Yesterday we
looked at how the shift to a cash economy accelerated the concentration of capital
ownership in the hands of the few people who had access to this relatively
scarce form of money. And make no
mistake: until the twentieth century, when governments began taking over
currencies and backing them with their own debt to control economic activity,
what most people think of as “money” (coin, banknotes, demand deposits, and
some time deposits) was not the vehicle by means of which most transactions
were carried out — and even then it was far from being the only form of money.
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| Bill of Lading, a negotiable form of money. |
As late as 1916 in
the United States, non-cash transactions accounted for more than 80% of
economic activity. Barter (yes, most
international trade is carried on in the form of barter, even today),
mortgages, bills of exchange, promissory notes, drafts, letters of credit, etc., etc., etc., — these were
the forms of money most people used.
Before the shift
to a cash economy, anyone who could produce a marketable good or service could
“create money” simply by entering into a contract to deliver a good or service
in the future for consideration received today, or receive a good or service
today by promising to deliver consideration in the future. Most people today, unfortunately, use the
latter exclusively for consumption purposes, “consumer credit,” and not to
acquire capital that will generate its own repayment.
Even more unfortunately,
most people with goods or services to sell prefer to receive consideration now
instead of in the future. Cash allowed
the “New Men” with gold and silver to pay for consumer and capital goods now.
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| Bill of Exchange, a form of money based on creditworthiness. |
This cut out
ordinary people who only had contracts for future delivery of goods and
services not yet produced to pay for existing consumer and capital goods. Access to the immediate means of carrying out
transactions became a monopoly of those whose wealth was in the form of cash,
to the disadvantage of those whose wealth was in the form of land or labor.
It also fueled
inflation, as people with only contracts for payment had to increase their
consideration, for example, to fifteen shillings worth of future goods and
services to pay for what someone with cash could obtain for ten shillings. If fifteen shillings in the future were
sufficient compensation for not having ten shillings in cash today, the
individual who offered fifteen shillings in the future would obtain what he
wanted . . . and drive up the price for everyone.
But wait, there’s
more!
All of what we
said above relates to the private sector.
What happens when government gets into the act?
There is only one
legitimate way for a government to obtain revenue: taxation. If tax revenues are not sufficient to meet
current needs, governments borrow, and repay the debt out of future tax
revenues.
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| Renaissance banks: more contracts than coins. |
With the shift to
a cash economy, and the need for cash to carry out transactions, banks were
reinvented. Before the invention of
cash, banks (although that’s not what they were called; the name came in during
the Renaissance when the shift to a cash economy seems to have started)
performed the essential function of serving as clearinghouses for and certifying
all the different types of money in the economy.
This was the case
for thousands of years before cash was invented. Most people think that documents surviving
from the ancient world are all great works of literature and treatises on the
arts and sciences, etc., etc.
No, they are financial documents and records. Daily life was impossible without them once
you got beyond a simple tribal culture, hence the reason Scribes attained such
an honored (and powerful) place in society, equal to that of blacksmiths, who
made the tools. The Medieval “Benefit of
the Clergy” was not so much because they were consecrated to God, but because
they had an essential skill for economic life: reading, writing, and drawing up
contracts.
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| Ancient Chinese Knife and Shirt trade tokens. |
Then along came
coined money, and governments realized they could pull a stunt. The first coins were all privately issued,
relying on trust in the word of the issuer that a lump of metal contained the
specified amount. (In the Orient, the
first “coins” were tokens, but still privately issued, and relying on trust in
the issuer.)
Because setting standards
and regulating weights and measures is considered a proper function of
government, governments naturally assumed the function of buying gold and
silver, forming the metal into “coins,” and stamping them to certify that they
were of the proper weight and fineness.
Minting coins,
however, costs money, so to cover the costs without having to take it out of
other tax revenues, governments started putting in less than the actual weight
and fineness of metal they certified.
They declared that the coins contained the full value of metal, anyway,
and promised to redeem the coin at full value, and booked the liability as a
profit.
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| Aureus of the Divine Augustus |
Putting less than
the actual value of metal into a coin is not, however, a profit, but a tax in
the amount of the shortage — and a very insidious tax, too. People very quickly figured out (for example)
that a drachm of silver in the form of a coin would not buy a full drachm weight
of silver from a refiner or dealer in silver.
The price level increased because the value of the money had been
lowered, and the government pocketed the proceeds of what amounted to an
illicit tax.
Since governments
always end up spending more money than they can raise in taxes, debasement of
the coinage was almost always resorted to in order to make up the
difference. Usually it proceeded fairly
slowly, and in some cases was very carefully avoided, e.g., the Roman Aureus, the standard gold coin of the Empire since
the time of Augustus Caesar, became the Solidus, then the Ducat, and is still
minted today in some countries to the same weight and fineness, .986 pure gold,
.1109 ounces (1/72 of a Roman pound).
Local Solidi might be debased, but not the imperial coin.
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| Debased Shilling (33-1/3% silver) of Henry VIII Tudor. |
The first ruler
in the West to use debasement as a matter of public policy instead of financial
desperation was Henry VIII Tudor, whose gargantuan appetites required enormous
sums of money . . . and reduced the fineness of English coinage to a low of .333 and of Irish coinage to .250. His need for cash did not
bring about the “Break with Rome,” but it did give him an excuse to seize what
it had taken the Church in England nearly a thousand years to accumulate . . .
and which Henry wasted in less than five.
Henry Tudor,
however, was still confined to debasing precious metal coinage. This limited the amount of damage he could
do, although at the time it seemed pretty bad, especially combined with all his
other innovations.
Since Henry’s
debasement was at the dawn of the shift to a cash economy, it didn’t really
affect too many people individually, relatively speaking. Private sector contracts simply shifted back
to being denominated in commodities instead of currency. The only people really hurt were merchants
engaged in international trade, and the minority with cash incomes — mostly
government workers and pensioners.
That, however,
was to change as the cash economy displaced more of the economy that depended
on other types of money.
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