by Felix Martin
If money was a tool of the sovereign, other important questions followed: how exactly did it work, and to what objectives should the sovereign deploy it? To answer these questions, the Jixia scholars developed a simple but powerful theory of money. First of all, the value of money, they explained, was unrelated to the intrinsic value of the particular token used: “[t]he three forms of currency [pearls and jades; gold; and knife- and spade-shaped coins] offer no warmth to the naked, nor can they fill the bellies of the hungry,” the Guanzi proclaimed. Instead, money’s value was directly proportional to how much of it was in circulation compared to the quantity of goods available. The role of the sovereign, therefore, was to modulate the quantity of money available in order to vary the value of the monetary standard in terms of those goods. He could choose a deflationary policy—“[i]f nine-tenths of the kingdom’s currency remains in the hands of the ruler and only one-tenth circulates among the people, the value of money will rise and prices of the myriad goods will fall”; or an inflationary one—“[h]e transfers money to the public domain, while accumulating goods in his own hands, thus causing the prices of the myriad goods to increase ten-fold”—depending on the needs of the economy.25
Varying the monetary standard in this way could serve two purposes. First, it would provide a powerful means of redistributing wealth and income amongst the sovereign’s subjects, as inflation eroded the claims of creditors and eased the burden of debtors, shifting wealth from the former to the latter—or deflation did the opposite. Moreover, the most important redistribution, if new money were minted, would be to the sovereign from his subjects as he spent new money into circulation at essentially no cost—the miraculous power that economists in the Western tradition would later come to call “seigniorage.” Second, it would regulate economic activity by making the primary instrument for the organisation and settlement of trade more or less readily available. The goal of government should be a harmonious society, and monetary policy was a powerful tool with which to achieve it. Of course, there was a catch. For money’s powers to be effective, the Jixia scholars pointed out, the sovereign must retain exclusive control over them. If anyone else in the kingdom was able to issue money then they would arrogate to themselves control over the value of the standard, and usurp part of the sovereign’s power.
From their inception, the precepts of the Jixia academy were hailed for their clarity and logic. But it took bitter experience to establish them as the unchallenged axioms of Chinese monetary thought—and in the meantime, the matter of monetary control was sometimes fiercely contested. In the chaotic decades following the overthrow of the Qin dynasty in 202 BC, the emperors of the newly installed Han dynasty pursued a loose fiscal and monetary policy, spending beyond their means and financing their deficit by issuing new money. Eventually, a radically deflationary monetary policy aimed at restoring confidence in the imperial currency had to be imposed. The squeeze that followed proved as painful and unpopular as ever: but in this instance so painful and unpopular that in 175 BC Emperor Wen was persuaded to attempt an unprecedented experiment that contravened the most sacred teachings of the Jixia school. Henceforth, issuers other than the emperor would be allowed to mint money. The Han dynasty Grand Historian Sima Chen explained the consequences:
The people were allowed to mint [coins] at will. As a result the king of Wu, though only a feudal lord, was able, by extracting ore from his mountains and minting coins, to rival the wealth of the Son of Heaven. It was this wealth that he eventually used to start his revolt. Similarly Teng T’ung, who was only a high official, succeeded in becoming richer than a vassal king by minting coins. The coins of the king of Wu and Teng T’ung were soon circulating all over the empire, and as a result the private minting of coinage was finally prohibited.26
Monetary entrepreneurs had managed to convince the emperor that to alleviate the effects of his stabilisation policy he should permit them to issue money. The problem was that private issuers require political authority in order to make their liabilities liquid. A vicious circle therefore emerged. The private issuers sought to build their political authority in order to enable the supposed monetary palliative to take proper effect; the financial power this gave them increased that authority, and so on. Before long, it became clear that whatever their economic merits, the private moneys and their issuers posed a political challenge to the integrity of the empire. Palace counsellors warned that the growing political chaos was the direct result of ignoring the monetary axioms of the Jixia academy, and in 113 BC the Emperor Wu re-established the imperial monopoly over money. Sang Hongyang, his chief adviser on economic matters, explained the explicitly political reasoning that lay behind the crackdown: “If the currency system is unified under the emperor’s control, the people will not serve two masters.”27
The experiment with monetary heterodoxy had failed. The academy’s conception of money and the policy recommendations that derived from it had been proved correct. Whoever wished to remain in power and see his domain well governed should jealously guard the management of the monetary standard and the monopoly of issuance. As the Guanzi put it, “[t]he prescient ruler grasps the reins of the common currency in order to bridle the Sovereigns of Destiny.”28
The ingenious initiative of Duke Huan of Qi meant that the first great work of Chinese monetary thought was a creation of court employees, intended to bolster the monetary franchise of the sovereign. In Europe, the situation was to be quite the opposite. Not only was European monetary thought to take many centuries to develop beyond the maxims of Plato and Aristotle, but when it did, it was not the sovereign but his subjects who were responsible for the progress—and its aim was not to reinforce the sovereign’s control over money, but to relax it. In the next chapter, we will discover why.
