Coined: The Rich Life of Money and How Its History Has Shaped Us

by Kabir Sehgal

  The Code of Hammurabi offered borrowers some protections: A debtor was to be freed after three years of bonded labor; and if a debtor died because of abuse while a bonded laborer, the creditor was punished with the death of his son.91 Over history, many leaders have tried to protect debtors. For example, in Athens around 600 BC, there was a real possibility of popular revolution—as bonded labor and slavery had become rampant. Solon, the archon of Athens, canceled debts and abolished debt slavery (but not all forms of pawning).92 He, like many overlords in antiquity, recognized the disastrous effects of too much debt: If the balance of power tilts too heavily in favor of the creditor, a whole society can come crumbling down. Debt protection, then, is also creditor protection. Let’s not upset the whole applecart.

  Imprisonment for debt was also a common practice in ancient times. During the Roman Empire, a creditor could arrest the debtor for debt delinquency and haul him into court. If guilty, the debtor could land in a private jail, and after sixty days become a slave, bonded laborer, or even be killed. Though uncommon, creditors were allowed to cut up a debtor’s body into chunks commensurate to the debt owed.93 Yet Roman rulers, like those of Greece and Babylon, realized the importance of debtor protection. They ushered in public prisons, four-month grace periods for repayments, and eventually the abolition of debt imprisonment altogether.

  But debt imprisonment endured. In eighteenth-century England, many debtors found themselves locked up in Fleet Prison in London, or Marshalsea Prison, which Charles Dickens mentions in his writings. One of these debtors in Fleet Prison was a trader who simply had had a bad financial year. He was dragged from his room and laid outside to face inclement weather. Though he was in poor health, the trader was beaten and abused with a sword by the warden. The next day the prisoner was tortured by having irons put on his legs. The prisoner pleaded that he would like a hearing before a court to protest such cruel punishment, yet he was taken to the dungeon, where even more irons were used to keep him in constant pain for three weeks, and he almost lost his ability to see. After many inhumane episodes like this, Parliament banned debt prisons with the Debtors Act of 1869.94

  Many who fled England for America were debtors themselves, escaping the reach of creditors. However, debt prisons existed in colonial America and were a common grievance among colonists.95 Pennsylvania’s founder, William Penn, and Revolutionary War financier Robert Morris both spent time in these prisons. My native state of Georgia actually began as a debtor’s safe haven. Its founder, James Oglethorpe, developed a strong opposition to debtors’ prisons because his friend died from smallpox in one. He established the Georgia Society, a debtors’ refuge, which ultimately won a royal charter from King George II to set up the colony of Georgia. Despite efforts to stamp out debt imprisonment, it still lingered. In 1830, more than ten thousand people were imprisoned in New York debt prisons. Many times the debts were minimal. In Philadelphia, thirty inmates had debts outstanding of not more than a dollar.96 There were five people imprisoned for debt delinquency for every one put away for a violent offense. Eventually, by 1833, the federal government wised up and abolished debt prisons.97

  State-sponsored debt bondage and imprisonment has declined considerably. But according to the US Department of State, even today, millions like Raju in South Asia and in other parts of the world are laboring to repay their debts, and find themselves in difficult circumstances. Sometimes they are even working to repay the debts of their deceased ancestors.98

  The dark side of debt isn’t limited to the emerging world. Remarkably, in America, several states still allow the jailing of debtors, and more than five thousand warrants have been issued since 2010.99 In 2011, citizens were jailed essentially for carrying outstanding debts. Collection agencies resorted to harsh measures during the global financial crisis. One lady who was pulled over because of an ineffective muffler was arrested because she had failed to show up in court to answer for $730 in unpaid medical expenses; she wasn’t even aware that the collection agency had filed a lawsuit against her.100 Though financial debt instruments have become more complex and easily tradable, the dark side of debt has lingered since before Hammurabi’s times.

