A HISTORY OF MONEY Studium Generale WUR Wageningen, 30 October 2018 Joost Jonker University of Amsterdam/IISH Contents • Money, an introduction • Three phases • Conclusions Money, an introduction • Three requirements : • Stable value, relative scarcity, trust • To fulfill three functions : • Means of exchange, gauge of value, store of value Money, an introduction • Money a convention • Anything meeting requirements can serve as money if we agree on it : shells, dolphin teeth, squirrel pelts, coco beans, cigarettes... Money, an introduction • Trust lodged in : • The preciousness of the material • The social cohesion of a community • The power of rulers • Any two of these three Three phases, 1: commodity standards • From earliest times until 1914 • Oldest forms ingots of scarce metal: copper, bronze, gold, silver... Three phases, 1: commodity standards • Oldest forms scarce metal ingots : copper, bronze, gold, silver... • Coinage appears about 3,000 years ago • Stamped lumps of precious metal: electrum, silver, gold • Big coins, so small circulation Stater from Efesos, 6th-7th century BCE Stater from Miletos, 6th-7th century BCE Puranas, Karshapanas or Pana from India, 6th century BCE Three phases, 1: commodity standards • Oldest forms scarce metal ingots : copper, bronze, gold, silver... • Coinage appears about 3,000 years ago • Stamped lumps of precious metal: electrum, silver, gold • Big coins, small circulation • Coining seized as sovereign right : stamped with authority Roman gold aureus, 2nd Century CE Gold dinar, India, 6th Century CE Gold dinar minted at Damascus, 7th Century CE Three phases, 1: commodity standards • Advantages : • Coins worth their weight in metal • Fixed and recognizable value • Stable exchange rates between coins and countries Spanish silver dollar, 1797 British gold sovereign, 1817 Gold 10-guilder piece, Netherlands 1933 Three phases, 1: commodity standards • Drawbacks : • Cumbersome for both large and small transactions • Clipping and counterfeiting popular pastime Quinten Metsys, The money changer and his wife (1514) Three phases, 1: commodity standards • Drawbacks : • Cumbersome for large and small transactions • Clipping and counterfeiting popular pastime • Monetary policy impossible • Sovereigns untrustworty, always debase coins Three phases, 1: commodity standards • Solutions : • Technology (mint presses, ribbed sides, edge lettering) 10 stuiverstuk, Zeeland, 1613 10 stuiverstuk, Holland, 1761 Three phases, 1: commodity standards • Solutions : • Technology (mint presses, ribbed sides, edge lettering) • Parliamentary control over minting and money circulation • Central banks set up to manage currency • Licensed to issue paper money Chinese Jiaozi banknote, 11th Century BCE Swedish Riksbank note, 1666 Three phases, 1: commodity standards • First forms in China, 12th-13th century • Europe late 17th century • Based on trust in repayment : fiduciary money • Essentially a promise to pay backed by silver or gold Three phases, 2: fiduciary money • From 1914 until 1971 • First World War ends Gold Standard • Gold concentrated in central banks, no longer in circulation Three phases, 2: fiduciary money • Gradual acceptance of money as managed (Keynes) • Backing rests on trust in government • Economic mismanagement can wreck currencies Reichsmark note, July 1923 Zimbabwe dollar, 2008 Reichsmark note, October 1923 Three phases, 2: fiduciary money • Bretton Woods links Western currencies to gold via US dollar • Macro-monetary flexibility boosts post-war growth • Constraints on US economic policy ends system, 1971 Three phases, 3: fiat money • From 1971 until now • Money no longer backed by anything at all • Strong exchange fluctuations upset international economy • Monetary policy from technical management into political football • Efforts to reboot economy boost inflation everywhere Three phases, 3: fiat money • Governments from solution to key problem • Stable money depends on social and political balance • Calls for a return to gold • Suspicion against state inspires alternatives like bitcoin Conclusions • Money is a convention • Acceptance depends on ability to fulfill three functions • Fiat money culmination of 5,000 years evolution • Balance between parliament and independent central bank the best bet for stable currency Alternative currencies • A regular occurence throughout history : • Local scarcity of coin • Emergency situations Alternative currencies • Cryptocurrencies the newest manifestation : • A world currency • Circulating freely without governments or banks • Trust lodged in supposed power of abstract and diffuse community to check production and use Alternative currencies • Must meet at least two criteria to fulfill three functions : • Relative scarcity, stable value, trust • Means of exchange, gauge of value, store of value • So far, only relative scarcity possible Alternative currencies • Fallacies and drawbacks : • Abstract community diverse and unable to control • Growing use will dampen strong fluctuations • Ideal vehicle for thieves, speculators, and money launderers • Transactions still very slow and very expensive • Fools and their money... .