Lesson 2 of the Money & Society MOOC: Lessons from History:

This lesson is narrated by co-author Matthew Slater. It can be used for non-commercial purposes if clearly stating:  Adapted from Bendell, J and M. Slater (2015) Money and Society, free course,

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file-577d5f273bd20The doomsday book. After conquering England in 1066 , William I commissioned this survey of his new realm. This enabled him to systematically exact a tribute from the English: which they continue to pay to this day?! 


This is lesson 2 of the Money and Society MOOC and my name is Matthew Slater. As we saw in lesson 1, monetary history is often mentioned when people discuss or debate contemporary currency or banking issues. Histories shape not only our view of the past but our sense of what exists at all, and what might come next. Given the financial crisis got more people asking questions about money, so financial history has become more popular. When introducing his TV series on the Ascent of Money, historian Niall Ferguson (2008) argued that financial history is, I quote “the essential backstory behind all history.” That’s quite a claim, resonating with the boldness of the claims made by monetary reformers about the importance of this subject for the future of humanity.

Before we start, lets remember that history is a highly subjective enterprise. Niall Ferguson’s TV series and associated book told a history of genius men with their networks of trust using the latest technologies and innovative ideas, to create new financial services thus becoming deservedly rich and powerful. His monetary history is one of bankers as charismatic entrepreneurs. Other well-known recent attempts to examine monetary history have been grounded in more social scientific theory. For instance, David Graeber’s history is based on anthropological study, and so views the history of money as the ebbs and flows of different means of regulating social relationships. The recent book by sociologist Nigel Dodd (2014) looks at the history of money through the eyes of social commentators and thus his is a history of human imagination, where people seek to advance society through better forms of money.

In this lesson we are not going to offer you a narrative of money’s development through time, but thread together several themes and mostly Western examples in approximately chronological order. We will invite you to consider what underlying drivers might be at work. So, as we go along, keep asking yourself, could there be an overarching explanation for how money has evolved?
Now lets do some history.


Ancient Mesopotamian Accounting


The symbol for beer, an upright jar with pointed base, appears three times on the tablet.

Some of the very earliest forms of money that we have physical record of today are clay tablets, from around 3000BCE. You can see on this cuniform tablet that the “writing” is in images, showing vats of beer and human heads eating from a bowl. Archaeologist Joan Oates asserts that “Writing was invented in Mesopotamia as a method of book-keeping. The earliest known texts are lists of livestock and agricultural equipment…from the city of Uruk c.3,100 bc. (Oates 1979, 15). She concludes “the invention of writing represented at first merely a technical advance in economic administration” (Oates 1979, 25).

Welsh Economist Glyn Davies, in his very useful A History of Money: From Ancient Times to the Present Day, tells us “Hundreds of thousands of cuneiform blocks have been unearthed by archaeologists in the various city sites along the Tigris and Euphrates, many of which were deposit receipts and monetary contracts, confirming the existence of simple banking operations as everyday affairs, common and widespread throughout Babylonia.” and “The banking operations of the temple and palace-based banks preceded coinage by well over a thousand years, and so did private banking houses by some hundreds of years.” (Davies, 2002).

There are records from seventh century BC about the ‘Grandsons of Egibi’ from the city of Babylon that show they carried out a very wide variety of business activities combined with their banking. They acted as pawnbrokers, gave loans against securities, and accepted a range of deposits.  Ancient Economic Historian Fritz Heichelheim tells us “Customers could have current accounts with them and could withdraw the whole or parts of certain deposits with cheques . . . Speculation and investment for secure income were combined in the business pattern of this bank” (Heichelheim, 1958)
So let us be clear that in money as in many other things, the ancients were more sophisticated than we may have assumed. Since at least the dawn of writing, money, credit and banking have been very much intertwined.

Oates, Joan (1979). Babylon
Davies, G. (2002). A History of Money. Cardiff: University of Wales Press. Pp 50-51
Heichelheim, F. M. (1958). An Ancient Economic History (Leiden) pp72


Rai stones of Yap

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  • Translucent limestone – valuable like gold?
  • Some religious significance
  • Valued according to the cost of production
  • Expensive to create
  • Consensus ownership

The islanders of Yap quarried these great translucent limestone disks from an island over 200 miles away. Small stones were used to pay for common commodities, while larger ones were used for dowries or compensation for deaths.
The value of the stones wasn’t quantified or uniform, but each stone had its own history. If someone had died while quarrying it. For example, it might be worth more because it had cost more, or because the story was more dramatic!
Occasionally a stone was “exchanged” when one tribe came to the aid of another, say for support against a rival tribe or in celebration of some event. But the stone would reside with the new tribe only until such time as aid of a similar value could be given in return. The stones, then, act as a memory of the contributions occurring between islanders. Anthropologists refer to this as a “gift economy,” where goods aren’t traded as much as they are given with the expectation of a comparable favour at some later date.
In one incident a stone never made it back to the island because it was thrown overboard to save the boat in a storm. The islanders agreed that the stone was still ‘valid’ and it remains in the economy to this day!
Each stones’s oral history told not only of its value, but also its ownership. This meant that the when heavy stones were transferred, they need not move at all, because the stone’s own story told who owned it.  JM Keynes found this aspect fascinating enough to write about in Volume II of his Treatise on Money (1930). Should we treat this as so unusual? Modern money hardly ever moves between banks, even though it might change ownership several times in a day.
Yap stones are very interesting to monetary historians. Some theorists have characterised them as fiat money, because they have no intrinsic value and no use in everyday life – but might that be culturally blind? In the west, the exchange value of gold is much greater than its value as a commodity, but many people would be offended if we said that gold was a mostly fiat currency!
Perhaps the Rai stones might be better compared to gold. After all they were acquired at great cost, appreciated for beauty, and used for the larger transactions in the community. Also a great deal of gold changes hands these days without ever leaving the vault. The ownership is not in the fact of possession, but in a story elaborated through laws and numbers.
Unlike a commodity, however, these stones cannot be consumed, and unlike a commodity the stones are not fungible, or exchangeable for one another or useful-in-themselves. The value of the stone reflects the effort and cost ALREADY invested in it, which also makes it sound like what we defined as ‘acknowledgement’ currency in lesson one.
J.M. Keynes, Treatise on Money (1930)
Basic description of Yap Rai and economic discussion
Yap Stones and the Myth of Fiat Money
Milton Friedman considers gold standard in light of Rai stones


The ‘other’ global currency

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Think: Given the global scope and long time over which Cowrie shells were used as money, why do you think they merit only a footnote in monetary history, compared to say, gold?

