded on a mix of trade and coercion - stretched to coastal regions all around the eastern Mediterranean, and militarily it had the best high tech capability of the day, which meant naval power. Sparta had the bigger army.

    Athens was further blessed with productive silver mines and a sufficiently progressive government that it was able to extract annual revenues from its empire back to the central Athenian core - ostensibly for defence. Through trade, silver mining and tribute its wealth became phenomenal.

    It spent this money in two main ways. The first was squabbling, which tended to boil over into wars - notably with Persia and later Sparta.  As with most disputes it was usual for both sides to end up weaker at the end, and because there were so many competing proto-empires in the region the typical result of any large scale dispute was the relegation of both combatants to second class imperial status. Certainly the costs of wars and defence was one of Athens' regular and major state expenditures.

    The other we are lucky enough still to be able to see. The enormous Athenian riches of the 5th century BC were spent in building the great public works of the time. There being no particular political pressure for welfare systems in those days, the surplus money was spent on public architecture. The objective was nothing less than to house the Gods, whose previous shrines and temples had been destroyed by Persians in 480 BC. Thanks to this we have the Parthenon and the other great buildings of the Acropolis.

    They were not cheap, and even at the time the degree of extravagance which they entailed encouraged considerable political criticism.

    Presiding over this rebuilding was Pericles. He was a second generation politician, being the son of the moderately significant Xanthippus. Pericles was a master of manipulating popular sentiment - what we would call now 'a great communicator' - and was around at the time when this skill could be used in earnest for the first time, to drive newly democratic Athens in particular directions.

    Although he found himself unable to include his then ally - Sparta - in his plans, he managed to generate enough popular support within his more immediate Athenian alliances to finance his ambitious building program, although he had to resort to demagoguery and even religious exhortation to do so. Indeed he may even have been operating what amounted to a deliberate economic stimulation package for Athens and was later accused of exactly this by one of the two principal sources of historical information on his life [Plutarch].

    At any rate he spent the money, and continued to become involved in occasional military disputes. He had a long and costly campaign to recover Samos, which had been an ally, but revolted in 440 BC. The campaign was eventually successful in its direct aims, but damaging to Athenian strategic alliances. Sparta - generally friendly to that point with Athens - might easily have got involved then on the Samos side, but stayed out.

    Pericles general policy "was one of firmness, coupled with careful manipulation of the diplomatic position to keep Athens technically in the right". He detected a looming war with Sparta which might never have happened were it not for his increasing the diplomatic temperature on key trade issues - notably concerning the region of Megara, which was strategically important for food supplies and whose trade was substantially embargoed by Athens.  After military coercion most of Megara was placed under Athenian 'defensive assistance'. This transparent expansionism was not welcomed by Sparta.

    Although he saw war as inevitable well before it came, and made financial plans to accomodate it, Pericles underestimated its likely length and cost. The Peloponnesian war finally broke out in 429 BC and lasted for 27 years. He saw very little of it, dying in its second year of a plague which swept through Athens killing large numbers of the population.

    The eventual monetary consequences of this war were slow to materialise, because at its start Athens was rich in silver and gold, which circulated as money. These large metallic resources were used to pay garrison soldiers, who were on foreign territory and whose purchases from foreign populations required commodity money rather than any Athenian representative currency with no obvious value in its government guarantee.

    By 407 BC the metallic pot was more or less empty and Athenian domestic currency had to be debased - incorporating significant amounts of copper. It was assigned a face value well above the commodity worth of the modest amount of included gold. It was further debased in 405 BC to highly overvalued copper discs which circulated concurrently with the older gold and silver based coinage, because even at this stage the state still held the population's monetary trust.

    But a year after this debasement the 27 year war was finally lost. The inability of Athens any longer to pay her occupied populations for supplies with a form of money they would accept, or to offer worthwhile financial incentives to her allies, contributed to this loss. The result was the complete valuelessness of the increasingly copper based currency which had appeared in the final three years of the war - once the real money ran out.

    Athenians were now perhaps used to a representative money. In the 50 years following the end of the Peloponnesian war a relatively steady state allowed the re-appearance of copper discs as money, and these were officially redeemable in silver. This was perhaps the finest period of ancient Greek culture - being the time of Demosthenes, Socrates, Plato and Aristotle. For all the appearance of easy wealth which these Greeks must have enjoyed there is no record of the copper money ever being redeemed.

    The eventual effect of prolonged war was the impoverishment of the state and after those 50 years of further prosperity - a time of essentially notional but nonetheless trusted money - Athenian political and military dominance of the region ended. A rough and ready people immediately to the north, the Macedonians, were regarded as rather backward by Athens at its height, but their king Philip was militarily and politically shrewd, and he had access to gold mines. This gave him the ability to pay a Macedonian army on the march, so he steadily encroached southwards into Athenian areas, beating them in battle in 338 BC, and subsequently imposing relatively benign terms for peace.

    The Greeks rose up from this temporarily but were thoroughly and finally subjugated by Philip's son, Alexander the Great, who went on to conquer half the known world before his death at the age of 32.

    The legacy of both Philip's and Alexander's enormous military success was colossal debt. Their imperial achievements were short lived in part because of this. 