5 The Birth of the Money Interest
PARADISE LOST: THE MONETARY ACHIEVEMENTS OF THE ROMANS
With every passing year, we realise that the technological achievements of the Roman world are greater than we thought. Fifty years ago, we tended to take the view that Virgil popularised in a famous passage of the Aeneid: that the Romans may not have been much good at science, technology, or the arts, but that they made up for this by excelling at their vocation to build empires and rule the world.1 Now, we know that their generals owned computers and that their entrepreneurs built mechanised factories.2 But if Rome’s technological achievements were impressive, they were as nothing to its financial sophistication. Within a few centuries of its birth in the Aegean, money was everywhere in Rome. The financial infrastructure was vast and complex. There was of course a trusted coinage, but as in any sophisticated monetary economy, coins were principally for small transactions. Big tickets—and in Rome’s heyday, there were some very big tickets—were settled using littera or nomina—promissory notes or bonds. The great politician and orator Cicero summarised the normal method of large payments in the late Republic as “nomina facit, negotium conficit” (“[one] provides the bonds, and completes the transaction”).3 Nor did the credit economy extend only to large payments. In the poet Ovid’s satirical textbook for young lovers, The Art of Love, he warns the prospective Lothario that girlfriends need presents—and it is no good making the excuse that you have no cash on hand, because you can always write a cheque.4
Already by the beginning of the Imperial age, the days when the smart Roman’s wealth was entirely in land were long gone. “Dives agris, divespositis in faenore nummis” (“Rich in fields, rich in money out at interest”) was how the poet Horace described the worldly Roman of his day.5 He would hardly have seemed out of place in Victorian England, with its rentiers begging to be excused from paying a bill because they are “all in the funds at the moment.” Then, as now, there were even those who spurned real assets entirely, and preferred to be rich in monetary form alone.6 Bankers could take deposits, make loans, and settle international payments.7 Then as now, this financial elite specialised in dazzling the uninitiated with the sophistication of their technique: the
jaded Cicero wrote of them with pointed irony that “concerning the acquisition and placing of money and its use, certain excellent fellows, whose place of business is near the Temple of Janus, converse more eloquently than philosophers of any school.”8
In such an extensively monetised economy, it is hardly surprising that the Romans were also well acquainted with another familiar feature of modern finance: the credit crisis. Occasionally, the similarities with the modern age are nothing short of eerie. In AD 33, the Emperor Tiberius’ financial officials were persuaded that the recent boom in private lending had become excessive. It was decided that regulation must be tightened in order to extinguish this irrational exuberance. After a brief review of the statutes, it was discovered that none other than the father of the dynasty, Julius Caesar, had in his wisdom instituted a law many decades before specifying strict limits on how much of their patrimony wealthy aristocrats could farm out in loans.9 He had, in other words, introduced a rigorous capital adequacy requirement for lenders. The law was clear enough: but not for the first time in history, industrious lenders had proved remarkably skilled at circumventing it. Their ingenious evasions, the historian Tacitus reported, “though continually put down by new regulations, still, through strange artifices, reappeared.”10
Now the emperor decreed the game was up: the letter of the old dictator’s law would be enforced. The consequences were chaotic. As soon as the first ruling was made, it was realised with some embarrassment that most of the Senate was in breach of it. All the familiar features of a modern banking crisis followed. There was a mad scramble to call in loans in order to comply. Seeing the danger, the authorities attempted to soften the edict by relaxing its terms and announcing a generous transitional period. But the measure came too late. The property market collapsed as mortgaged land was fire-sold to fund repayments. Mass bankruptcy threatened to engulf the financial system. With Rome in the grip of a credit crunch, the emperor was forced to implement a massive bailout. The Imperial treasury refinanced the overextended lenders with a 100-million sesterces programme of three-year, interest-free loans against security of deliberately overvalued real estate. To the Senate’s relief, it all ended happily: “Credit was thus restored, and gradually private lending resumed.”11
