The Evolution of Money

by David Orrell

  • Whale teeth (Fiji)

  • Very large, hard-to-move stone discs (Pacific islands of Yap)

  • Knives or tools (parts of Africa)

  • Iron rings and bracelets (parts of Africa)

  • Brass rods (Tiv people of West Africa)

  • Woodpecker scalps (Karok people of the Californian interior)

  • Human skulls (Sumatra)

  • Casino chips (some cities in nineteenth-century Siam [Thailand])

  • Strings of wampum beads (American colonies)

  • Tobacco, or receipts for warehoused tobacco (American colonies)

  • Cigarettes (POW camps, postwar Germany, modern prisons—these are inflation-proof because if the value drops too far they get smoked)

  • Carbon credits

  • Binary information (e.g., bitcoins)

  We would not describe all these as forms of money, since many are used as social currencies, which are rather different from the money used in markets.

  The Sumerians were responsible for a number of innovations that we still find useful today, including arithmetic, beer, the twenty-four-hour day, wheeled vehicles, and urban conglomerations. City-states such as Ur, whose location in modern-day Iraq is marked by the remains of its famous ziggurat, were home to tens of thousands of urban dwellers and were surrounded by farms that supplied them with agricultural produce. The system was controlled by temple bureaucrats, whose job of regulating this humming economy led to yet another invention—accountancy.

  Transactions were recorded first using clay tokens, and then—more efficiently—by inscribing with a reed on clay tablets. Measurements of quantities such as weight of produce were made using a system of units based, like the Sumerian number system, on multiples of 60. A shekel weighed about 8.3 grams; 60 shekels made up a mina (about half a kilogram); and 60 minas were a talent (about 30 kilograms). Around 3000 B.C.E., the temple accountants began to use a shekel of silver as a unit of currency. The price of everything else, including commodities, labor, or legal penalties, was set by the state in terms of these shekels.

  For example, the Laws of Eshnunna, named after a city near what is now Baghdad, specified that 1 shekel in silver was equivalent to 12 silas of oil, 15 silas of lard, 300 silas of potash, 600 silas of salt, 600 silas of barley, and so on, with a sila being about a liter in volume. A shekel of silver would buy 180 shekels-weight of copper or 360 shekels-weight of wool. A month’s labor was 1 shekel of silver, while renting a wagon for a day together with oxen and driver would set you back one-third of a shekel.17 If a man bit and severed the nose of a man, the fine was 60 shekels (1 mina). An eye was 60, a finger was 40, a tooth or an ear was 30, and a slap in the face was 10 shekels.18 This last was weirdly the same as compensation for the loss of a slave. Of course, while the state could control legal penalties, attempts at price fixing would have been harder to enforce and maintain.19

  The Sumerian economy was dominated by the day-to-day running of temples and palaces, and everything from wages to rents to taxes was being calculated and paid for in terms of shekels. In this sense silver did conform to our standard picture of money; however, because the economy was centrally planned and controlled (one imagines a version of North Korea without the nukes), the main use of the shekel was as an accounting device for bureaucrats, with transactions recorded as marks in a ledger. The actual metal did not circulate widely but was kept in carefully guarded vaults. If someone had to pay the palace, they weren’t expected to show up with lumps of silver—they were more likely to use barley, wool, or some other commodity, with the value reckoned in shekels. Outside the palace, most market dealings were done on the basis of credit, so for example, one’s beer consumption could be paid at harvest by delivery of the corresponding quantity of barley.20

  In a way, this use of silver as an accounting device is reminiscent of the world’s international gold reserves, of which a large fraction—some 7,055 tons—is kept underneath Manhattan in a very large basement vault belonging to the U.S. Federal Reserve. The owners are governments, central banks, and other official organizations from around the world. (A similar arrangement exists at the Bank of England, whose vaults contain a further 4,950 tons. Both are an inheritance from the days of the gold standard, which was controlled by first Great Britain and later the United States.)21 When one entity decides to sell a portion of its gold to another, a bank employee just goes down and wheels the gold bars along to the correct room—but the metal rarely actually leaves the vault.22 Everyone just needs to know it’s there. Which it probably is.23