China started using these shells as money as early as 2000BCE and were used as money into the 20th century. The molluscs live mostly near the Maldives and were relatively scarce in far away China. Since the shells had no use beyond ornaments, and their value was not decreed by fiat, we would categorise these also as an acknowledgement currency.

Despite being subject to volatile levels of supply cowries have at times been a serious rival to coins. The use of cowries as money ranged from Africa through to India and China and into the New World. Cowrie shells have even been found in Anglo-Saxon graves. They were far from a perfect currency as the price varied very highly between different places and fortunes were made transporting them by the boatload. Eventually as happens easily with unmanaged acknowledgement currencies, inflation in many places made them impractical to use as a means of exchange.

The shells were often taken out of circulation by the rich, or used in burial but in the end they were too easy to acquire and too difficult to count in large numbers, and they gave way to other forms of money. Cowrie shells are really remarkable because they were current for over 3 millennia and used in many parts of the world. Given the global scope and long time over which Cowrie shells were used as money, why do you think they merit only a footnote in monetary history, compared to say, gold?

Paper: The Cowry Shell as Money, Colin Narbeth
Blog: Artifacts of wealth: patterns in the evolution of collectibles and money; Nick Szabo.


Origin of the myth of barter?

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With just these three examples, we see how ancient societies used accounts and agreements for monetary transactions, and objects both large and small. Do you remember in Lesson One we described the myth that money emerged to make barter more efficient? Some put the origin of this story to Adam Smith in the 18th Century.

Then in the 19th century, William Stanley Jevons wrote a popular book that reinforced this view. He gave an account of a famous naturalist who, when on his expeditions in the Malay Archipelago, found that in islands where there was no currency but much food, mealtimes were sometimes preceded by long periods of hard bargaining, and if the commodities offered by the explorers were not wanted then their whole party went without dinner. Davies said of him, “It was largely his great influence which helped to condition conventional economic thought for a century regarding the inconvenience of barter.” (2002, p14). Such anecdotes then entered popular culture. For instance, in 1940, Geoffrey Crowther, formerly editor of The Economist, insisted that money “needed the conscious reasoning power of Man to make the step from simple barter to money-accounting” (Crowther 1940, 15).

Despite this, by the 1960s,  monetary historians were challenging this view. “The picture drawn by economists about the inconvenience of barter in primitive communities is grossly exaggerated. It would seem that the assumption that money necessarily arose from the realisation of the inconveniences of barter, popular as it is among economists, needs careful re-examination” concluded Professor Einzig (1966, 353). Yet the myth of barter continued to grow and is even taught by some economists today!
Crowther, G. (1940). An Outline of Money (London).
Davies, G. (2002). A History of Money. Cardiff: University of Wales Press.
Paul Einzig (1966) Primitive Money, Oxford.


Colonial currency

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Antique Print of 1879 War South Africa Moodie Ladysmith Native Hut Tax.

British South African Company Hut Tokens

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When Europeans settled in Africa, usually to administer the resource extraction, they had to deal with the problem of de facto subjects who they considered lazy, and sometimes hostile. A common solution to this problem was the imposition of a tax on these natives. It had to be simple to calculate and so in many cases the colonisers simply levied a tax per hut, either in money, labour, grain, or stock.
Historian Narissa Ramdhani (1985) explains “The military governor of Sierra Leone, Colonel Frederic Carthew, had decreed that, to pay for the privilege of British administration, the inhabitants of the new Protectorate should be taxed on the size of their huts; the owner of a four-roomed hut would pay ten shillings a year, those with smaller huts would pay five shillings”
Often, a district was considered to be pacified only when the hut tax was collected. This was effective at enriching colonists and reminding the native population of their new role in their own land. When the tax was in money, the consequences were more profound. The tax demand, would have been the first money experience of many locals who weren’t using money, certainly not European money before that. To obtain the money to pay the taxes, they had to work for Europeans. The tax collector in Portuguese territories was therefore always followed by the labour recruiter! If they hadn’t got the money on taxation day, natives might be taken into slavery.
This is a stark example of how something so simple as a tax demand can be used not only to create demand for your currency, but to impoverish whole populations and bend them to your will.
Ramdhani, Narissa, Financing Colonial Rule: The Hut Tax System (1985)


First Fiat

New imageMuch of our understanding of ancient monetary history comes from coins which survive to the present day. By looking at their metal composition, judging dates and of course reading the inscriptions, much can be learned but much is also left to interpretation. Both Plato and Aristotle showed full comprehension of how and why fiat currency worked, and stressed that money shouldn’t be a commodity, subject to fluctuations in value, but should have a value fixed by the law.

Numismatist Alexander del Mar never tired of pointing out how his predecessors had completely misread history by failing to understand that many ancient coins, like notes today, deliberately had a face value way above their metallic value. Gold and silver had their monetary uses, but not within the states. They were often reserved for use between jurisdictions as gold has been used until modern times.

Stephen Zarlenga tells us about the system in Sparta, created in the 8th Century BC. He says: “The iron discs were purposely made useless for anything else by dipping them in vinegar while they were hot to make them brittle. The ‘intrinsic’ value of the pieces was purposely destroyed… In Sparta’s case it seems to have worked well for about 3 1/2 centuries during which time she became a premier Hellenic power. It was abandoned about 415 BC, after Sparta embarked on campaigns of foreign conquest and captured large amounts of gold and silver… Such a fiat system, based on law, was normally limited to domestic boundaries.” (Zarlenga 2001)

Sparta was a state which took away children from their mothers, trained boys for sacrifice and war, and sought genetic superiority. (Harpers, 2008) Today we might characterise such extreme submission of the individual to the state as fascism. However forceful the state though, it seems no force was required to persuade the Spartans to accept worthless coins in payment. We know this because these fiat coins preceded by 200 years (what we believe to be) the first precious metal coins, which were made of electrum in nearby Lydia. (Fleur de Coin)

A wealthy state could issue much commodity money, and have it stolen or seized in war, or depleted through the excessive purchase of luxury goods from abroad. But a state issuing fiat money took no such risks and furthermore had as much money as needed to keep everyone productive and serving the rulers of the state. Perhaps the fact that so many other cities adopted the model, including eventually Rome, was testimony to the model’s success.

Zarlenga, Stephen, The Lost Science of money (2001) pp31
Spartan philosophy by Scott Horton on Harpers’ Blog (2008)
Fleur de Coin,



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“…the Roman monetary system was a numerary one, and the numismatic relics which have so long been regarded by the learned world as copper coins, were essentially irredeemable notes stamped, (for lack of paper) on copper, and devised and designed to pass in exchanges for a much greater value than that of the material of which they were composed.”  Alexander Del Mar, cited in Zarlenga

Brutus issued the EID MAR silver denarius to remind his soldiers that they fought for the Roman Republic. The reverse of the coin bears the images of two daggers, between which is a liberty cap, an ancient symbol of freedom. The inscription reads EID MAR, meaning “the Ides of March.”

