New Internationalist

The Story Of Money

Issue 306

The Story of Money. Background illustration: Mary Evans Picture Library.
The language of the market is buzzing with special terms -
often with quite similar meanings.

A cunning invention
Money is ingenious. Less cumbersome than barter, basically it is any medium of exchange a group of people agree to call money. The earliest known record of its use is around 2400 BC in Mesopotamia and Egypt. There are records of money in China and in the Aegean in the 7th century BC, and in 4th century BC India. It has usually emerged when a community has wanted to expand trade with others. But it has also proved useful for paying fines, taxes and levies – and, of course, rewarding labour.

A head for money
All sorts of things are used as money. Perhaps the most varied repertoire has been found in Micronesia and Melanesia, where feathers, cloth, teeth and stone, as well as the common cowry shell, feature. Sumatrans of the 15th century used human skulls, while Mexicans of that period favoured cocoa beans. Shells were widely used in India, North America and Africa, while up until the 19th century the Lele people of central Africa favoured cloth. The first people to start making coins from precious metals appear to have been the 7th century BC Lydians, who lived on the Asian coast of the Aegean. Gold, silver, copper and brass became the commonest currency, used by the Chinese, Greeks, Romans, Arabs and Indians. But paper money was already being used in China as early as the Song Dynasty of 960-1279.

Immoral income
Ethical qualms have probably always surrounded money. Aristotle despised and distrusted it. Both Jesus of Nazareth and the Prophet Mohammed were acutely aware of the social and moral damage that love of money and the hunger for accumulating it could do. Earning interest by lending money was prohibited in both religions, with some effect until the late Middle Ages. But such qualms ultimately gave way to pecuniary interest and international trade and banking flourished.

Spawning capitalism
The Spanish conquistadors could hardly believe the abundance of gold and silver they saw when they first arrived in the Americas in the late 15th century. First they got their hands on it by looting and kidnapping: King Atahualpa of the Incas was held to ransom by Francisco Pizarro in exchange for a room-full of gold. Then they moved on to exploiting the continent’s gold and silver deposits, mined by mainly indigenous slave labour under appalling conditions. The massive inflow of precious metals sent Europe into an inflationary spiral, with wages lagging behind prices. Entrepreneurs could make easy money, the poor became poorer, and capitalism was born.

John Law: banker, gambler, murderer
Banking flourished during the European Renaissance in port cities such as Antwerp, Amsterdam, Venice and Genoa. Modern banking, however, began with a Scots gambler named John Law, fleeing a murder charge in England to try his luck in France. He got the go-ahead from the French Regent, Philip Duc d’Orleans, to issue bank-notes in the form of loans against the security of the land of the country. The notes soon gained more credibility than hard coin, fortunes were made overnight and the word ‘millionaire’ entered the vocabulary. But too many were issued and Law fled France in 1720 leaving broken fortunes, falling prices, depressed business and an enduring suspicion of banking.

Making a mint in the colonies
Trade and colonialism had a profound effect on indigenous money systems in Africa, Asia and the Americas. With Portuguese, Dutch, French and British traders and settlers came Western-style money. Local precious metals were exploited and mints established. Sometimes indigenous currencies were manipulated too, as when European traders imported vast quantities of cowrie shells into West Africa from the Indian Ocean to trade for slaves. In 1835 the East India Company started minting the existing silver rupee and turned it into the standard coinage of India, while in China the First Opium War (1840-42) opened the way for foreign commercial banks issuing their own notes.

Revolutionary excesses
Revolutionaries are always short of funds and have often resorted to printing their own money. The American Revolution against British rule was financed by vast issues of ‘continental’ bills – to the tune of $240 million between 1775 and 1779. The Revolutionary Government in France did the same thing in 1789, and went on to finance the Revolutionary Wars with paper money. But lack of financial control led to overproduction and the notes plummeted to about 0.3% of their face value.

Smith, Marx and 'callous' cash
New ideas about money, society and the relationship between them, were sparked off by the Industrial Revolution. The two most important thinkers were Adam Smith (1723-90) and Karl Marx (1818-1883). Smith proposed that the wealth of a nation ought not to be measured in terms of money but in terms of its useful labour force. Marx also argued that ‘value’ resided in labour, but cash often triumphed. He and Engels wrote in the Communist Manifesto of 1848: ‘The bourgeoisie... has mercilessly torn apart the motley feudal bonds... and has left no other nexus between man and man [sic] than callous cash payment.’ Marx went further to attack the unequal distribution of wealth between worker, capitalist and landlord, arguing that it arose out of the capitalist system of production itself.

Inflating fascism
A big problem with money is the temptation to issue too much of it. The adoption of the Gold Standard by Western nations in 1876, however, linked money to gold reserves and provided a relatively fixed exchange-rate system. This collapsed with the outbreak of the First World War. After the war the victors imposed massive reparations on Germany, which responded by over-issuing money. The results were catastrophic. Goods worth 100 marks in 1913 cost 147,479 marks in 1922 and a staggering 75,570,000,000,000 marks in 1923! The conditions were ripe for the rise of fascism and were not helped by the 1929 Wall Street Crash in the US which caused depression, poverty and unemployment on an international scale.

Fragile world
The high costs of failing to develop rules for economic co-ordination were clear to all by 1944 when delegates from 44 countries met at Bretton Woods. They agreed to a new international money system of fixed, but adjustable, exchange rates. After a period of relative success, the Bretton Woods system came to an end in 1971 when US President Nixon terminated the guarantee to exchange one ounce of gold at $35. Many countries pegged their currencies to the US dollar or to other ‘strong’ currencies, while others floated their exchange rates independently. The result was international monetary instability, which has in part contributed to the current Third World debt crisis. As the world’s economy has become globalized, its international monetary system is increasingly fragile and unsustainable.

Text sources include Money: A History edited
by Jonathan Williams (British Museum Press).

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