  Back in Mesopotamia, larger debts were recorded on the cuneiforms, which were put inside clay envelopes and marked with the seal of the borrower. The creditor would keep the envelope and break it open when the debt was repaid. In cases in which the tablet promised to repay the bearer, rather than a specific individual, it was also possible to sell the tablet—and therefore the debt—to another person.24 Such debt therefore became a tradable currency in itself—to use an expression from economics, it had been monetized. The principle was the same as that of paper money, which promises to “pay the bearer on demand.”

  The Sumerian system did not therefore rely on either barter or the widespread circulation of coins. Instead it would be better described as being based on a complex network of debts, specified in a scrip-like virtual currency—the shekel—that had the backing of the main employer and central administrator—the state. (Scrip is the same as money when there is only one company in town.) Cuneiforms were one way of expressing this debt in a tradable form that we would recognize as a kind of physical money object, but it would be more accurate to say that the real currency was the virtual silver that flitted invisibly through the economy, like fish at the bottom of a lake, just as money today is mostly electronic.

  The interest charged on loans was known as máš, which was the word for “baby calf.” For commercial loans this was set at one-sixtieth per month, which was an easy number to compute since the number system was based on sixty.25 Interest payments on state loans went to the temple, from which they flowed back into the community, but private loans were made as well. For example, if a farmer had a bad harvest, debts could accumulate to the point where they became unpayable, to the point of forcing him into slavery. The concept of money may still have been in its infancy, but the numbers were real enough. To avoid social unrest, the Sumerian rulers occasionally canceled all debts, a practice that later came to be known as the Jubilee.26

  Much less is known about how finance worked in the other early urban civilizations of Egypt or China; but again it seems clear that money first emerged as an accounting device. In ancient Egypt value was expressed in terms of deben, which originally referred to a measure of grain. Wheat was deposited in centralized, state-owned warehouses that functioned as banks and facilitated payments of debts and taxes.27 Gold was sacred to the sun god Ra and did not serve as currency, unless perhaps with the gods: the primary use of the metal was to be buried with the dead.28 Pre-imperial China was relatively less bureaucratic or centralized, and there appears to have been a patchwork of local arrangements. A common form of money was cowries—highly durable shells that have found use as a currency in many parts of the world—but a variety of credit instruments, such as knotted strings or notched pieces of bamboo, were also used. The first metallic coins to appear in China were imitations in bronze and copper of cowrie shells, and the Chinese character for money is said to be based on the shape of a cowrie shell.

  Many of the examples used by Smith and later by Jevons were based on then-current ideas about tribal societies such as the Native Americans of North America. But when anthropologists actually investigated those cultures, they found that while barter certainly took place, it was a somewhat specialized form of transaction, usually involving parties who were borderline hostile and had little trust of each other. (Barter is also common in places where people are used to using money but are short of cash, such as jails.) More important were gift economies,
in which transactions are framed as gifts; communal arrangements where goods are distributed by councils; and “social currencies” used to signify status, arrange marriages, compensate for damages, and so on. More on this later.

  New inventions often result from a collision between existing technologies and cultural practices. The success of Johannes Gutenberg’s printing press in the fifteenth century was due less to the novelty of its mechanism—the technology of mass-produced stamping had existed for some time—than its ability to fill a cultural need: the desire for uniformity in the enormous market for Catholic texts. The personal computer arose from the union of West Coast, hippie-ish, electronic hobbyists and tinkerers—who came up with the radical ideas—with the (mostly) East Coast, mainstream computer industry—which provided the applications and organization. Similarly, the invention of the next form of money can be seen as the offspring of a social technology—numeracy and accounting—with the ultimate “killer app”: war.

