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What is money?
When we talk about money, we tend to think about bills,
and, above all, coins. In ancient times other items could
function as money: amber, ivory, leather, salt etc. During
one part of their history, ancient Greeks used iron nails
as coins. Money doesn't have to be valuable in and of
itself (and who decides what is valuable anyway?), but the
key word is agreement. As long as everyone agrees that the
bills, coins or beads are worth a certain amount, then the
system works. As soon as even just a slight number of
people refuse to participate in the agreement, the whole
monetary system of a society may fail.
How did the system of money develop?
The simplest and most natural way to get what one
wants/needs must be to simply trade one or more
commodities for another. It is a very concrete way of
thinking ("if I give you this jug, you can give me that
loaf of bread"). The system of barter is therefore easy
to understand.
The concept of money, IOUs, credit and giro are more
complicated, mainly because it is very abstract. One can
eat the loaf of bread or use the jug for storing food, but
coins are worthless if a person is alone.
In the early days of barter, there was also the concept of
payment, i.e. when people willingly, or not so willingly,
gave their products without gaining anything concrete in
return. Some examples are:
- People had to pay fines if they committed certain
crimes. The English word "pay" can be derived from the
Latin verb "pacare", which originally meant "to
pacify" or "to make peace with".
- In some societies people had to provide a dowry
when getting married.
- The rulers imposed taxes on people to support
people who didn't work directly with the production of
food.
- Religion claimed tributes and sacrifices to the
gods and the priests.
If someone had to pay a fine for a crime, there were
probably rules for HOW MUCH that person had to pay. If
he/she had to pay a cow, who would judge the value of the
cow? Is a scrawny, old cow worth just as much as a young
and healthy one? It was easier to agree on some sort of
number and that is where money comes in. If everyone in
society could agree that 10 pieces of a certain coin was
the fine for a certain crime, punishment would be more
fair (unless there was inflation, see our discussion on
that below), and also easier to administrate.
Trade became more sophisticated though the extensive
networks between the states of the Mediterranean. Greek
bowls could be traded for ivory from Punt, but it was
probably not the Greeks themselves that went all the way
down to Punt to collect the ivory. Most likely, the
Egyptians got the ivory in return for something else and
then they in turn bartered the ivory for the Greek
bowls. The more complicated this network got, the more
tradespeople needed a system of money, where fortunes
could be transferred more quickly (however, see commentary
under Monetary uniformity/rivalry).
People started bartering with commodities that were one or
more of the following:
- Were conveniently/easily stored,
- had high value,
- were easy to transport and/or
- were durable.
From the beginning these items were not seen as money in
our sense (e.g. bills, which do not have any real value,
at least not as long as paper is abundant), but as
something that actually had a value in and of itself. To
this very day many people find it safer to invest in gold
rather than keeping their entire fortune in bills, or in
bank accounts. Gold is not necessarily easy to transport,
but it is extremely durable and considered valuable in
most societies of the world.
These commodities (e.g. gold) that were once accepted for
their own value (to make jewellery etc.), were soon used
for payments like the above mentioned, where nothing "in
natura" was expected in return. The fact that people
generally agreed on their value made them useful for
general trading, supplementing or even replacing barter.
Money's effect on society
Agreement and the necessity of a strong power
Money is nothing but an agreement between people. Coins
and especially bills are IOUs that everyone in society
believes and trusts has the promised value. This agreement
is very fragile. If a country or society has deep
financial troubles, people have a tendency to go back to
the old barter system where they trade goods rather than
money. The whole system depends on EVERYONE agreeing on
the value of money. This requires a strong power; a king,
aristocracy or some other leader etc. That authority must
claim and maintain the value of the money.
The most amazing change here is that people actually
accepted the abstract idea of money. The change wasn't
that abrupt, of course, and people slowly adjusted to the
abstract thinking of money, but it is a profound change in
people's mentality.
Another important thing is the absolute connection between
society and money. If one is alone on a desert island, one
has no use for money. Money requires that people live in
structured and centralized societies with functioning
administration.