This first flowering of monetary society in Europe was not to last, however. As the military and political might of Rome declined, so did its rich financial ecosystem. In the late third century AD, as Rome’s prize possession of Egypt passed in and out of foreign hands, there was serious monetary disorder, including an inflation in AD 274–5 when prices rose by 1,000 per cent in a single year.12 After AD 300, bankers disappear from the records—the social and political stability required to underpin professional finance had, it seems, disintegrated.13 As the institutions of government retreated from the outer reaches of the empire, so, largely, did the institution of money. The effects were most severe in the most remote and marginal colonies. In Britain, for example, the Roman monetary system disappeared completely within a generation of the departure of the legions at the beginning of the fifth century AD. For a full two hundred years, coinage was forgotten as a means of representing money despite having been in constant use for nearly five centuries before then.14 Eventually, all over Europe—even in Rome itself—the splendid sophistication of monetary society faded away. Like Greece after the fall of Mycenae, Europe entered its own Dark Age—an age that saw a near-total regression from monetary to traditional society.
The lowest point of Europe’s descent into monetary barbarism: a Roman coin, having lost all monetary significance, reworked as jewellery in a 7th-century British pendant.
(illustration credit 5.1)
EUROPE’S MONETARY RENAISSANCE
Near-total—but not complete. While the rich panorama of financial technologies, from the elaborate techniques of high finance to the simple convenience of humble coinage, were forgotten, one ghostly, but vitally important, vestige of Roman monetary society remained: the concept of universal economic value. The recalcification of the fluid social fabric into fixed tribal and feudal relations was virtually complete. But the persistence in the collective memory of this hallmark of monetary society proved in time to be a stock of intellectual fixed capital which would greatly facilitate the remonetisation of European society. An initial resurgence of monetary society came with the consolidation of the Frankish Empire in the late eighth century. Under Charlemagne, the monetary units of pounds, shillings, and pence were introduced and money was issued on a standard consistent across most of Europe. But this first renaissance proved short-lived, and it was only in the second half of the twelfth century that remonetisation began in earnest, following the relentless logic established nearly two millennia earlier in the Aegean.15 Starting in the Low Countries in the last quarter of the twelfth century, feudal obligations traditionally payable in kind began to be transformed throughout Europe into fiefs rentes—rents payable in money.16 The institution of the corvée—under which a lord’s vassals were required to render him service for a certain number of days a year—was replaced with paid labour. Civil officialdom began to function as a professional, salaried cadre, rather than a poor man’s simulacrum of the hereditary nobility. This in turn meant that in jurisdictions where the economy could support it, direct taxation in money was reintroduced for the first time since the Roman era.17
The familiar consequences of the monetisation of previously static social relations appeared: the re-emergence of social mobility, the revival of ambition and avarice as prime factors motivating behaviour, and the realignment of aristocratic competitiveness from the battlefield and the jousting lists towards the accumulation and ostentation of wealth.18 “Nummus nobilitas” (“Money is nobility!”) declaimed the poet Hildebert of Lavardin sarcastically, in an uncanny echo of Aristodemus’ complaint that “Money is the man!”19 But medieval Europe was a larger, richer, and more powerful forum for monetary society than ancient Greece had ever been. The results of its growth could therefore be both more spectacular and more ridiculous—and so more reminiscent of the excesses of monetary society in the modern age. The aristocrats of the Italian city of Bologna, for example—one of the richest cities of the early medieval era—devoted their newfound energies to a very modern passion: vying with one another to build the tallest tower. The result was the Manhattan of the Middle Ages: 180 towers, some nearly a hundred metres tall, in a city less than four kilometres square.