  Money 2.0

  The first coins are believed to have been made in the seventh century B.C.E., not in Mesopotamia, but in the nearby kingdom of Lydia. They were discovered during the British Museum excavations of the Temple of Artemis at Ephesus (one of the seven wonders of the ancient world, whose construction was paid for by the Lydian king Croesus) in 1904/1905. The coins were oval (later circular, perhaps to deter tampering) pieces of a gold-silver alloy called electrum—or “white gold” by Herodotus—with a simple stamp on one side, showing, for example, the head of a lion, that certified the coin. They were made by placing a blank round of metal on top of a die and hammering it down with a punch. According to myth, King Midas—he who was cursed to turn whatever he touched, including his own daughter, into gold—was instructed by Dionysius to bathe in the river Pactolus to rid himself of the power. The gold flowed into the river bank, which was said to be the source of the naturally occurring electrum. Actual coins had a lower gold content and were probably from a man-made version of the alloy.

  The denominations ranged from 1 stater (a translation of “shekel”), which weighed about 14 grams, down through various fractions to as small as a ninety-sixth of a stater. These were valuable coins: like a Sumerian shekel, 1 stater is believed to have been worth about a month’s salary, and even a ninety-sixth stater coin could have fed a worker for a few days.29 The commonest coins, which were one-third of a stater, would fetch about ten sheep, and so were not designed for everyday smaller transactions.

  Lydian merchants dealt in a variety of commodities such as grains, oil, beer, as well as in goods such as ceramics and cosmetics, and they also had the first known brothels and gambling houses. It is not known how much coins were used for external trade, but it is clear that the idea of coinage quickly spread, first to the Greek cities of coastal Asia Minor, and from there to the mainland and surrounding islands.30 By 600 B.C.E., most self-respecting Greek city-states were churning out their own coins as a sign of their independence, which can also be translated as power, as we shall see in chapter 6. The need to exchange between these coins, as well as make deposits and loans, meant that basic money-changing and banking services grew alongside their use.

  As Jevons and colleagues pointed out, these new coins combined the advantages of commodity money with those of tokens. Coins were valuable in themselves because they were made of precious metals, but unlike commodities such as grain, they were easily transportable and didn’t degrade with time. The stamp was also a reassurance that the coins would be accepted as currency within a certain region. Coins therefore always traded there for a value that was more than the cost of their content, since if this were not the case they would have been melted down. There was a constant tension between these two aspects of coin money, with the worth of a coin tending toward its stamp value within a city and toward its (lower) metal value when traded to foreigners.

  While coins were certainly convenient for certain types of trade, the main motivation for the spread of coin money appears to have had less to do with the needs of the market—which historian Michael Crawford calls an “accidental consequence of the coinage”—than with those of the military.31 The Greeks were enthusiastic warriors—their first great piece of literature, the Iliad, is mostly about warfare—and coinage was introduced at a time when the largest expense of Greek rulers was the mobilization of huge armies. Coins served as a device for payment but also as a tool to both motivate the troops and control the general public.

  Long before gold and silver were being used as money, they were being used as jewelry and hoarded as treasure; and one of the positive spin-offs from military campaigns was that they usually involved plunder. What easier way to pay soldiers, and share the profits, than by giving each a small portion of the loot?32 The coins, which were too valuable to be useful for small-scale transactions such as buying a loaf of bread, would have been perfect for a soldier’s bonus. Also, soldiers and mercenaries needed money that could be transported easily and used in other countries. We were reminded of this in 2011 when the International Monetary Fund estimated that the former Libyan dictator Muammar Gaddafi had stockpiled about 165 tons of gold. As a gold analyst told the BBC, “Obviously for Gaddafi to have this anonymous highly liquid asset potentially is quite useful. … If you look back, gold is the ultimate means of payment, the ultimate form of exchange in crisis.”33

  At the same time, though, states wanted to encourage wider use of the coins, to solve logistical problems such as how to pay their own debts, to levy taxes on subject cities (Athens was exempt), and to supply the army and navy with supplies. Coins were ideal for use in this type of transaction, because they had a well-defined value that was enforced, guaranteed, and, of course, accepted by the state. Mints were located in temples, which were the traditional storehouses for captured wealth. The coins were distributed to soldiers and their suppliers, but also to the public at large through payments for service or the occasional handout. This ensured the development of markets that would accept the money. Because taxes and fees were paid by coin, people had to get their hands on money. This made them dependent on the state and motivated them to help provision the troops. Coinage was therefore spread around the area through war, conquest, and the distribution of the proceeds.

