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1 What is money?

Money has flowed through human civilization for millennia, lubricating trade and other forms of exchange and taking on many forms – from wooden tally sticks to evanescent bits and bytes whizzing through the electronic ether. And as it moves from person to person, money talks – offering a running commentary on the balance of power between individuals, corporations and the state.

FOR SOMETHING THAT plays such a central part in everyday life, money is remarkably slippery and amorphous. Is it an object, or just a piece of information? You can consider as money the coins in your pocket or the notes in your wallet. But if your total worldly wealth is on your person right now you are unlikely to feel very secure. You hope that the cash you have in your bank account also counts as money, though it may never have taken a physical form – just an electronic entry in some remote computer. Even some of the world’s poorest communities are now receiving payments and settling accounts using mobile phones.

Money is what money does. Suppose you are in a taxi, discover that you have no cash and offer to pay with your watch. Is your watch money? If so, then absolutely anything could be money – which would make this a very fat book. Since the book is mercifully slim, there must be an escape route, via a snappy definition. One of the standard assertions is: ‘Money is anything that is widely used for making payments and accounting for debts and credits.’ Or, in more specific terms, money is anything that governments will accept for paying taxes.

Credit and barter

Money has often been thought of as just like any other commodity – part of a sophisticated form of barter. In fact money has its origins in credit as people tried to keep track of mutual obligations.¹ One the earliest types of record was the ‘tally stick’. This would be a stick generally of hazel-wood on which details of the obligation were recorded, with notches and in writing. The stick was then split. The debtor kept one half; the creditor kept the other. Since each stick was unique the record would be quite specific. Its value depended, however, not on the price of hazel-wood but on the relationship between debtor and creditor.²

In principle the creditor could pass on the tally stick to someone else and indeed this often happened. This would make the tally stick a limited form of money. However, another option might be to use something else as an intermediate token or commodity – a more general ‘medium of exchange’. For this purpose you could use any readily transferable item but the best bet will be something in limited supply. Throughout the ages the most common tokens have been made of precious metals, and particularly silver and gold, which have the merit of being relatively scarce and portable while also being divisible into any size and weight.

Metals are durable, which is why even when many other elements of ancient cultures have disappeared, pieces of metallic money often remain as the most persistent vestiges of human activity. This might suggest that most transactions were carried out with cash, but many more took the form of credit, even if any records of transactions have long since vanished.

The earliest known usages of commodities as money tokens have been traced back to the 24th century BCE, in Mesopotamia, the land between the Tigris and Euphrates rivers, which is now shared between Iraq, Syria and Turkey. Here people often used both silver and grain when exchanging goods. They could also use these for paying fines. Around 1000 BCE the king of Eshnunna in northern Mesopotamia, for example, declared that the fine for biting a man’s nose was around half a kilo of silver.³

Of course metals that are scarce in some places can be quite common in others. So if you lived in, or better yet owned, a place that had a gratifying supply of precious metals, you would literally be sitting on a goldmine. Lydia, for example, a territory in what is now Turkey, was well endowed with a natural gold-silver alloy called electrum. The last king of Lydia, from 560 BCE, was Croesus, who became fabulously wealthy; indeed he was ‘as rich as Croesus’.

Slotting in coins

Lydia is also thought to have been the first place to introduce coins – casting different weights of gold or silver so as to offer a system of regular oval pieces stamped on either face with different symbols according to the value. Instead of carrying around a pair of scales to tell how much metal you were exchanging you could instead accept the coins at ‘face value’.

Coins were also being produced in city states in ancient Greece. In Athens, for example, the government would pay citizens with coins for public-service activities, from fighting (as soldiers) to taking turns in juries. At first the face value of the coins supposedly matched the value of the metal they contained. But this would prove awkward for the smallest transactions which might require tiny scraps of silver, so the Greek cities also started to issue bronze coins, simply asserting their value, which was generally greater than their metal content. This represented an early example of what might be called ‘fiat’ money.⁴ Indeed, even the gold and silver coins were often irregular so they too relied on the fiat element. In fact, the use of gold and silver in some respects confuses the issue, implying that money is a commodity like any other when it is more a token that represents a recognized debt.

Soon Athens was making similar declarations about gold or silver coins, imposing a value higher than the actual metal content. It could do this by ensuring that only the state could produce the coins and making it clear that it would prosecute any forgers. This was also an early example of ‘seigniorage’ – the power over money creation that allows the government to manufacture money and use it to pay its own bills. Athens also saw the first signs of what we now call bankers. These started out as money changers, providing foreigners arriving in the city with coins they would need for daily transactions. But some money-changers also started to store coins, and to lend them out – at an interest rate of around 12 per cent a year.

To make the value readily identifiable, the coins were originally stamped with symbols such as plants or animals. In Athens, for example, one of the coins carried a stamp of the city’s sacred bird and became known as an ‘owl’. Eventually, however, the temptation for rulers to portray themselves on the coinage proved irresistible. The first monarch of this era to decide that coins would look better if adorned with his face was Alexander the Great who, by around the third century BCE, had conquered most of the known world and felt entitled to lord it over its money as well.