  From Mind to Matter

  The first part of this book serves as the intellectual foundation for the next section. The evolutionary investigation into money shows that exchange is fundamental to all organisms. Initially the instruments being exchanged were food items that served an evolutionary purpose to promote survival. But as humans gained capacity for symbolic thought, more durable commodities were exchanged. Chapter 4 is an extension of this line of thought, and it addresses the commodity form of money.

  However, this anthropological investigation into money suggests that debt is our primary currency. Not every transaction is completed immediately. We do favors for each other and remember who owes us. Moreover, financial debt precedes the invention of coined money by thousands of years. Money need not be a commodity, then. We can transact in something that doesn’t have intrinsic worth, since it can still be a symbol of value. Chapter 5 is an extension of this line of thought. It addresses money as a symbol of value determined by the issuer, which is usually the government.

  From the Galapagos to the Trobriand Islands, my quest to understand money started with grasping the roots of an idea. Whether using money is a function of genetics, a neural stimulant, or a behavior instilled by culture, why we exchange remains a fascinating question. But now is the time to move from why to what. To move from the mind of money, to the body of it—how it looks and feels. And how despite its changing forms, it remains a symbol of value throughout.

  PART II

  BODY

  The Material Forms of Money

  CHAPTER FOUR

  Hard and Heavy

  A brief history of hard money

  Gold is irresistible.

  —Goethe1

  Men agreed to employ in their dealings with each other something intrinsically useful and easily applicable to the purposes of life, for example, iron, silver and the like.

  —Aristotle2

  The possession of a gold coin is incontestably more agreeable than the possession of goods.

  —Silvio Gesell3

  Employees in the vault at the Federal Reserve Bank of New York wear these magnesium shoe clips when moving gold bars.

  When I was a kid, someone on the playground told me that if I dug far enough, eventually I would reach China. That’s a myth, but here’s something that isn’t: If you dig deeply enough in New York City, the town in which I live, you may just strike gold.

  Eighty-six feet below ground level, resting on the bedrock of Manhattan, behind a ninety-ton door, is the gold vault of the Federal Reserve Bank of New York, which is home to more gold than anywhere else in the world: 530,000 bars, weighing an aggregate of 6,700 tons.4 I learned about this vault years ago, but I still had my suspicions: Is there really a vault? Why store gold in a city subject to potential terrorist attacks? And a more sweeping question: Why stockpile so much of a primitive, antiquated metal in the first place? To answer these burning questions, I signed up for a public tour and jumped on the No. 4 train down to Wall Street.

  The New York Federal Reserve building is so large you almost don’t see it. Inspired by the design of Renaissance palaces, the twenty-two-story building with its stonework and black iron gates conveys power and authority, yet it hides in the shadows of neighboring buildings. A guard brandishing an automatic weapon checks my name on a list. I pass through a metal detector and am greeted by a neatly groomed tour guide wearing a navy pinstripe suit and ocean-blue tie. He ushers me down via a crowded elevator to the vault. I walk by a dozen cubicles and an exhibit for tourists and there it is: yellow, bright, and heavy. Gold bars, plenty of them, tucked into several light blue holding cells that span the length of half a football field. The vault smells like stale, locked-up metal. Some bars are shaped like rectangular bricks, which can be seven inches long, more than three inches wide, and almost two inc
hes thick. Bars made after 1986 are in the form of trapezoids. A bar can weigh about twenty-eight pounds, but because of its density it feels like twice that. Etched on every bar is its purity level and identification numbers. There is an old giant scale that can weigh amounts as little as one one-hundredth of an ounce up to 640 pounds. It’s a reminder of the mechanical process involved in storing, weighing, and moving the gold bars. While transporting bars, workers wear protective metal casings over their shoes. In the spirit of a Jules Verne novel, I journeyed to the interior of the vault, and verified that, yes, it exists.