  When in 359 B.C.E. the oracle at Delphi told Philip of Macedon that “with silver spears you may conquer the world,” the ruler took over the silver mines of nearby kingdoms and used the proceeds as bribes against his opponents. The spread of coinage was accelerated by Philip’s son, and Aristotle’s student, Alexander the Great. During his conquest of the Persian Empire, salaries for his army of more than 100,000 soldiers amounted to about half a ton of silver per day. The silver was obtained largely from Persian mines, with the labor supplied by war captives, and was formed into Alexander’s own coins. These had an image of the supreme god Zeus on the back and Hercules on the front (the image of a man who became a god after performing twelve superhuman tasks must have appealed to Alexander). Alexander would go on to invade the Babylonian Empire in Mesopotamia. He wiped out the existing credit system and insisted that taxes be paid in his own coins.

  Rather than emerging naturally from barter, as mainstream economists like to imagine, the money system was imposed at the sharp end of a sword. However, even if its main function was for paying the army and collecting taxes, it certainly had a revolutionary effect on the structure of society. Money created its own markets and institutions, such as currency changers and banks, as well as its own demand. It promoted new kinds of social ties and connections by making it easier for people from different social circles or regions to carry out transactions. Its use turned computation into an essential skill and changed the way people thought and interacted. And it was a wonderful way of coordinating and controlling activity, because suddenly the rules were clear: everyone was on the same page.

  Box 1.2

  The Tetradrachm

  The production of metallic money relied on extracting large quantities of gold and silver, and conque
red armies were put to work as slaves in massive mines. The most popular coin in ancient Greece was the silver tetradrachm, which was equivalent to 4 drachmae (a drachma, from the Greek word for “grasp” or “seize,” was a unit of weight, referring to a handful of grain). The coin sported an image of the goddess Athena on one side and an owl (the symbol of the wise Athenian people) on the other. The silver for the coin was extracted from mines such as the ones in Laurium, whose pits, which were up to 400 feet deep, are estimated to have employed (or rather, not employed) some 20,000 slaves.

  Greek silver tetradrachm of Athens (Attica), 520–510 B.C.E. Obverse shows the helmeted head of Athena; reverse side shows an owl with olive-sprig and moon crescent. (From H. A. Cahn, “Dating the Early Coinages of Athens,” Kleine Schriften zur Münzkunde und Archäologie [1975]: 94, fig. 5a, http://commons.wikimedia.org/wiki/File%3AGreek_Silver_Tetradrachm_of_Athens_[Attica].jpg)

  Each coin contained around 15 to 20 grams of silver, depending on the mint, and would have paid about two weeks of unskilled labor.* Versions were in wide circulation from 510 to 25 B.C.E., when the mines ran out. The “thirty pieces of silver” paid to Judas for betraying Jesus are believed to have been Tyrian tetradrachms.

  *Glyn Davies, A History of Money: From Ancient Times to the Present Day, 3rd ed. (Cardiff: University of Wales Press, 2002), 76.

  The introduction of money was followed in Greece by a cultural blossoming in art, philosophy, literature, architecture, astronomy, mathematics, and democracy; and its spread around the world, both through imitation and independent reinvention, coincided with the start of what German philosopher Karl Jaspers called the Axial Age, in which “the spiritual foundations of humanity were laid simultaneously and independently in China, India, Persia, Judea, and Greece. And these are the foundations upon which humanity still subsists today.”34 It was as if a part of the human mind that had long laid dormant had suddenly been liberated by the arrival of cash (box 1.2).