Thursday, March 9, 2017

Good as Gold, IV: The Money Monopoly


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.
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.
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.
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.
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.
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.
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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