The ascent of Rome happened under a fiat money system. Del Mar drives the point home: “…the Roman monetary system was a numerary one, and the numismatic relics which have so long been regarded by the learned world as copper coins, were essentially irredeemable notes stamped, (for lack of paper) on copper, and devised and designed to pass in exchanges for a much greater value than that of the material of which they were composed.”

However that changed during the second Punic wars in the 3rd Century BCE. Carthage had silver money, and territories not entirely under Roman control would prefer Carthaginian silver money because it had value regardless of the outcome of the war. Also fiat money would have been easy to forge, or at least, if captured, it could have been spent against the interests of Rome. So around 200BCE Rome destroyed its old bronze coinage and minted precious metal instead.

Though fiat coinage continued to be used after the wars, Zarlenga explains: “Commodity money in Rome brought Rome’s monetary independence to an end… Once reduced to using a commodity weight to signfiy money, Rome would be on a never ending quest for precious metals – a great waste of resources and misdirection of energy. Even worse since these metals were concentrated in eastern hoards, this handed power over to the east.”

If you have time watch some of the film Money Masters on this topic.
Zarlenga, Stephen, The Lost Science of money (2001) Chapter 2



Cornering the market

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He made a whip from ropes and chased them all out of the temple, including the cattle and the sheep. He scattered the coins and overturned the tables of those who exchanged currency.  –  John 2v15

Think: Can you think of any examples of markets being cornered?

Commodity monies are the most easy to abuse for profit. Any commodity, in finite supply, can be cornered by well resourced middlemen collaborating for mutual benefit. By hoarding the commodity the price can be pushed up, and then by flooding the market the price can be pushed down. By knowing which way the market will go tomorrow, gains can be made through secondary speculation. Arguably, commodity markets are fair game, but some discontents argue that money is a common good because its value comes ultimately from all the productive people.


Tally sticks

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Optionally watch Chris Cook on the Kaiser report until 25:30. Now watch A History of the Knights Templar until 13:45
Tally sticks are a highly unusual form of credit money issued not only by the British monarch, but used widely throughout England for 500 years. A stick of wood was cut with notches at conventional intervals signifying a quantity of money, and then the stick was cloven in half. Nobles paying their taxes early would be given one half while the other half was stored in the treasury. The noble could then spend the tally stick as money, with all recipients knowing that the king would accept it in payment of taxes.
Tally sticks were NOT fiat currency; they did not circulate indefinitely.  Instead they represented a loan made to the king, interest free. When the stick was returned to the treasury and matched with its other side, it was technically invalidated as when a credit meets a debt, or when matter meets antimatter. Could this way of financing the crown have helped finance the rise of England as a naval power in the late middle ages?
Davies 2002, ibid


Templar banking network

New imageThe Templar seal conveys poverty, pilgrimage and brotherhood as two knights share a horse. This origin myth belied a hugely powerful network……..  Templar Commandery network circa 1300AD
Knights templar seal

The Knights Templar was a very powerful order of the Catholic church which arose after the first crusade and was dissolved two centuries later by a French king who was financially deeply indebted to them. The Templars official mission was to assist pilgrims to the holy land, but through donations, conquest, tax breaks and great PR, the order became an international business network, a formidable army and provided a range of financial services.

One of the financial services the Templars provided was international money transfer, which was only possible with such a network as theirs. This wasn’t very much about escorting bullion through bandit territories, but like Western Union, depositing in one office and picking up in another. Customers/pilgrims would be given travellers cheques with encrypted instructions to other ‘branches’ to pay out.

Pilgrims and merchants would benefit from the spending power of the currency, such as gold Florins, but without having to carry them.  Coins were heavy, and shipments of coins could take weeks and require large numbers of costly armed guards to prevent robbery, and even then, one had to trust the guards.

The day the order was officially shut down and its leaders in France arrested would become known as an infamously unlucky day – Friday 13th. This suggests to us that the collapse of the order had major ramifications on ordinary people. Was this loss only felt by the merchant and ruling classes or were the masses left out of pocket like a banking collapse now when vast paper wealth disappears?

People still needed banking. After the king of France dissolved the order, many analysts contend the knights went ‘underground’, and especially to the Alps, in areas now known as Switzerland, which later emerged as a banking centre.
What made the Templars such successful bankers is that they were a network with a high degree of internal trust. They had the ears of the most powerful people in Europe. And they were very good at keeping secrets.

Butler, Alan; Stephen Dafoe (1998). The Warriors and the Bankers: A History of the Knights Templar from 1307 to the present. Belleville: Templar Books. ISBN 0-9683567-2-9.
Sanello, Frank (2003). The Knights Templars: God’s Warriors, the Devil’s Bankers. Taylor Trade Publishing. pp. 207–208. ISBN 0-87833-302-9.


Bills of Exchange

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Interest influences the nature, function & impact of money & usury was discouraged by most religions. The Italian bankers, including the Bardi and Peruzzi, got around this in the 13th century, through the creation of Bills of Exchange, which became a private international money used by elites, including the merchants, nobility, monarchs and the catholic church. The banks issued more Bills of Exchange than the coins referred to, so they were effectively issuing their own currency, and this was more significant than charging interest through fees

The Christian ban on usury meant that in medieval Europe in the 12th century (1100s), much of the money lending was done by Jewish families, as their religion allowed them to lend to non-Jews. Some non-Jews also lent at interest, but were considered criminals by the church and authorities for doing so. So it was highly unusual for money lenders , Jew or Gentile, to gain social status or political power. Nonetheless, in the 13th and 14th centuries Italian bankers such as the Bardis and Peruzzis rose to great power, in league with the Catholic Church. But what were these banks actually doing and why wasn’t it usurious?

We suppose that they were managing payments between the king and the Pope and lending money to the king. In those days though, they didn’t call it lending. They had a workaround which worked very well between different countries because it involved a currency exchange and was widespread in Europe in the medieval period. A merchant needing to finance an export trade would promise to pay the bank in a foreign currency at a future date, and in return the bank would cover the cost of the original purchase. This agreement was written in a document called a ‘bill of exchange’.

Anthropologist Jack Weatherford defined it as “a written document ordering the payment of a certain amount of money to a certain person at a certain time and place“ (2009, p. 74). Very like a modern cheque, in fact. A bill of exchange could be transported by a relay of horse riders across Europe within a week, and could not be cashed by a robber. The fees of around 10% were therefore acceptable to a merchant (Weatherford, 2009). When the merchant sold the goods abroad, he would repay the foreign branch of the bank using the foreign currency, plus an agreed fee. Because this was a delayed currency transfer, not a loan, it was not usurious!