The persistence of Charlemagne’s monetary units formed the basis for this extensive remonetisation, but it also gave rise to its chaotic practical organisation. Whereas the original introduction of money to Europe had taken place under the auspices of a unified Roman political authority, its reconstitution was the definition of piecemeal. Since the collapse of Charlemagne’s empire, Europe had lacked a unified political space. With the exception of England, no unitary jurisdiction extended beyond one or two major cities and their hinterlands—and many were very much smaller. So whilst the pounds, shillings, and pence of Charlemagne’s empire were deployed throughout Europe to organise the revived monetary practices of evaluation, negotiation, and contracting, all standardisation was lost. A cornucopia of moneys were issued, corresponding to the enormous variety of jurisdictions which enjoyed the privilege of minting and money issuance—from great kingdoms and principalities to tiny baronial and ecclesiastical fiefdoms. The result was a monetary landscape that appeared superficially simple—since the monetary units of pounds, shillings, and pence were used almost everywhere—but was in reality extraordinarily complex, since the actual value of these units depended on the particular standard maintained by the individual feudal issuer.
This revitalised monetary regime had one especially attractive feature for its feudal issuers. In an age when the imposition of direct taxes remained a logistical and economic challenge for many of them, the levying of seigniorage by the manipulation of the monetary standard represented an invaluable source of revenue. An important feature of the monetary t
echnology of the day made this simple to do. The dominant technology for representing money was coinage, with silver the metal of choice for higher-value coins, and bronze or other less valuable metals and alloys for smaller denominations. But unlike today’s coins, medieval types were typically struck without any written indication of their nominal value: there was no number stamped on either face—only the face or arms of the issuing sovereign or some other identifying design. The value of the coins was then fixed by edicts published by the sovereign on whose political authority they were minted. This system had a great advantage for the sovereign. Simply by reducing the tariffed, nominal value of a coin, the sovereign could effectively impose a one-off wealth tax on all holders of coined money. A certain coin, the sovereign would announce, is no longer good for one shilling, but only for sixpence. The coin had been “cried down”; or equivalently, one could say that the standard had been “cried up.” An offer might then be made to recoin the cried-down issue, upon presentation at the Mint, into a new type. The sovereign could then in addition levy a charge on the re-minting operation.
Naturally, this process was unpopular with users of the sovereign’s coinage. Fortunately for them, there was one partial, natural defence. High-value coins—minted from silver, for example—had an intrinsic value regardless of the tariff assigned to them: the price at which their metal content could be sold on the open market to smiths and jewellers, or indeed to competing mints. They included, as it were, portable collateral for the sovereign’s promise to pay. This meant that there was a lower limit to the tariffed value which the issuing sovereign could assign his coinage. If a coin was cried down too far, the collateral would be worth more than the credit the coin represented, and holders could sell it to a smith for its bullion value. On the other hand, the alert sovereign could respond by reducing the silver content of the new type when the coinage was re-minted—a so-called “debasement.” It was a recipe for a constant game of cat-and-mouse between the coin-issuer and the coin-user, with even a coin’s precious-metal content, which effectively served as collateral for the creditworthiness of its issuer, always vulnerable to erosion by the predations of the sovereign.