    Athenian money meanwhile had defined a pattern which was to repeat in other empires which were to follow:- dominance of trade; influx of gold to balance exports; public wealth; liberty; overconfidence; the discovery of loosely managed money as a stimulating solution to stagnation in an economy near its zenith; an ongoing success born of cultural momentum and monetary expansion which was to persist for decades before finally the emptiness of the monetary promise was exposed, leading to rapid national collapse.

    The Roman Republic - 385 BC to 207 BC

    The Roman Republic was the intelligent beneficiary of monetary accidents which befell so many of its forebears. Unquestionably the Romans learnt from the experience of others.

    Their money was entirely representative. It was copper and issued with a face value of about 3 times its commodity value. It was carefully made using the innovation of striking, rather than casting, and the dies used were of the highest quality and artistic complexity. They were extremely difficult to forge and the penalties were heavy.

    Furthermore the monopoly on coin fabrication was jealously guarded by the state, and the extent to which coins remained overvalued was supported by disciplined fiscal government. The Romans were probably the first to obey their own monetary laws limiting the supply of coins.

    As a result for 178 years there is no evidence of demonetisation. On the contrary. As the population and economy increased the money - strictly limited in supply - increased in value too.

    The Romans had come to understand the danger of monetary over-issuance. An example of nearly contemporary Roman writing on the subject shows an analysis which Milton Freidman (a famous 20th century monetarist) would have been hard pressed to better.

    "The origin of buying and selling began with exchange. Anciently money was unknown, and there existed no terms by which merchandise could be precisely valued, but every one, according to the wants of the time and circumstances, exchanged things useless to him, against things which were useful; for it commonly happens that one is in need of what another has in excess. But, as it seldom coincided in time that what one possessed the other wanted, or conversely, a device was chosen, whose legal and permanent value remedied, by its homogeneity, the difficulties of barter. This device - being officially promulgated - circulated and maintained its purchasing power not so much from its substance, as from its quantity. Since that time only one consideration in an exchange was called merchandise, the other is called price." Julius Paulus

    However the result of strict Roman monetary discipline was a perennial shortage of capital, and a tendency not to put what there was into economically productive use. By law the patrician class was prevented from investing in straightforward commercial enterprises, and instead they were involved in primarily civil projects, which contributed to the grandeur of Rome. As a result the economy lagged the political and civic development of the republic, and there were hostilities which broke out periodically between the patrician and plebeian classes. The Romans discovered a social side to monetary policy, namely that the inequitable wealth distribution which arises when money supply is too tight tends to produce social unrest.

    In the end it was not social unrest which undermined the monetary system of the Roman Republic. It was Hannibal. In the legendary campaign in which he travelled, with his elephants, from Carthage in North Africa, through silver rich Spain and across the Alps, he threatened Rome from the north.

    Hannibal took control of the Roman copper mines in what is now Tuscany in northern Italy, and overran many cities where the Roman currency circulated. It became valueless under him. Ahead of his advancing army swathes of the peasant population retreated to Rome itself, where the Romans were forced to issue underweight and overvalued coinage, even more so to finance the massive military effort which was required to repulse the enemy. Even though Hannibal never did take Rome the threat of the implosion of the Roman state irrevocably undermined the money.

    What came out afterwards was a very different Rome. It was necessarily more militarist, and expansionist (which it had to be to sustain its militarism) and within 100 years its republican politics had subsided into what was effectively dictatorship.

    Nevertheless the republic's original money system lasted "for nearly two centuries, during which all that was admirable of Roman civilisation saw its origin, its growth and its maturity. When the system fell Rome had lost its liberties. The state was to grow yet more powerful and dreaded, but that state and its people were no longer one."  Del Mar

    Chinese paper money under Kublai Khan - About 1200 AD

    The Chinese were not strangers to paper money. The first apparent use of paper as money was Chinese - in about 140 BC, although how it ended is not known.

    In the early part of the 11th century iron coin was in circulation, but it was overissued and fell in value so that true 'felted' paper was used to represent inconveniently large monetary multiples. This occurred in Szechuan province as an innovation of a private bank. Ostensibly the issued notes were redeemable in three years. 15 similar banks copied the idea and the notes in issue rapidly grew in number, rather faster than did the reserves of the banks. By 1032 all the banks which had issued them had failed.

    Chinese government paper money was then issued in 1131 AD to finance military spending and soon afterwards official paper issue started in earnest. New notes were issued in rapidly increasing numbers and redemption rights into metal were soon suspended. Notes went into circulation on the back of public confidence in the institutions of state, and the provincial governments started issuing in their own name towards the end of the 12th century.

    In 1215 the awesome Genghis Khan overran most of China. Complete power was not immediate, largely because Genghis set off to overrun Asia and terrorise even Eastern Europe, but later between 1260 and 1263, when his grandson Kublai was Chinese emperor,  there was an extensive issue of paper money known as the 'First Mongol Issue', which fairly rapidly depreciated.