But all the condemnation of usury was arguably obscuring a larger danger. These bills of exchange needed no collateral to ‘back’ them; they were issued in unlimited quantities, and later, the law was changed to make them transferrable, so they were able to circulate as money. Weatherford explains “the bills of exchange themselves became money as they circulated to third, fourth and fifth parties in much the same way we accept paper money today” (2009, p. 77)

He explains “the miracle of banking deposits and loans” is that it transformed a physical Florin into dozens of promises of Florins, “that could be used by different individuals in different cities at the same time…  Everyone had more money; it was sheer magic” (2009, p76). They were so useful that “Large amounts of ‘fictitious’ bills were issued which were simply domestic deals masquerading as foreign currency exchanges” (Davies, 2002, p 157). Long before the invention of the printing press these family-owned banks became wealthy and respectable collecting fees for the social service of issuing money with the flick of a quill. By 1330 the Peruzzi bank had fifteen branches from the Middle East to London, and its own courier system. They were working with popes, the church, the nobility and civic institutions.

Weatherford, J (2009) The History of Money, Crown Publishing Group.
Davies (2002) ibid


Cosy with Catholicism

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  • The Italian Banks made deals with the Pope to collect money, and with Monarch’s such as Edward III, to fund for wars, from whom they extracted monopoly trade deals
  • The money-creation function of these banks was their main profit making activity, often overlooked by historians who assume a coin-based system in the Middle Ages
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The second main means of profit making by the Italian banks of the 14th century was the use of this money creating power to extract lucrative concessions and monopolies from monarchs. 19th century historian Edward Bond assessed that the Bardi and Peruzzi banks were collecting money for the Pope from every catholic across the Christian world. According to contracts signed by Pope John XXII in 1317, all the money from English churches was deposited with the Peruzzi and Bardi in London. The English monarchy, in return for receiving loans, gave the Bardis a near monopoly on selling English wool abroad. (Weatherford, 2009 p76) In the same year that the Knights Templar were disbanded in 1307, King Edward 1st granted a piece of land, Lombard Street, to his creditors from Lombardy and Tuscany, which today, is the heart of the City of London. The charging of interest was a small matter compared to these ways of making profit through trade, in which the Jews were banned from participating.
This international private money wasn’t used by the everyday person, but had a massive impact on policy and economy. The Lombard and Peruzzi banks were funding several wars at the same time, and eventually things unravelled. Edward III in England was sacking France but some say not repaying loans. France was being sacked and not repaying loans. The banks were providing specie to pay soldiers in Flanders and Florence and in 1343 they collapsed together – maybe the first example of financial contagion.
“The Bardi and Peruzzi had held so large a share of the commerce of Christendom, that upon their failing every other merchant was suspected and distrusted” wrote Giovanni Villani, a writer in the 14th century (cited in The Gentleman’s Magazine, 1840). Fortunately for the them, their private fortunes endured for several centuries after.
The Italians were not the first to issue Bills of Exchange, as there is evidence of them in China in the 8th century and from Arab merchants in the 10th century. The Italians, however, were able to take bills of exchange to a whole new level, making them a key form of international money, used by the powerful merchants, religious leaders and monarchs; they gave bankers huge influence over political affairs across a whole continent.
Many economic historians have said that credit issuance was not a key motive, practice and source of profit for bankers at the dawn of European banking but evidence may indicate otherwise; Professor of Economic History at the University of Cambridge, Michael Postan wrote in the 1950s that “there cannot be many topics in the history of the Middle Ages on which the evidence is as copious as on credit” (1954, p 63).

The Gentlemans Magazine (1840) The section Archaelogia vol XXVIII part II, in Volume 168, September.


Creditors to crowns

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 ‘Adoration of the Magi of 1475’ by Botticelli

Given the ongoing bad reputation of money lenders in society, we might wonder why this famous painting by Botticeli, portrays the son of a money lender as one of the Magi, adoring the infant Christ, along with the rest of his family, the Medicis of Florence. At that time, 1475, the Medici family had been ruling Florence for 40 years, and were probably the richest family in Europe.

The painting reflects the way the sons of money lenders had sought and attained respectability, nobility, and even royalty. 50 years after the collapse of the Lombardi banks, back street userer Giovanni de’ Medici founded the Medici Bank in Florence. In just one generation, that family had become the rulers of the city.

Contrary to some analyses (Ferguson, 2008), the Medici did not invent Bills of Exchange to mask interest payments, nor were they the first to have Europe-wide network which enabled more diverse lending and credit clearing. So we do not know what propelled the bank to power.

Medici relations with the Church were not as close in 15th century as the Bardis & Peruzzis had been in 14th. While the Medici ran the city, another banking family was closer to Pope Sixtus IV and they had conflicting business interests. They arranged to murder Lorenzo (the Magnificent) and his brother Guiliano (on the right of the painting with the long black hair) in a coup d’etat. But the attempt was botched and Guiliano was stabbed in the centre of Florence in front of thousands of witnesses while Lorenzo escaped. The Pazzi family was exiled, and Lorenzo continued to rule, concentrating on building political alliances.

When Medici Bank went bankrupt in 1497, its depositors were only able to recover one tenth of their money. The Medicis had their assets seized and were expelled from Florence. Historian Raymond Bogaert (1968) argued that the bust was a result of the boom fuelled by the growth of fractional reserve banking.  He notes that this practice was widespread and caused many economic crashes. Historian JH de Soto therefore notes a trend: “This same fate of failures affected all banks in Seville in the 15th century. Hence, the systematic failure of fractional-reserve private banks … is a fact of history” (cited in Davies, 2012).  Although the bank was not restored, Lorenzo’s statesmanship paid dividends to his descendants for many generations; two of his daughters became queens of France, his son became Pope Leo X, and restored the family’s position in Florence, and the son of his murdered brother became Pope Clement VII and decriminalised usuary.

Davies (2002) ibid
Ferguson (2008) ibid
Raymond De Roover (1963) The rise and decline of the Medici Bank 1397 – 1494, Beard books.
Raymond Bogaert (1968) Banques et banquiers dans les cités grecques, Sijthoff Publishers.
Weatherford, J (2009) The History of Money, Crown Publishing Group.
On the painting:

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14.  The Battle of San Romano. This victory of the Florentine army over the Sienese in 1432 would not have been possible without Florence’s compulsory bond purchases.

This Canadian propaganda shows how bonds were sold to citizens even in WWII. 