When in Rome

A couple of centuries later the Romans too took up the idea of making coins. They also introduced some of our modern terminology. One of the first places they used to manufacture coins was near a temple located on the Capitol, the citadel of Rome. The goddess occupying that temple was Juno Moneta, from whom are derived the words ‘money’ and the place where coins are made, the ‘mint’. Juno’s function as a goddess, appropriately enough for this risky item, was the ‘one who warns’.

In Rome the basic unit of currency was the bronze coin, the ‘as’, which was literally the value of an ass. The principal silver coin was named the denarius, which in 212 BCE could buy 10 asses. The Romans also gave an early indication of the power of money, or at least the power of money backed by brute force. As they crushed other regimes across Europe they grabbed most of the local precious metals. In 167 BCE, when the Romans defeated the kingdom of Macedon, for example, they marched off with a cool 324,000 kilograms of silver, equivalent to 75 million denarii. In this way they cornered most of the available silver and ensured that the denarius would become the major currency in the western Mediterranean.

In Europe nowadays, if you dig up ancient coins, the chances are they will be Roman. This is because, in the second and third century BCE, the Romans minted many millions of them. However, since even they could not seize sufficient precious metal to make these coins, they steadily reduced the silver content. In the mid-260s CE in Britain, which the Romans had conquered, they replaced the denarius with the ‘radiate’, which by then was down to just 0.5 per cent silver. This did not prove very popular. Britons and others started to turn their noses up at coins whose value was set by imperial decree and reverted to weighing out precious metal. Indeed, following the collapse of the Roman Empire, most of the barbarian kingdoms wisely stuck to gold.

The seventh century saw the emergence of the first Muslim communities – spreading out from Mecca, one of the principal trading cities of Arabia, to establish a caliphate that would eventually extend from what is now Afghanistan right across to Spain. They too started to use coins. The prophet Muhammad himself was generally uneasy about money and is supposed to have said ‘money puts my community to the test’. But his victorious followers found it easier to go with the financial flow, and generally absorbed the monetary systems of the countries they conquered, though carefully replacing any Christian crosses with Islamic symbols that varied according to the religious orientation of the ruler, Sunni or Shi’a. Initially they used gold, largely from Africa, but later switched to silver. By the 11th century in Egypt, one dinar, derived from the Latin ‘denarius aureus’, could pay for a servant for a month, or buy around 100 kilograms of wheat.

China’s ‘little brothers’

Coins were also appearing on the other side of the world. In China at around the same time, when the kings were trading they sometimes used various commodities, including grain or cloth or knives or spades. But gradually they too started to adopt forms of token payment through coins. At first they felt more comfortable if these actually looked like miniature spades or knives. But eventually they found it easier to make metal disks. Distinctively, they punched a square hole in the middle, to make the coins easier to carry in bulk by passing a string through the hole. The Chinese are also fervent believers in the power of luck and some of their coins, particularly during the 10th century, were considered very auspicious and were known as ‘little brothers’. Across Asia you can still buy these, and their multiple successors and copies, as amulets or temple souvenirs.

Unlike European rulers, the Chinese royals and nobles resisted the temptation to put their own faces on the coins. Indeed it would not be until 1912 that the first Chinese face appeared – that of Sun Yat-sen, president of the newly formed Republic of China. China also originated paper money. But it seemed in no hurry to do so. Having invented paper around 100 CE the Chinese did not produce their first paper money until 1,000 years or so later, during the Song dynasty. This was a matter of convenience. At that point, China was divided up into many regions, each of which used its own currency, often in the form of low-value iron coins. Moreover, some regions forbade the export of coins. Itinerant merchants found this very awkward, and so started to buy goods not with coins, but with ‘exchange notes’, a kind of IOU which promised to pay the bearer the appropriate amount of cash or gold at a later date in a more convenient place. If the buying merchant who wrote the note had a good reputation, then that note, before it expired, was as good as gold.

Later, Chinese rulers latched on to this innovation and started to issue such notes themselves. But they did not put any time limit, and offered the more general promise to the bearers that they could exchange the notes at the mint for gold or silver or, if preferred, less-tattered notes. By the time of the Mongol Yuan dynasty, from the 13th century, the government permitted only paper money. When the Venetian merchant Marco Polo arrived in 1275, he discovered that China, as so often, was some way ahead of the rest of the world.

Pounds to pesos to dollars

London, by contrast, in the first millennium CE was still in the numismatic dark ages. Indeed, even coinage was rare until the eighth century when King Offa of Mercia issued the first silver penny. Subsequently some of the Saxon kingdoms started to issue silver coins, known as ‘sterlings’, of which they could turn out around 240 from a pound weight of silver. Hence the term a pound of sterlings, later abbreviated to a ‘pound sterling’. At this point most documents were written in Latin, in which the word for pound is ‘libra’, which is why the symbol for the pound is a crossed L, or £ in its more ornate form. Eventually, after the Normans conquered England, they developed an accounting system that also involved 240 pennies to the pound. This was to last, though with pennies made of copper, until 1971 when the UK decimalized the coinage, retaining the pound but dividing it instead into 100 pence – popularly, if inelegantly, abbreviated to ‘pee’.