  As for my next question about storing the gold in New York: It’s here largely for historical reasons. Built in the 1920s, the vault became a popular and secure place to store the world’s gold, especially during and after World War II. At the time of my visit, the value of all the gold totaled more than $350 billion and represented 25 percent of the world’s whole supply. But the Federal Reserve doesn’t own any of it. It belongs to other entities, like governments, foreign central banks, and international organizations.5 And despite the prospect of calamities besetting New York City, the vault is impenetrable: There are no computers, in order to rule out cyberattacks, and the door is air- and watertight. There have been no successful robberies of the Fed except for the one staged in Die Hard III. Should anyone ever stage a burglary, one of the marksmen who practices on the second-floor shooting range will quickly put an end to it.

  And as for my last question, about why to store gold in the first place, the easy answer is because it’s valuable and there isn’t a lot of it. If you put all the known gold in the world into the 555-foot Washington Monument, only one-third of the obelisk would be full.6 But it’s not just a question of scarcity; there’s something special about gold. Not every metal is safeguarded under an enormous custom-designed solid vault door. To understand why, I looked for answers in another New York City institution. I jumped on the train again and took it uptown to the public library.

  Since the dawn of civilization, there has been a recurring question about money: Is it hard or soft? Expanding the question, is money an item with intrinsic worth? Or is it inherently worthless and merely represents something else of value? Put in material terms: Is money a gold coin or a dollar bill? It depends on the time and the place, and what the people, or the ruling authority, deem acceptable. Alas, money can clearly be both—as long as it remains a symbol of value. Lest we forget, the brain has neuroplasticity; it is capable of learning new ideas and updating old ones. Ultimately, the social brain, the “super-brain” of society, determines what will function as currency, from cacao, used by the Aztecs, to butter, which once circulated in Norway.

  While there have been many forms of money, answering “hard” or “soft” to the aforementioned question has historically been a dividing line between two economic doctrines, metallism and chartalism. They’re worth exploring because they provide a straightforward framework for understanding monetary history. Early twentieth-century economist Georg Friedrich Knapp coined both terms. Though these terms aren’t used widely today, they’re easy to remember and accurately convey the underlying meanings. The main distinction between these two doctrines concerns the source of money’s value. Metallism posits that money’s value comes from its intrinsic worth, the market price of commodities, usually but not necessarily metal. Silver, gold, and other commodities like barley and grain have served as currency because they have inherent worth as determined by the market. Paper notes can also serve as money in the metallist worldview as long as they are backed by metal or some other item with intrinsic worth. For example, in an economy using a gold standard, the currency may be convertible into a fixed amount of gold. The fixed supply of hard money supposedly makes it difficult for anyone, especially the government, to create more and adjust the overall supply.

  Chartalism, derived from the Latin word charta, or ticket, contends that money itself doesn’t have intrinsic value.7 In this doctrine, money is “soft,” a noncommodity, or a token—like a dollar bill, which is merely a piece of paper with no intrinsic value. It’s the state that creates money and its use value. The dollar is created by an authority, the Federal Reserve System of the United States. The state also creates a large demand for its currency by administering taxes, fines, and fees in dollars. Since payment of these items is mandatory, one must procure and deal in dollars. The state may also institute legal tender laws. For example, in the United States, the Coinage Act of 1965 states, “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.”8 In addition, because of its minimal cost of production, soft money can easily have its supply adjusted by its issuer and, to a lesser extent, counterfeiters.

  Metallists and chartalists hold different ideas regarding how money originated, evoking the divide between Adam Smith and Alfred Mitchell-Innes. Metallists contend that money replaced barter. Money, then, is a creation of the private market, and the state merely blesses what the market settles upon. Chartalists believe debt or credit systems preceded money: Evidence of interest-bearing loans appears in ancient Mesopotamia, thousands of years before coins surface in the Kingdom of Lydia around 630 BC. We become aware of the fault lines between these two doctrines: metallism versus chartalism, metal versus credit, marketplace versus state, hard versus soft. It seems as if chartalism has won the day since the current global monetary system relies on non-metal-backed soft currency. Yet the link between money and metal is a dominant one in economic theory. Many influential economic thinkers are considered to hold metallist views, including John Locke, Adam Smith, John Stuart Mill, and Karl Marx.9

  I focus on hard money in this chapter and soft money in the next. I define “hard money” as coins made from precious metals or paper backed by it.