 Government bonds, or the buying of government debt obligations, have been key to the creation of money for at least the last 600 years. Bonds appeared as warring Italian city states sought to borrow specie money to pay their mercenary armies. Military spending in Florence rose from 50,000 florens at turn of 1400 to 5 million by 1427. To fund this, they didn’t just tax citizens but forced them to lend money to government – to buy bonds. The purchase was compulsory, but they would earn interest on these bonds and also buy and sell them in the market. It was a novel way of raising funds and helped Florence win its wars. (Ferguson, 2008).
These days governments sell (and redeem) bonds every month to make up the difference between what they collect in tax and what they spend. The risk of default is much lower than in the 15th Century and citizens usually only partake via their pension funds. Some argue that the US Confederates lost the civil war because they issued the wrong kind of bonds. European financiers wanted bonds that were redeemed in cotton, the Confederates’ main export. But when the port of New Orleans was lost, the Confederates could no longer export cotton, and were forced to to the banks to obtain money at high interest rates (Ferguson 2008).
Through the practice of fractional reserve, banks were able to buy bonds with their own bank notes that they issued themselves, i.e. claim cheques on gold issued well beyond the amount they actually stored in their vaults.  Therefore what originated as a means of concentrating citizen resources in the hands of the government, gradually became a means by which private banks were able to own government debt.
Niall Ferguson, 2008, Ascent of Money.


Clipping and Free Coinage

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When a currency has a legal value but also valuable metal content, unscrupulous people shave the edges of the coins, or even cut or clip them and sell the accumulated metal. This is called ‘coin clipping‘ and was a major problem in northern Europe in 17th Century.

Stephen Zarlenga reports that “London had hundreds of independent unregulated goldsmith/bankers. … [and] Coin clipping … appears to have been a primary activity of merchants in Northern Europe… In the mid 1690s the English coinage was again in dreadful condition, being clipped and about 50% underweight. On just one day, seven men were hanged and one woman burned at the stake for coin clipping.” (Zarlenga 2001)

Around the same time, a French engineer solved the problem of clipping by inventing a machine to ‘mill’ the edges of the coins so that clipped coins would be instantly recognisable. Though the English parliament approved it, this advance was resisted by ‘the moneyers‘, who had been made responsible for the coin supply by an act of Parliament. Naturally the engineer was disappointed, but he responded with a very interesting accusation. He accused London’s money profession not of the common crime of coin clipping, but of deliberately creating coins of different weights and then shipping the heavy ones to Holland where they were reminted. (Zarlenga 2001) He was saying that the biggest coin clippers were the private mints themselves. This reminds me of Bill Black’s book, “The best way to rob a bank is to own it”.

This illegal debasement of coinage has been a problem for monetary authorities throughout history. Those same authorities, however, do the same thing when they re-mint coins and reduce the precious metal content. Of course when the authorities themselves dilute the money supply with base metals this is not a crime but, seignurage. Historians who suppose that ‘sound’ money is valuable money, often attribute the fall of great powers to their abuse of seignurage, but this is too simplistic. If the legal value of the money is respected the metal value can be zero and the money will work just as well, at least domestically. Forgery of money is treated like theft, but an injection of ‘money’ can also be a boon for an economy whose government is not ensuring there is sufficient medium of exchange.

The Lost Science of Money, Stephen Zarlenga, 2001, pp266


Origin of central banking

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In the early 17th Century The Netherlands, prosperous through international trade, had created a new kind of bank – not a global payment network issuing bills of exchange as we seen, but a solution to the problem of the abused coinage system by using account-keeping. This had the side effect of making credit between account holders very easy to issue, and some scholars have linked this bank to the first ever credit bubble in history, Tulipmania.
William III was a prince from who had been handed the throne of England as a result of a protestant-led coup. When he needed money for a war with France A group of mostly Hugenot (dissident French) merchants set up the Bank of England to make that loan initially on normal commercial terms. The creation of the bank seems not to have been entirely above board. William Paterson, the founder of the bank, wrote “All this while, the very name of a bank or corporation was avoided, though the notion of both was intended.” And from Zarlenga we hear, “The Bank of England’s authorising legislation was quietly passed, as a rider to a tax bill on shipping tonnage”.
In The Money Masters, Bill Still the producer says, “The investors, whose names were never revealed, were supposed to put up, 1.2 million pounds in gold coin, but only 750K was ever received. Despite that, the bank was duly chartered.”
Only 2 years later, according to Austrian economist Murray Rothbard, “”the English government simply allowed the B of E to ‘suspend specie payment’ – that is, refuse to pay its contractual obligations of redeeming its notes in gold – yet to continue in operation, issuing notes and enforcing payments on its own debtors… The straits of the B of E were shown in an account submitted at the end of 1696, when its notes outstanding were 765,000 backed by only 36,000 in cash…the rest of the early history of the B of E was a shameful record of periodic suspension of specie payment, despite an ever-increasing set of special privileges conferred upon it by the British government.” (Rothbard, 2008)
Privileges like a monopoly on lending to the government were extraordinary given the government’s ability to secure all debt by its ability to levy tax. And having no competitors meant they could set their own terms for lending.
The Bank of England has been the model for all subsequent central banks. German monetary theorist Heinrich Ritterhausen described a sequence by which the production of money becomes privatised through central banks: (Quoted in Money and Sustainability)
• In exchange for financing a war, a private bank receives the exclusive licence to issue paper notes, thereby becoming a central bank. • Government tax offices accept these paper notes for tax payments in addition to metallic money. • The central bank becomes a source of credit
• An emergency occurs – usually another war, or major political crisis – and a shift of power takes place between the government and the bank • More paper money is issued than there are metallic reserves. To avoid a run on the bank, the convertability to metallic money is legally abolished and the acceptance of the notes becomes compulsory • The paper money becomes the only measure of value
So though the Bank of England is to some an epitome of a respectable, conservative and non-partisan organisation, critics say it was founded by a foreign interloper, with the help of foreign merchants, and has been leeching from its host nation ever since. Similar well documented nefarious activities, people and motives surround the creation of the Federal Reserve bank in the USA, which was designed in secret by bankers, rejected by congress, and then passed on Christmas eve when nobody was sitting. But that is another story.
Students should remember that the form and function of central banking has changed over time. For a good overview of the role of modern central banks in money creation, please refer to the book ‘Where does money come from”, which was further reading in lesson 1.
Saxe bannister, The writings of William Paterson
Christopher Hollis, The Two Nations (1935)
Rothbard, Murray (2008). The mystery of Banking 2nd Edition pp 180
French, Doug (2006). “The Dutch Monetary Environment During Tulipmania”. Quarterly Journal of Austrian Economics 9
Money and Sustainability: The Missing Link Chapter VI, The Institutional Framework of Power pp124, Lietaer et al.
Ritterhausen, Die Zentralenbank (1962) pp18-19
The Lost Science of Money, Zarlenga pp301
The Creature from Jekyll Island, G Edward Griffin, 1994


Banking and War

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The exact role of banks in war, and the responsibility they bear for it deserves much more attention by students of peace, and we can devote only one slide to it here.