    It was followed by the Second Mongol Issue, equally irredeemable, and unlimited in issue, which happened between 1264 and 1290. It was described by Marco Polo in one history's great books :-

    "The emperor's mint then is in this same city of Cambaluc, and the way it [money] is wrought is such that you might say he has the secret of alchemy in perfection, and you would be right. For he makes his money after this fashion. He makes them take of the bark of a certain tree, in fact of the mulberry tree, the leaves of which are the food of the silkworms, these trees being so numerous that the whole districts are full of them. What they take is a certain fine white bast or skin which lies between the wood of the tree and the thick outer bark, and this they make into something resembling sheets of paper, but black. When these sheets have been prepared they are cut up into pieces of different sizes.

    All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver; and on every piece a variety of officials, whose duty it is, have to write their names, and to put their seals. And when all is prepared duly, the chief officer deputed by the Khan smears the seal entrusted to him with vermilion, and impresses it on the paper, so that the form of the seal remains imprinted upon it in red; the money is then authentic. Anyone forging it would be punished with death. And the Khan causes every year to be made such a vast quantity of this money, which costs him nothing, that it must equal in amount all the treasure of the world.

    Furthermore all merchants arriving from India or other countries, and bringing with them gold or silver or gems and pearls, are prohibited from selling to any one but the emperor. He has twelve experts chosen for this business, men of shrewdness and experience in such affairs; these appraise the articles, and the emperor then pays a liberal price for them in those pieces of paper. The merchants accept his price readily, for in the first place they would not get so good an one from anybody else, and secondly they are paid without any delay. And with this paper money they can buy what they like anywhere over the empire" Marco Polo - The Travels

    Life under this system was actually extremely good.

    "This was the most brilliant period in the history of China. Kublai Khan, after subduing and uniting the whole country and adding Burmah, Cochin-China, and Tonquin to the empire, entered upon a series of internal improvements and civil reforms, which raised the country he had conquered to the highest rank of civilization, power and progress. Tranquillity succeeded the commotions of the previous period; life and property were amply protected; justice was equally dispensed; and the effect of a gradual increase in the currency, which was jealously guarded from counterfeiting, was to stimulate industry and prevent the monopolization of capital. It was during this era that the Imperial canal, 1660 miles long, together with many other notable structures were built." Del Mar

    Inflation took hold in 1287.  The second Mongol issue continued falling in value until about 1310. At about this time a third issue replaced the second, duplicating the 5 - 1 ratio with which the second had replaced the first. Then things changed markedly for the worse.

    "Population and trade had greatly increased, but the emissions of paper notes were suffered to largely outrun both, and the inevitable consequence was depreciation. All the beneficial effects of a currency which is allowed to expand with a growth of population and trade were now turned into those evil effects that flow from a currency emitted in excess of such growth. These effects were not slow to develop themselves. Excessive and too rapid augmentation of the currency, resulted in the entire subversion of the old order of society. The best families in the empire were ruined, a new set of men came into the control of public affairs, and the country became the scene of internecine warfare and confusion." Del Mar

    In the final phase of the Mongol dynasty in about 1350 huge efforts were made to correct the management of the currency but the situation was beyond repair, monetary paper having been issued in one form or another by all manner of private, provincial and central government agencies in what amounted to an explosion of credit.

    Upon the demise of the Mongol system of government which had presided over so many benefits only to see them destroyed through financial crisis, the usurping Ming dynasty issued yet more paper currency with the solemn legend "This paper money shall have currency, and be used in all respects as if it were copper money". There was no public confidence in the firmness of this declaration and at the outset the paper traded at 17 : 13 against copper coinage. Before long the ratio fell to 300 : 1.

    It was reported that gold and silver crept quietly back into circulation. If they did it was deeply unofficial, because neither was being minted in China at that time.

    Highly valued wooden sticks in England - 1670 AD

    While the Pilgrim Fathers were busy founding America their English puritan brothers were also shaking off religious oppression. By 1650 Oliver Cromwell had taken power from the king, chopped off his head, and in a familiar pattern was lording it over a parliament which he dissolved when it threatened to oppose him. He died passing power directly to his feeble son, apparently untroubled by charges of hypocrisy.

    With Cromwell gone England decided that if it were going to have a king it ought to be a proper one. So Charles II was sought out and granted a restored throne in 1660, 11 years after his father's beheading.

    The new king's powers were less than those of his father. Much of what he needed to do now depended on the co-operation of parliament. In particular the royal tax raising privilege had been lost, leaving Charles forever begging taxes from his new governing partner.   Parliament met rarely, and the logistics of tax collection caused further delays, so cash was always short and the king struggled to pay the bills on time.

    At about this time the financial development of London was getting underway. The goldsmiths - whose traditional role was the fabrication of jewellery and plate - were emerging from a number of potential candidates as the trade group which would evolve into modern bankers. Their success grew from the safekeeping role of their vaults through the uncertain period of the civil war, and also from the strength of London's position within growing European trade with its requirement to exchange foreign coin.

    The goldsmiths soon found themselves able to lend, and from this they became the key middlemen in a developing market in government debt.

    It worked like this. Armed with parliamentary permission to raise taxes Charles immediately cashed in by selling specific future tax receipts to the goldsmiths, at a discount to their face value. The goldsmiths needed to be able to honour their private accounts, and unable to distribute the royal debt were rapidly unable to lend the king more. So it was arranged that the debt redemption would in fact be paid not specifically to the original goldsmith lender but to any bearer of the debt, thereby enabling the original lender to sell the debt on and replenish his cash.