Elsewhere in Europe there were the first stirrings of the almighty dollar. One origin was the St Joachim valley in what is now the Czech Republic, which had a number of silver mines. The German for valley is Tal and the coins produced there were often called thalers. This suffered many variations in spelling and pronunciation and, given the well-known gift for languages among English-speaking peoples, the thaler was often mispronounced as the dollar.

Other coins in continental Europe at this time included in Spain the ‘peso’ which is simply Spanish for ‘weight’. The prosaic peso does, however, have the distinction of having provoked an early example of global inflation. In 1544 the conquistadores who were trampling across South America came across in Potosí, in what is now Bolivia, a mountain which consisted largely of silver ore. For three or more centuries they excavated this treasure trove, delivering in all more than 62,000 metric tons of silver to Spain. This was an excellent result for the Spanish, who used this to pay off many of their debts. But it was less beneficial for the toiling Amerindian miners who dug out the ore, largely as slave labor. And it was also a mixed blessing for many other people back in continental Europe since, over the period 1500 to 1600 as the silver flowed across the Atlantic, prices rose fivefold. This was then transmitted to other countries. In England, for example, in the 200 years or so following the discovery of the Americas, prices rose three and a half times.⁵ If the citizens of Europe had not heard about the discovery of the New World in any other way, they would have felt the impact in their pockets.

The peso was also widely used in Britain’s American colonies. Here it became known as the Spanish milled thaler or dollar. So when the US designated its own currency in 1792 it also adopted the word dollar. But where did the $ sign come from? Surprisingly, its origins have been lost. One explanation is that it came from the standard abbreviation of the peso, a P, for which the plural was PS. If you just keep the vertical stroke of the P and superimpose the S on it you get the $. Quite so. On the other hand, the dollar sign often has two vertical strokes, prompting another explanation. The Spanish dollar had two vertical lines on the reverse to represent the Pillars of Hercules, and it is said that these lines eventually got transferred to the US dollar. Since no-one is entirely sure where the $ came from, feel free to invent your own explanation.

Finding funny money

Of course not everyone was trading with coins. A favorite observation of Europeans travelling to exotic parts was that these foreigners seemed to be using many odd things for money. Travellers venturing across Africa and the Pacific, for example, often ‘discovered’ people exchanging a wide variety of objects. One of the most common was salt. In 1520 a Portuguese visitor to what is now Ethiopia found people trading with blocks of salt ‘cut out of mountains’. English colonists in North America found the native people in Virginia using clam shells, while visitors to parts of India found local people using cowrie shells. Travellers to the Pacific encountered an even more diverse array of possibilities including teeth and, in one of the more arcane options, ‘the little feathers near the eye of fowls’.⁶

While these make for curious travellers’ tales they probably say more about the perceptions of the colonists than about the places they visited. For one thing, many of these countries had previously used coins: the kings of Ethiopia, for example, following Roman influences, had issued coins from the third to the seventh centuries. And India, following Greek patterns, had a long and sophisticated tradition of coinage from the fourth century, which by the 16th century had flowered into more than 300 types of rupya (Hindi for ‘silver coin’).

The predilection for spotting curious types of money resulted partly from the limitations of the new arrivals who, puzzled by complex cultures they could not understand, tended to reduce them to their own simple terms. In fact many of the exchanges they observed were concerned not with commerce but with religion or social customs or hierarchy. These might indeed involve a ritual exchange of cloth or shells but not as a commercial transaction.

One example is the Lele people in what is now the Democratic Republic of Congo who exchanged cloth woven from raffia. For centuries the Lele, under Belgian colonial rule, were all too familiar with the experience of laboring for Belgian francs. But they also had a wide variety of other circumstances in which, for the purposes of forging social ties, the only acceptable payment was cloth – for fees to traditional healers, for example, or fines for adultery, or as gifts to mark rites of passage.

In fact money is often strange, but not because of peculiar forms of currency. All over the world money has evolved and mutated. Nowadays it is a complex phenomenon, based on indirect forms of credit, and appearing and disappearing at the stroke of a pen – largely because of the invention of banking, which is the focus of the next chapter.

1 F Martin, Money, the unauthorized biography, The Bodley Head, London, 2013. 2 A Mitchell Innes, ‘What is Money?’ in Credit and State Theories of Money – The Contributions of A Mitchell Innes, Edward Elgar, Cheltenham, 2004. 3 C Eagleton and J Williams, Money: A history, British Museum Press, London, 2007. 4 J Cribb, Money: From Cowrie Shells to credit cards, British Museum Publications, London, 1986. 5 JK Galbraith, Money: Whence It came, Where It Went, Houghton Mifflin Company, Boston, 1975. 6 Eagleton and Williams, op cit.