In 1803, Napoleon now confident in his position as Emperor of France, set out with unprecedented popular support to liberate the rest of Europe from the tyranny of their monarchies. Napoleon was able to sell most of the American midwest to the United States in 1803 to pay for his military adventures. The monarchs of Europe turned from their family squabbles and starting working together to save all their heads from rolling.

The celebrity historian Niall Ferguson (2008) explained how Nathan Rothschild profited from the Napoleonic Wars, which were fought between the British and the French. First, Nathan Rothschild backed the English Duke of Wellington by buying British bonds to fund the war. Second, he gathered masses of gold from across Europe to sell to Wellington so he could pay a multinational mercenary army, who didn’t want British pounds or bank issued notes.

Due to having a fast courier service in place, the Rothschilds in London had 2-days’ notice ahead of the British government learning that the battle of Waterloo was won. On the one hand this meant the war ended sooner than anticipated and the Rothschild bank was left with lot of gold to spend quickly as its price would soon decline. On the other hand, they knew before the rest of the market that the British bonds would rise, and so bought them at a cheaper price for two days and sold a year later for a massive profit. Ferguson focuses on the risk that the Rothschild’s took. That assumes the Rothschild’s had something to lose from “lending” to Wellington, yet they created the currency in the process of lending, and if the army lost it wouldnt have absolved the British government’s debt, so it is unclear how much they actually risked.

A more important issue is to consider the extent to which Wellington’s war would have been possible without a large bank like the Rothschilds. Other funding options would have required taxes on the British population, or conscription, and thus depended on the will of the people rather than an act of parliament, a banker and mercenaries.

To profit many times over from a war which was already happening might raise no ethical qualms, even if you happen to have a virtual monopoly throughout Europe, but there are questions about whether the role of finance in war is simply supplying a demand created by belligerent governments. From a purely business perspective, when a bank makes a loan, its balance sheet expands (because of the collateral offered) – which is what every business seeks to do. If banks were to actually pursue, lobby for, encourage, abet or support opportunities for conflict, though not illegal it might be considered anti-social or immoral. Napoleon is alleged to have said:  ”Money has no motherland; financiers are without patriotism and without decency.” which would explain his reluctance to deal with them

John Ruskin in 19th Century asserted that financiers seek war; in Unto This Last, he wrote “…all unjust war is supportable, if not by pillage of the enemy, only by loans from capitalists, these loans are repaid by subsequent taxation of the people, who appear to have no will in the matter, the capitalists’ will being the primary root of the war…” (quoted in Bendell, 2014).

In the 1930s US General Smedley Butler after blowing the whistle on an attempted fascist coup d’etat against Roosevelt, toured the country with a speech and wrote a book called “War is a Racket”. Speaking from personal experience, he went further than Ruskin, asserting that the war – at least the US engagements he had been a part of, was instigated by banks and for banks.
Bendell 2014 Healing Capitalism, Greenleaf.
Niall Ferguson, 2008, Ascent of Money. Now watch War is a racket


Unacknowledged Power

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Wadesdon Manor in Buckinghamshire, UK, built from 1874 for Baron Ferdinand de Rothschild and donated to the National Trust in 1957, and is now overseen by a Rothschild charitable trust.

We can see some common threads in the powerful banking networks we’ve looked at so far: • There was a strong trust between the members of different branches; not a kind of trust that be built within business relations, but only through religious vows, blood, or marriage. A kind of trust that means when one makes a promise, another keeps it. A kind of trust, we would venture, that means many things don’t need to be written down, and a kind of trust that means the network will rally around when their interests are threatened.
• Bankers had access to the most powerful people – more than access, they had the ability to set the terms of loans, and to deny loans. • These well connected people were communicating the politics of the day with each other through a private courier network. In an era when governments were suspicious of each other, and information was scarce, there would have been plenty of opportunities for collusion and sharing insider knowledge.

In the 19th Century there were many testimonies and claims that the Rothschild wealth exceeded that of royalty, as did, perhaps, their political power.
Whereas some focus on the role of specific banking families, the more general question is to what extent the people and institutions which create and sell credit to governments, have been influencing policy behind the scenes, in order to look after their own interests or pursue undeclared political, or ideological agendas.

Evidence from China shows that many monetary technologies, arrangements and dilemmas were experienced there in advance of Europe. China’s tool-coins were in general use at the end of the second millennium BC. (Davies, 2002, p 58) Bank notes were in use at least 500 years before Europe (Davies, 2002, p 58). Historian Glyn Davies notes that “In contrast to the development of coinage in and around the Mediterranean where the precious metals held the most important role, China concentrated almost exclusively on base metals for coinage” (Davies, 2002, pg 56).

China wasn’t insulated from what was happening in the rest of the world, especially the conquests in Latin America. In 16th century when Spain was using gold and silver for money, they discovered a great deal of those metals in South America, and recruited slaves to mine as much as possible, exporting it back to Spain but also to China.

The import of vast quantities of cheap New World silver into China “played an important part in the pace of China’s economic development . . . but ultimately proved to be a mixed blessing and did much to undermine the economic and political stability of the Ming Empire (1368-1644) during the last few decades of that dynasty’s existence” (Atwell 1982, 68).

Dr Atwell indicates that silver from Chinese domestic mines during much of the fifteenth and sixteenth centuries had declined so much that the annual total was exceeded by the silver carried in just one Spanish galleon from Acapulco to Manila. With a population of 100,000,000 the world’s most advanced economy had become dangerously dependent for its basic monetary supplies on imported silver. For as long as this source remained plentiful, Chinese commercial activity prospered, but eventually ‘the sharp decline in bullion imports (from about 1640) had disastrous consequences for the late Ming economy. Without sufficient supplies of silver, many people in China were unable to pay their taxes, or rents, repay loans, or in some cases even to buy food”. (Atwell 1982, 89).

All Atwell information from Davies, 2002, p 190.


Silver surplus

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In China, the South American silver caused a boom and when it stopped flowing, a bust. This implies that the new money created new employment and new creation of value. The experience of Spain though, was more inflationary, implying that the new money did not so much stimulate the economy, but merely redirected spending power to the silver importers.

Usually inflation is associated with fiat currencies because it is very easy for a government to issue too much money when it wants to accomplish more than it can through taxation, but it can happen with precious metal money too.