    The problem then would be how to ensure the new bearer of the debt - not being the original borrower - could reliably identify the authenticity of the bearer note. And here nature offered an ancient solution.

    A piece of wood split down the middle will only match perfectly with its other half. So wooden sticks became a key component of English currency. The government's debt office took a nice looking hazel stick and notched across it various symbols which denoted monetary amounts borrowed and lent. The stick was then split down the middle, with each side showing one end of the notches. One side - which had a wooden handle known as a 'stock' - was held by the king's treasury, while the other was given to the goldsmith, who also got a piece of paper describing the date and circumstances of redemption.

    The system was simple and effective. The goldsmith-bankers proved trustworthy and traded the majority of what were by now being called 'stocks' between themselves to provide liquidity. They had ample reason to remain honest as they were the key middlemen in a profitable and rapidly growing market. For their part the wooden sticks were beyond forgery, and the king was the ultimate and trusted guarantor of all the debts.

    It was the perfection of the system which ultimately caused its downfall because it led to a market far bigger than was ever healthy. To begin with the supply of cash came from the goldsmith bankers themselves. Then, with caution, they let out a little of the money they held on private current accounts, knowing that their own personal credit would get them sufficient cash if ever they needed it to repay their depositors. Then they realised they could do better still by offering interest on private accounts held at notice, because the notice period would eliminate unanticipated cash calls. By paying interest they accumulated more public cash, and these funds were lent on to the king at an increasing rate.

    Charles soon found he no longer needed to bother with parliamentary approval to raise taxes before issuing stocks, because he could sell it anyway, and from about 1668 it became generally accepted that the state's borrowings were secured by unspecified future taxes on the nation; an assumption which remains with us today.

    The parliamentary brake on the speed of issue of this new monetary medium had now been sidestepped, and before long half of London was booming on credit evidenced by valuable broken wooden sticks. This was when things started to get harder.

    As each tier of willing private depositors dried up it took another notch up the interest rate scale to squeeze out more of the public's cash. The goldsmiths could only offer to the king discounts which they could finance by attracting deposits, and by 1670 the king was having to accept as much as 10% per annum discount on the face of his 'stock' debts. Depositors were by now receiving 7% and the middlemen the rest.

    By 1671 the system was hardly benefiting the king at all because redemptions were consuming all the cash subsequent issues could raise. He had sucked in all the private money he was going to get, so when at the year's end he demanded still more vital cash for his navy the bankers couldn't get it - at any price.

    Annoyed, Charles conveniently remembered that the bulk of the loans which he had recently taken out had been at rates above the 6% limit permitted by his own usury laws. He declared the debts illegal and his own exchequer's payments stopped. This temporary action was enacted on 2nd January 1672, was extended after one year for another two, and after those two (subject to a few carefully chosen exceptions) it became indefinite.

    The effect - often repeated since - was that those who lent to the state turned out to have accidentally provided all their carefully accumulated personal wealth as voluntary taxes. The goldsmiths were blamed.  They were caricatured as greedy opportunists and damned by their once enthusiastic depositors. Eleven of the biggest 14 failed, leaving their chiefs variously (i) ruined, (ii) bankrupted (iii) on the run (iv) jailed or (v) dead.

    The humble wooden stick never regained any credibility. It was doomed to lose out to its close cousin - paper.

    John Law's Royal Bank of France - 1716 AD

    John Law was a Scot.  He was born in Edinburgh in 1671, the son of a successful banker and goldsmith.  At 14 he was apprenticed into these trades, and he re-emerged at 17 just in time to inherit from his father, who died that same year.  He was by then already known for his rare mathematical talents, and for his popularity with the ladies.

    Enriched by the family estate he set off for London where he added gambling to his abilities.  He won regularly, and earned that mixture of respect and jealousy which follows a man who succeeds in both the card room and the bedroom.

    Unfortunately his winnings in the bedroom carried unsuspected hidden risks.  London was in those days a place where a lady’s virtue was worth dying for (this was very long ago) and when Law was challenged to a duel he accepted and, not unreasonably, shot his challenger dead.

    Originally sentenced to hang it is generally accepted that he was given a little friendly assistance in escaping during the appeals process, and because London had become a dangerous place for him he set off for Europe.

    Getting the top job

    For some years he made his living off his wits.  He was a high-roller, and this way of life brought him into regular contact with the Duc d’Orleans.  Yet surprisingly for a gambler there were, even then, early signs of Law believing in his own higher purpose. He had without much notice already published serious pieces on economics, and had been very interested in the financing of trade which he had learned all about in Amsterdam.  So the society of the Duc, who was far more influential than Law though certainly not as clever, soon had Law expounding his views on economic management.

    History, meanwhile, was doing its normal thing with a great king.  Louis 14th was dying, and having been widely celebrated and honoured throughout his life he was soon to be remembered with some bitterness for the size of the national debt he had left to his heir.  Young Louis XV was only seven, and it was the Duc d'Orleans who was appointed Regent.  His immediate problem was the 3 billion livres borrowed by the dead king.

    Devaluation quickly followed.  The government debased its coinage by 20%, which served no particular purpose other than to drive the old coins out of circulation.  Then the state decided to offer rewards to informants against hoarders.  The guilty were packed into the Bastille.