  Indeed, there were commodities that functioned as currency before the invention of coinage, or the M in Karl Marx’s formula of monetary exchange, C M C. Economic historians refer to the commodities in the C C exchange as “proto-money.” Proto-money, like barley or gems, can normally be used for another purpose—like nourishment or jewelry. But that’s not always the case. During the nineteenth century, Western explorers found an unusual currency on the island of Yap in the Pacific Ocean. Fei, a bulky limestone rock found in round shapes up to four meters in diameter, functioned as money. These rocks were transported from limestone quarries more than four hundred miles away via boats made from bamboo. There’s a local legend from Yap that once a very large fei sank to the bottom of the ocean while in transit, but it was agreed that it would continue to represent wealth for its owner and could be used for purchases despite being at the bottom of the sea.10 Fei was cumbersome and rare but served as a store of value and was an instrument that facilitated exchange—even though it didn’t physically change hands.

  Some of the monetary words we use today originate from proto-money. Capital and cattle come from the Latin word caput, which means “head.” The number of cattle heads that one owned was once a measure of affluence. During the Roman Republic, soldiers were paid a salarium, a salt ration from which the word salary originates.11 Buckskins were used as currency in the American frontier during the eighteenth century, which led to the word buck being used as a synonym for the dollar. But proto-money is typically not issued by a state or authority, and not formally denominated with a stated value. It’s a less formal instrument of exchange than coins as we know them today.

  The development of coins made money easier to use. Coins were small and their value was eventually standardized by authorities. Coins helped facilitate human cooperation, or as Ofek might say, they were an output of the evolutionary force of exchange. Like Paleolithic hand axes refined over thousands of years, coins have been continually improved to make trade more convenient and efficient. Minting technologies have evolved from hammer-striking to automated presses. Starting in the seventh century BC, the coin maker would make planche
ts that were cast from molten metal in a relatively standard size, which were then hand-struck. In late antiquity and early medieval times, coin makers would take a sheet of metal, cut a blank piece, shape it into a round form, and then place it on a set die.12 The blank would then be struck with a hammer. In sixteenth-century France, the screw press was adopted. A rolling mill that was powered by horses or water was used to flatten metal, which was then cut. The blank was struck with a die using a big screw. In the nineteenth century, steam-powered machines were used to make coins.13

  As coinage technology improved, the symbols on coins became more intricate. As civilization and art developed outside the cave, we adorned coins with assorted symbols of various meaning. Authorities employed skilled artisans to design complex symbols to help create a state identity.14 The coins also helped to spread the culture of the issuers. Invading armies couldn’t carry with them buildings or temples, but they brought coins with depictions of these structures. The art on the coins told a story. In time, these symbols would represent kings and queens—and define countries and cultures.

  But the progression from proto to hard money didn’t happen overnight. It took thousands of years, and began in the cradle of civilization.

  Silver Civilization

  In Mesopotamia around 2500 BC, several commodities, like vegetables, cattle, and sheep, functioned as proto-money.15 These valuable commodities were ultimately sources of energy that helped to increase the chances of survival for humans, and had also become instruments of exchange. Over time, more durable, nonperishable items served as proto-money. As in the Paleolithic era, hand axes functioned as currency in northern Mesopotamia, and later axes became a symbol of money itself. The shekel was originally a unit of weight in this civilization, and the concept was depicted with the sign for an axe in the Sumerian language.16 Clay objects known as bullae may also have functioned as proto-money. These clay spheres were like an archaic piggy bank: Inside were clay tokens, etched with numerals, which could have been used in transactions.17