All this new money helped to finance the Crown through a period of expansion and conquest, but the influx of money had tragic consequences in the rest of the economy across Europe. As the new money was absorbed into the wider economy, prices increased 3-4 fold across Europe. Some commentators note that the poor were further impoverished by this influx of money.
Deflation is the opposite of inflation. At first glance it might appear a good thing that prices go down. But what usually drives prices down is that the economy is short of money, so it means lower employment, less access to money and less purchasing power overall.

In modern economies when money comes into existence through borrowing, inflation can always be constrained by increasing interest rates to disincentivise borrowing; but deflation is harder to constrain since the ideological foundations of modern money crumble when interest is at zero and below. This is one reason why economists think some inflation is a good idea, because it gives some wiggle room to adjust interest rates without going below zero.

Note that interest rates going below zero is not really the same as negative interest, or demurrage which we discuss elsewhere. We suspect that if there was a holding charge on money, the whole banking system would look very different.

Also note that inflation favours debtors while, deflation favours creditors. According to monetary historian Glyn Davies, the history of money can be seen as a struggle between these competing functions of money:
“…an unceasing conflict between the interest of debtors, who seek to enlarge the quantity of money and who seek busily to find acceptable substitutes, and the interest of creditors, who seek to maintain or increase the value of money by limiting its supply, by refusing substitutes or accepting them with great reluctance and generally trying in all sorts of ways to safeguard the quality of money.” (Davies, 2002)

To sum up, altering the quantity of money in relation to the size of the economy isn’t bad in itself, but does need to be managed with great responsibility. This tinkering necessarily involves a redistribution of value between people holding and people owing money; and it has psychological effects, such as creating boom/bust conditions.

Four Horsemen of American Gold and Silver Imports on Europe – 1499_1650.pdf
Davies, G. (2002). A History of Money. Cardiff: University of Wales Press. p30


Inflation & deflation

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Between the 16th and 18th centuries, as much as 300 tons of silver per year were stolen from Peru and Mexico. Prices increased 3-4 times across Europe.

This bullion never made it back to Spain and was recovered from the sea bed along with 40 tons of silver and gold.

Under certain circumstances inflation can become a positive feedback loop, and can spiral until the currency is destroyed and government and normal life becomes all but impossible.
The proximate causes of hyperinflation are easy to identify – the government spends vastly more than they can collect in taxes. Wheelbarrows full of banknotes and cascades of zero triplets issued as fiat by irresponsible governments, make compelling cautionary tales for metalists and banking apologists such as Niall Ferguson in the Ascent of Money (2008). But we think other cautionary tales could be inferred from a deeper look at history.

To finance the United States’ revolutionary war, the new Congress created a fiat currency called Continentals. They soon lost control of the value and hyperinflation ensued. A cautionary tale? Perhaps, but when this history is recounted by metalists they invariably forget to mention that the British enemy had a printing press on a ship moored in New York Harbor: “The British counterfeits (colonial currency) of continentals were excellent—so good, in fact, that in April 1777 the king’s counterfeiters ran an ad in a New York newspaper offering to sell their false currency to loyal subjects of the Crown at a rock-bottom price—the cost of the paper it was printed on,” explained Thomas Craughwell (2007)

It must have worked, because just a few years later the British are well documented as doing something very similar in their efforts to counter the French Revolution . Yes, the French government were issuing many, many Assignats, but it can’t have helped that “Seventeen manufacturing establishments were in full operation in London, with a force of four hundred men devoted to the production of false and forged Assignats.” (Dillaye 1877)
Not all hyperinflations though, took place in wartime, but that doesn’t mean that parties in other countries weren’t involved.

After WWI Germany was forced to pay reparations to the victors in gold, so the Weimar hyperinflation of 1921-23 happened while Germany’s gold reserves were already depleted.  Hjalmar Schacht, who became President of the German Reichsbank immediately after the hyper-inflation blamed clearly blamed ‘foreign speculators’. So divisive is the subject, however, that we can probably never know the full picture, but hearing the accusations from people in the thick of it is enough to make us question what we thought we knew!

The Serbian hyperinflation in 1993/94 resulted from international sanctions being imposed on Serbia after the international media heaped on them all the blame for atrocities in Bosnia.
But monetary manipulation of various kinds is happening every day for many reasons. Attacking a country by attempting to cause inflation is just one way that political rivalry is expressed in market economy. Even now all the major powers are manipulating their own currencies and accusing their enemies of manipulating theirs. Wall street is buying the world with dollar debt only it can issue. The oil price crash looks like an attack on the Russian Rouble. In our opinion, a hyperinflationary event is just a dramatic form of currency death in competitive international ‘free’ markets.

Nazi counterfeiting:
Assignats and Mandats, S.D. Dillaye 1877, pp33
Web of Debt, Ellen Brown, 2010
Thomas Craughwell (2007) Stealing Lincoln’s Body (Cambridge, Mass.: Belknap Press of Harvard University Press, 2007: pg. 33)


Hyperinflation and other hunger games

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The Weimar inflation of 1921-23 • During the Serbian hyperinflation 1993-94, famous national faces ceased to be used on the notes. It was rumoured that this note featured the daughter of the artist.

As we discussed in lesson 1, the choice of a currency’s commodity backing can have profound economic and political ramifications. The USA was for a while on a bimetallic standard in which both silver and gold were legal tender. This enabled a larger money supply than either one metal. The working class liked silver because being more abundant, it was much more available to them. Unfortunately, to make a bimetallic standard work, they had to fix the ratio of the price of gold to silver otherwise it would be possible using arbitrage to cheat the state which was guaranteeing the value of the coin. Zarlenga quotes W.A. Shaw’s The History of Currency 1252 to 1896: “Such is the nature of bimetallic law that any overshooting of the ratio no matter which side – in favour of silver or in favor of gold – establishes a differentiation, and the differentiation at once gives to the one metal a fulcrum or lever point – a purchasing power – against the other, and the undervalued metal, whichever it is, at once tends to disappear.“ , which is how the bimetallic era ended as the ratio changed on international markets.