    As things deteriorated Law arrived on the Duc's doorstep in Paris.  His plan was simple.  He would be granted a bank, the management of the royal revenues, and the right to issue paper money.  The paper would be secured on a combination of the royal revenues and on its land – an idea he had proposed in his earnest papers many years earlier.

    The Royal Bank of France

    On the 5th of May, 1716 Law’s bank was created.  Its notes would thereafter be used in payment of taxes.  Its capital was purchased 25% in coin and 75% in oversupplied state bills at face value (at that time trading at a heavy discount).  Then by guaranteeing his paper money not with just any coin, but with the coin in issue at the time of a note's creation he quickly found his paper was preferred over the doubtful coinage, which had only recently been debased once and was expected to be debased further.  Through this impressive manoeuvre he collected most of the country’s stock of precious metal.  By the end of the year his bank notes were worth 15% more than equivalent coinage while the state’s debts were trading nearly 80% below nominal.

    He hadn’t finished.  His next plan was to leverage the optimism of France’s possessions in North America.  He persuaded the Duc to grant him an outright monopoly on France’s Mississippi trade.  Having got control of the coinage, paper money and tax collection, he now also had exclusive power over France’s great hope – trade with the New World.  He raised the capital in typical style selling the stock for a fantastic price payable in those deeply discounted state bills which no-one could wait to get rid of.

    “It was now that the frenzy of speculating began to seize upon the nation. Law's bank had effected so much good, that any promises for the future which he thought proper to make were readily believed. The Regent every day conferred new privileges upon the fortunate projector. The bank obtained the monopoly of the sale of tobacco; the sole right of refinage of gold and silver, and was finally erected into the Royal Bank of France. Amid the intoxication of success, both Law and the Regent forgot the maxim so loudly proclaimed by the former, that a banker deserved death who made issues of paper without the necessary funds to provide for them. As soon as the bank, from a private, became a public institution, the Regent caused a fabrication of notes to the amount of one thousand millions of livres. This was the first departure from sound principles, and one for which Law is not justly blameable.”  Charles Mackay – 1841.

    Before long the monopoly rights to trade with the east were also granted to the company, and in a succession of stock issues – each at higher prices than the previous one – a willing public fought for the right to surrender its increasingly valueless state bills for Law’s bank notes and the mushrooming Mississippi scrip.

    The beast had developed a momentum all its own.  Paris was booming. Luxury goods were sold out as soon as they went in the shops.  Gardens near Law’s bank had turned into a tented city which acted as an impromptu stock exchange.  Real estate values and rents soared, while the stock just rose and rose until even the speculators’ own coachmen became magnates and employed their erstwhile contemporaries.

    The Duc could only conclude that what was clearly so healthy in that particular quantity could hardly fail to be twice as healthy given twice as much.  And what with the extra trade and the sheer difficulty of supplying sufficient cash to keep pace with the frenzied exchange of company stock he took to arranging further issues of bank paper over the head of Law, who probably knew better, but may have suspended rigorous banking discipline under the widespread acclaim of his financial ingenuity.  Besides, blocking it would certainly have annoyed his boss.

    It was at about this time, as Paris fawned and worshipped, that the Prince de Conti arrived intending to buy as much corporate stock as he could lay his hands on.  He was outraged at being denied his full allocation, and as a result sent three wagons to Law’s bank to demand the immediate settlement – in coin – of his entire stock of Law’s paper.

    The Prince was paid, but was also instructed at risk of the extreme displeasure of the Duc – an unwise thing to provoke – to return two of the wagons immediately.  He complied.  But it was enough to make the smarter operators see the light.

    At first with small beginnings the professionals started to cash in their paper.  Coin, bullion, jewels and anything of transportable value were surreptitiously shipped abroad – to Belgium, Holland and England.

    Soon it became necessary to compel by decree the premium which notes had before quite naturally commanded over coin, and parliament declared that from then on coin would by law carry only 95% of the value of paper.  The decree was as useful as any similar one before or since.

    Law had no choice but to throw the last major dice of his banking career.  Gambling his remaining authority he abolished coin as a medium of exchange, and then in February 1720 declared it illegal to own more than the tiniest of sums in gold in any form.  Then he closed the borders, and sent instructions to all coach-houses to refuse fresh horses to anyone travelling to foreign lands until an inspector had examined their baggage.  The substantial fines imposed were shared with the public spirited individual who filed the report [footnote].

    By August of that year it was all over, and John Law was the most hated man in France.  Fortunately he was living in Venice.  Like all good gamblers he had gone on to the next game, by which means he continued his existence for another 9 years.  Much of the money he won at this time would have been that which had earlier escaped him in the capital flight which he had outlawed.

    Scandinavian copper money - 1600 AD to 1700 AD

    Sweden in the 17th century was not the peaceable country of today.  The Swedes were masters of a considerable and now mostly forgotten European empire.

    In the early 17th century revolution in (Dutch) Amsterdam had caused the citizens to gain control of the issue of coinage. The seafaring Dutch were returning precious metals by the boatload as a result of their dominance of worldwide trade. The Swedes presumed that the inflow of this bullion was related to the Dutch's ability to coin money privately.