Security/sense of value
Cattle have always (or at least as long as people have
kept domestic animals) been a capital asset to people. One
important use of cattle was as sacrifice to the gods. For
sacrifice purposes it was important that the animal was
healthy and without major flaws. For monetary purposes
this was less important. Cattle can be counted, just like
money. The idea of coins introduced the importance of
amount over quality. In the beginning the coins were
weighed, but later they were counted. One could say that
society went from quality to quantity, but that is not
entirely correct the value of the money,
counted or weighed, had to be trusted by society. The
monetary system requires absolute trust, which meant that
counterfeiting had to be punished, and that coins had to
be stamped to guarantee their value.
The ancient Greeks used iron nails as coins, but they were
easy to counterfeit, since they were made of base metals
and had low value in and of themselves. That is why rulers
started minting coins. Counterfeiting can increase
inflation and there was a need for reliable devices for
testing the purity of the money.
Monetary uniformity/ Rivalry
Coins were usually measured as part of a standard
weight. This could have made trade a lot easier, but the
problem was that the city-states could not agree on a
monetary currency. There was a lot of prestige in having a
widely accepted currency and the city-states constantly
fought each other's currencies. The custom of stamping
the coins to prevent counterfeiting also made it possible
for the various city-states to show their power with their
own seal.
Why did not the city-states agree on a monetary currency?
Coins, minted in a certain city-state, could always be
used in the very area where they were minted, i.e. the
city-state in question could A) guarantee the coins'
value and B) make sure that the money was re-invested in
the city-state's economy. That is why mercenaries, e.g.,
were paid in local currency.
Banking
Banking preceded the invention of coins. Already in
Ancient Mesopotamia there was a system of banking where
people could keep their grain and other items in the
safety of the palaces and the temples. In Egypt there was
also a system of banking, where harvests were kept in
central warehouses. Precious metals, carefully weighed,
could also be stored. The idea of counting the money
rather than weighing it came later.
This opened up for a new occupation. People could become
professional bankers and even make a fortune in their new
occupation. Money changing became a profession in all
states of the Mediterranean, well known from the Bible
where Jesus overturns the tables in the Temple of
Jerusalem.
The banks could also lend people money. Investments in
ship freights, construction of public buildings and mining
expeditions were common, where the banks lent a sum of
money to be repaid when the expidition came back
(hopefully with profit). Of course people had been
planning ahead before coins were introduced, but money
made it possible to invest way into the future. In many
ways money makes us live to a great extent in the future,
probably because it is so abstract.
During Greek rule of Egypt (the reign of Ptolemeis 323-30
BC), the old system of warehouses was used again. The
different "grain banks" had a central office in
Alexandria and worked according to a kind of "giro"
system. Transactions could be made from one "account" to
another without the grain actually leaving the
warehouses. That is taking the abstract thinking a step
further.
Inflation
Coin production made society more prone to inflation. When
Sparta in 407 BC occupied the silver mines at Laurion,
which belonged to Athens, there was a severe shortage of
silver coins. Athens tried to fight the inflation by
issuing a new bronze coin with a thin layer of
silver. People did not trust the new money and started
collecting the old silver coins, which vanished from the
city's financial circulation, which in turn only made the
inflation worse.
Propaganda
Since the coins were tightly connected to the various
city-stated, they also served as a means of
propaganda. Philip, the father of Alexander the Great,
issued coins to be spread as propaganda, celebrating his
victory in a chariot race.
Cities that were defeated were often forced to use the
currency of their conqueror (e.g. Aegina that, in 456 BC,
was forced to use the coin with the Athenian owl).
Minting
Minting could be quite a profitable affair. By minting
coins, whose real material value was less than the agreed
value (i.e. if a coin cost 10 to produce, but was "worth"
15), rulers could earn money by producing coins. The other
way around, rulers could lose money, if the true value was
less than the given (one example is the Swedish 5-öre
coin, which, in the end, cost 12 öre to produce).
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