    So in 1604 an equivalence of (silver) bullion to coined money was enacted in Sweden, but it established a 15% premium on coins.

    This was a steep cost and it made the scheme ineffective. Swedish silver bullion simply exited to Amsterdam to be coined by Dutch banks into Florins, which were used to buy trade goods which were in turn sold back in Sweden. Sweden's silver reserves quickly disappeared overseas.

    A follow up enactment by the Swedish king Charles IX in 1607 decreed that silver could be deposited ounce for ounce in return for redeemable dalers, the Swedish currency. The invitation was not widely taken up, presumably because the public understood the value of custody. Nonetheless an unlimited statutory right existed to coin privately owned bullion. It became known as a "Patent of Free Coinage". In effect there was now a two way capability of transfer between bullion and coin in unlimited amount - even if there was still little in the way of precious metals in Sweden.

    There were yet more silver depletions through the treaty of Alvsborg, under which the Swedes paid pretty much everything they had in ransom for the return of a fortress lost to the Danes in war. Thereafter, in the absence of anything better, and because Sweden controlled the world's best copper mines, an old currency of highly overvalued copper coins started to circulate.

    The Swedes may have been running on empty as regards precious metals, but they were still a mighty military force, and these copper coins were further issued in large numbers by Gustavus II in 1625 to finance war against the vengeful and expansionist Ferdinand II of Germany. It was Sweden's Gustavus who destroyed Ferdinand's catholic armies in four campaigns and finally secured northern Europe for its predominantly protestant population.

    But now the military debts of the state combined with a substantially overvalued copper coinage and a legislative structure designed for commodity money to launch Sweden into an absurd copper currency system. Copper came in, was minted to achieve its overvalued status, and promptly sunk the money to its commodity production cost - which in a country rich in copper mines was tiny.  The monetary reserves of the majority of the population were wiped out.

    Gustavus' daughter Christina who ascended the throne aged 6, had 12 years of childhood to comprehend these monetary mysteries before her majority at 18, whereupon she instructed the issue of copper backed exchequer bills called assignats which circulated as money, and then a bank was incorporated which took in copper and issued receipts called transport notes which were the origin of the modern banknote. The notes were pleasing to use and - a problem with early paper - easy to forge.

    To begin with this popular paper filled the bank with copper.  But the paper lost credibility and demand swerved back to the solidity of metal. So the copper was cut into sheets, stamped not very elegantly, and issued back into circulation as money in lumps weighing as much as 15 kilograms [the example shown, from the British Museum, is dated 1658 and about 65 cm long] 

    People had to walk the streets carrying these great slabs balanced on their heads.  It was only inconvenient at first, but then the world market dumped the commodity copper price as Swedish mines lost their dominance and the money became useless as well.

    It eventually fell to Baron George Heinrich de Goertz to offer his services as central banker to this copper rich, but otherwise now poor country.

    He minted a representative currency in copper, validated with the kings head and a legal tender face value of a daler. He did not limit the issue, nor ensure the quality of the coins which were beneath the technical capabilities of the day. Moreover he attempted this exercise on behalf of an administration which had lost virtually all financial credit with its population, and compounded the error by allowing to develop a widely held belief that at some unspecified time in the future collectors would refuse the coins as legal tender payment of taxes.  In other words he broke every rule in the central banker's book. The coins were detested, and sloshed around the Swedish economy depreciating rapidly.

    Goertz had been a successful minister in other areas of government and he never profited from the debacle, but he was still blamed for the financial misery and the associated evaporation of Swedish power.

    By all accounts in defence to the charge of "ruining public credit with imaginary money" he put up a brave and articulate defence - on his own behalf because he was denied counsel. It was not enough. He was the modern world's first central banker to be beheaded, on March 3rd 1719, and the punishment was popular.

    The Continental Currency - 1776 - The United States of America

    The story of the continental currency was published by the New York Herald in 1863.  The unabridged newspaper article which describes it is posted in full at

    The Greenback - 1860 to 1880 - The United States of America

    In spite of a constitutional bar to un-backed paper money which existed at the time Abraham Lincoln was forced, in 1862,  to issue the first tranche of what was eventually $450,000,000 of "greenbacks" needed to finance the North's efforts during the civil war.

    The greenback was a credit note.  Unlike America's extant currency it conferred no right of redemption into gold. What it did do was offer a promise that at some unspecified future date the issuer - Lincoln's government - would honour them with conversion back into a truly gold convertible currency.  Clearly this was an unfunded promise based on the outcome of the war, a fact which was not lost on the population.

    When soldiers sent their greenbacks home they were inferior to the sounder notes backed by gold, and a price differential arose according to which type of money was being used.  As fears of a long and costly war peaked the credit of Lincoln's government diminished until the differential reached 3:1, and even that flattered the greenback because there were doubts about the gold backed currency itself, whose redemption rights had been suspended to prevent its owners bleeding the treasury dry as they hedged the military outcome with metal.

    But - and here is a rarity - the greenback was redeemed, some fifteen years later.  This simple fact disproves the popular belief that 'all paper currency systems eventually end in disaster'.  On the contrary, this particular one was something of a success - especially for those who bought their government's integrity at a deep discount.

    We could conclude that the greenback was a story to re-assert faith in paper money systems, but it would be simplistic.  A significant factor in the redemption was corruption.  At the time there was no such thing as insider dealing and for those who knew that a redemption of doubtful paper was likely the only respectable course of action was to buy some.  In fact one of the constitutional reasons for sound money in the first place was to prevent a conflict arising where those with privileged knowledge could benefit privately.  It is beyond doubt that by the time of redemption a substantial haul of deeply discounted paper had found its way to officials and their private and commercial associates.  Their money was made at the collective expense of others who had held the paper while it was sinking.

    "The greenbacks ceased to be legal tender after a Supreme Court ruling struck them down as unconstitutional money. Who was the man who led the Supreme Court to strike down the very financing tool of the North's victory? It was the same man who ushered in its birth. For you see by 1870 the Chief Justice of the Supreme Court was none other than former Secretary of the Treasury, Salmon P. Chase."
    Larry LaBorde proprietor

    In the end the greenback's successful redemption was a mixed blessing.  This experience of state borrowing under duress was an important driver in encouraging the next political generation to embark, in the 1930s, on the deficit financing which is the cause of so much private prosperity and public debt today.  In that sense maybe the jury on the greenback case is still out.

    The Weimar hyperinflation - 1923 - Germany

    The most famous of modern monetary disasters occurred in Germany in 1923.  The indirect cause of the German hyperinflation was the Treaty of Versailles, which brought to a close the First World War. More directly it was the level of reparations which the German people were required to pay to the victors. More directly still it was the occupation by France and Belgium of Germany's industrial heartland in the Ruhr valley, as an attempt to force the payment of those reparations, which were outstanding.

    Germany was already proving ungovernable as democrats, republicans, communists and the extreme right vied for power. Assassinations were rife.

    In reaction to the Ruhr occupation the government, such as it was, encouraged the closure of factories to prevent the achievement of the foreign occupiers' aims, and it offered payment in newly printed money to Germans thrown out of work.

    The results are well documented. Restaurant prices rose during the meal; workers had to be paid twice a day; the money presses consumed a vast tonnage of paper; the population took to shares as a possible money store and financial speculation ran amok. It was fine to enter into this era with nothing to lose, but a disaster for anyone who had built themselves even a small fortune on the old rules of the world. German savers were wiped out.

    The inflation was a revolution of wealth - transferring it from those who had saved to those who had the foresight to act. It drove large numbers of the impoverished middle classes to despair and even suicide.

    "The young, and quick-witted did well. Overnight they became free, rich and independent. It was a situation in which mental inertia and reliance on past experience was punished by starvation and death." Sebastian Haffner - 1939

    What can we learn?

    These monetary episodes are varied, and represent the tiniest fraction of the relevant historical facts about money systems.

    The episodes are not easily comparable with modern states of today. But perhaps similar to our own times were the circumstances in Kublai Khan's China. Its borders were secure, it was enormously confident in its institutions of state, it had enjoyed a prolonged period of considerable economic success, and built its civic and commercial infrastructure on what amounted to capital issued for nothing. Credit - in the form of state and corporate paper - had been injected in quantities which had never previously been imagined. 

    It left a population of savers holding paper promises of wealth, of which there were such a massive number that everyone was happy.

    What seems to have happened in China is that a large and confident population worked harder than usual to accumulate a currency whose respectability was backed by the apparent integrity of a secure empire. As long as people strove to accumulate this money the state benefited from the productivity gains of a motivated population, which cost the state nothing.  The empire's infrastructure was constructed on credit, its economy expanded on credit.  This growth came from the power of a belief held by its citizenry that their labour was being validly remunerated in the token form of this Chinese imperial paper.

    In Khan's China the very best living standards were enjoyed - not surprisingly - when people worked for something which it cost the state almost nothing to put into circulation in ever greater amounts. To be possible this required near unanimous confidence in the system, and not surprisingly the period was recognised as one of enlightened economic management - a view which persisted for several decades during a period of steady currency inflation (which was also experienced by Athens during its magnificent decline in the 60 years following 400BC).

    Yet the most prosperous and confident period preceded rapid financial and political decline. When the confidence in the currency gave way there was wholesale destruction of the value of savings in almost all forms at once, and the popular energy required to sustain empire rapidly disappeared. As its hitherto reliable institutions imploded the state itself was overthrown from the inside within a few years.

    At that time the few holders of gold - which had no formal monetary role whatsoever - saw their personal purchasing power increase quickly.

    Gold at the junction of monetary systems

    This helps to illustrate one of the monetary roles of gold.

    A previously successful credit based system will eventually collapse under the weight of its historical circumstances and the excesses of credit which it is sucked into at the time of its greatest success. As the process of collapse unfolds one monetary store after another demolishes savers.  If they hold notional long term obligations like pensions the underwriters fail.  If they hold institutional debt the issuers fail.  If they hold bank notes and the banks fail.  It takes very few failures before the population starts to see risk in every credit based construct. Their faith in their institutions evaporates, and they become acutely aware of the dangers of anything intangible, and anything whose supply can relatively easily be expanded. This is when they begin to think obsessively about things whose supply is subject to some fundamental limit. 

    It becomes possible to understand why gold re-materialises as the only good money in times of such great economic distress. During such a period the most valued asset is the one which is incorruptible, and because the scarcity of gold is almost uniquely beyond the power of men to change (and because it can be discreetly owned) it is gold which re-appears as the agent of wealth storage and transfer at the junctions between the much longer episodes of representative money.

    At these relatively rare junction points, as the wheel of optimal monetary solutions turns through its phases, ownership of gold is what empowers a bold and contrarian few to take control of large amounts of capital.  Even as gold comes back into vogue, so the seeds of the new representative fiat currency system which will subsequently replace it will start to germinate, for the simple reason that there is never enough gold to finance the opportunities for growth in a potentially successful economic state.

    When the economic conditions are right for productive work and useful business development gold is an inferior form of money.  Given two neighbouring currency systems, one gold based and one fiat, and with a decent variety of opportunities with underlying demand, the fiat system will comfortably outperform the gold system.  Braver businessmen will back 2, 3 or 4 ventures at once, rather than the single project which gold allows, and they will usually win the race to the top of the economic pile.

    So at least half the art is to appreciate that there is no permanent answer, and that ultimate success depends on being flexible enough to profit from a return to a token based monetary system.

    Gold as a money of choice

    But gold does not only appear at the death of an old fiat system.

    In complete contrast gold also operates as money under the completely opposite circumstances, when all is well; so well that there is indeed enough to go round.

    The available evidence suggests that gold will often be adopted as money by the richest trading cultures (or occasionally international plunderers) of any given era.

    When the Ionians were the commercial powerhouse of the eastern Mediterranean gold became their currency - taking over from iron.  The same happened for the Athenians. It occurred again for the Romans in the first millennium, for the Venetians at the start of the renaissance, for the Spanish in the 16th century, for Britain in the 19th century, and in America through until 1933.  In every case, except the Spanish who simply grabbed the stuff, these societies enjoyed a substantial and prolonged trade surplus.  (Though to be fair to the Spanish some of the historical rules about trade were not so very different from the Spanish style gold-grab.)

    Gold was how they balanced the books.  It was simply the easiest thing to acquire and bring home from their foreign adventures - whether military or commercial - and it was a convenient way of avoiding a risky accumulation of foreign wealth. 

    This is not mandated by some monetary rulebook which says that gold shall balance the books, it just happens to be very convenient because gold is compact, scarce, easily recognised, not subject to variations in composition in different countries, consistently retains international purchasing power, and once refined has no technological, legal/administrative, or labour component as part of its value. It is an ideal medium for repatriating foreign earnings.

    Traders and adventurers bringing home gold start shopping with bullion.  They may even coin gold themselves, and the associated prestige has often been sought by whomever controls the state's money.  Where gold is the unit of money in use by the rich - and it is in sufficient supply - there is no obvious reason why a central bank should not take to issuing gold coinage or gold backed notes itself.  And that is precisely what has frequently happened.

    But it is never a phenomenon which is available everywhere at once, only, in fact, to one or two strong trading countries in the world at any given time, and then temporarily.  The accumulated wealth undermines the productive energies of its creators.  Their domestic producers start to concentrate on supplying things which poorer countries neither want nor can afford, and the bullion inflow stalls. As that trading strength diminishes over time the power of Gresham's law dominates, and gold circulation diminishes irreversibly - as the great Winston Churchill found out when he tried to return Britain to the gold standard in 1925. 

    Gold based money - even for economic superpowers - is temporary.  It disappears from circulation and seeks out the next great producers - to whom it will generally gravitate in settlement of new international trading debts. 

    Curiously the strongest industrial exporting nations of the last 50 years (notably Japan and Germany) have chosen to accumulate US dollars rather than gold, and now, instead of possessing bullion within their own borders these great exporters now own substantial slices - apparently some 40% - of the capital stock of foreign countries (particularly the United States) which buy their exports.

    This is a break with ordinary patterns of international trade.  It indicates that Germany and Japan are trusting the people of the USA to defend foreigners' property rights over American self-interest.

    Meanwhile it explains - in part - the relative availability of gold and its low price by previous standards.  It also raises the question of the attitude towards dollars (and gold) by the next generation of exporting powerhouses.

    There is evidence that the Arabian oil exporters show a growing appetite for gold, with Dubai having comfortably the largest per capita gold inventory in the world, and Saudi Arabia having a reducing tolerance for dollars.  Equally interesting is a growing Chinese demand.  After a prolonged abolition of private gold ownership, and co-incident with its growing status as a world exporter, China has recently created its Shanghai Gold Exchange and is extending the right to private gold ownership to individuals.  It would be wrong to assume that this presages a common use of gold as money within China, but its use within the trading elite of Chinese society is certainly consistent with previous episodes.

    This brief treatment of the history of money illustrates that gold is simply not practicable as a universal money, but that it operates as an occasional money for rich trading societies, and more commonly as an agent of transfer during periods of currency implosion - whether hyperinflationary, political, or military. Its use at these times is its greatest service to private individuals - who must be disciplined and discreet for it to work to their advantage. 

    To re-quote Del Mar in his assessment of the Chinese inflation - "The best families in the empire were ruined, a new set of men came into the control of public affairs". 

    Next gold FAQs section - 'Commodity numbers'

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