Interestingly the presidential election of 1896 was fought largely on the basis of the metal standard. William Jennings Bryan’s Populist Free Silver campaign advocated a return to bimetalism, while McKinley was calling for ‘sound money’, (by which he meant gold). Many American voters had become engaged on the money question since a document called the Hazard Circular emerged. We don’t know if it was genuine, but the document purports to be a banking industry tract from the civil war three decades earlier, explaining how control of the money supply could be used to make USA a vassal of England. (File & Claw, 2014)
Jennings Bryan’s famous campaign speech, of which there is a very early phonograph recording, galvanised the public with its melodramatic conclusion: “If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us … the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”
Can you imagine such impassioned political rhetoric today on the subject of monetary science?
In the 18th and 19th Centuries, countries made up their own minds about connecting their currencies to gold, but as international trade increased in the 20th Century, countries found themselves competing with each other to get the most favourable exchange rates for exporters, world wars wracked nations’ economies simultaneously and countries gradually synchronised, as wonderfully detailed by Jim Rickards in his 2009 book Currency Wars. At the Bretton Woods conference which designed a new global financial system after WWII, all countries agreed to ‘peg’ their currencies (that means back them) to the dollar, which would be backed by gold held by the US; if that smells fishy to you, then you have a nose for this subject, but remember the US was calling all the shots at this moment in history, being the only solvent country. So everyone went back on the gold standard.
By the 1960s US though, was spending a lot of dollars abroad in wars, and some countries were cashing dollars in for gold – not a problem if every dollar was backed according to Bretton Woods. However the trickle became a flood, and eventually the US ‘suspended specie payment’. In 1971 President Nixon appeared on the telly and announced to the world that due to’ foreign speculators’ attacking the dollar the US would ‘temporarily’ stop redeeming gold, and that he would work to build a new global financial system. This transition from gold, to promises of gold, to paper reminds us of Ritterhausen’s central bank formula described earlier!
Over the next few years the global system of floating exchange rates that now we take for granted was put in place and the gold standard gave way to a fiat era. Arab oil producers were especially disappointed that their dollars were no longer backed. After the oil shock of 1973 the US quickly allied with the largest oil producer Saudi Arabia and arranged that oil would ever more be priced and sold in dollars, and that the ruling family would have exclusive US protection and military hardware. So despite no longer being backed, dollars were still needed all over the world to buy oil, and US was able to spend trillions of dollars abroad giving it enormous commercial, military and diplomatic advantages. This is called, colloquially, the petrodollar system, some people say the dollar is now ‘backed’ by oil, or that the world is now on a ‘dollar standard’.
Many current commentators view all the current US military engagements as efforts to prop up the dollar in the face of growing solidarity between the BRICs countries who are using dollars less and less.
Zarlenga, Stephen, The Lost Science of Money, (2002) pp 482
Rickards, James, Currency Wars (2009)
File & Claw 2014 The History of the Hazard Circular,


Gold and silver and oil standards

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 “If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us … the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”  ~ 1896 Presidential candidate William Jennings Bryan

“There is also a newly emerging alliance among Saudi Arabia, Israel, Egypt, and Russia. The new alignment will have no particular use for US dollars and no reason to support them. This turn of events marks the beginning of a significant diminution in the role of the dollar in the international monetary system.”  ~ Jim Rickards, author of The Death of Money

Now watch Radical Abundance: How we get past ‘Free’ until at least 5:00

Douglas Rushkoff is a media studies lecturer and author who, in the video you just saw was focused on the history of corporations and their role in society. He points out that the modern corporation was built using centralised, or state money which took over from the local currencies of the middle ages which were based on devaluing grain reciepts. But this is much simplified.

Grain money is recorded in antiquity, but the other ‘common tender’ monies used in the middle ages had the same property of devaluing over time.Commoners rarely got to see precious metals, and these other monies were made of much cheaper materials and issued by fiat, by feudal lords or religious, civic or commercial institutions. One example, used mostly in France, was the mereau, another popular in the Holy Roman Empire, was called the Bracteate.

The bracteate was the thinnest ‘coin’ in monetary history. Its value was by decree. When the lord issuing it died, the whole money supply would be reminted and the new money sold at a rate of 3 new to 4 old. This worked as a tax on money and, similar to negative interest, meant that a bracteate was worth more when spent than when hoarded, because it could lose 1/4 of its value at any time.

This would explain how societies we don’t usually think of as wealthy, because we think wealth is in metal, were able to finance massive cultural investments like cathedrals. And when money is spent, it leads to greater distribution of wealth and less social division.

So we now have a picture of a society with two very different kinds of currencies. Specie currencies were used by monarchs and nobles, for buying international luxury commodities and for waging war. And local currencies were used by commoners for every day items. When a king borrowed money, or when the country was broke this only refers to specie and promises of specie. It doesn’t mean people couldn’t eat like in a depression now, because ordinary people used abundant money which was issued as needed.

The money we have now, though quite different in nature, is nonetheless a descendent of the high level money, and popular money, ‘common tender’ seems to have vanished from history. Money now is regarded as a commodity, it is limited in supply, it increases in value over time, and thus it makes a poor medium of exchange. This is why Silvio Gesell needed to insist that the purpose of money was as an exchange media, designed to circulate, and hence that the store of value function should be performed by real commodities.

So when we say a two tier currency system, we mean a currency for the rich, and a currency for the poor. But another way to look at it is a currency for circulation and a relatively liquid commodity for international trade and value storage. When you think about ‘money’ which do you have more in mind, a medium of exchange, or store of value? Spending or saving? something worthless or something valuable?

The Lost Science of Money, Stephen Zarlenga, (2001)
People money, John Rogers, (2012)
Svensson, Roger,The Bracteate as Economic Idea and Monetary Instrument (2013)

23. Medieval two-tier economies

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New imageWhen you think about ‘money’ which do you have more in mind, a medium of exchange, or store of value? Spending or saving? something worthless or something valuable? Bracteates were one sided medieval coins. Their thinness made them cheap to produce and resistant to clipping. Now read this short passage from The Ecology of Money, section “Currency as a form of tax”

Two tier money systems can be a good idea economically but a secondary consequence is that they tend to separate social classes. Just because two currencies exist in parallel doesn’t mean we can move freely between them. The friction between currencies (such as exchange rate fees, price instability, and lack of liquidity or even capital controls) can be thought of as membranes around markets, or even barriers between them.


Leper colony money

“There was a Catholic church at the colony and the lepers would put coins into the collection basket. The nuns that keep the church and linens clean would also clean the coins in alcohol and then present them to the paymaster for U.S. currency on the colony payday.”

Leper Colony
Leper coin A
Leper coin B
 This leper colony in Panama had its own currency. It’s not clear whether the inmates did any work to earn coins, or what exchanges they facilitated, only that they were backed by $US and they could be donated to the church. (Celerier 2014)
But to us the most interesting part is that if a leper escaped with these coins, they would be worthless outside the colony. The currency was part of the wall around the colony. (Elaine 2016).  “Leper colony coins and tokens serve as stark reminders of a time when people with leprosy were denied their freedom and common human dignity.” (Marr, 2009)
Celerier, Luis R. Palo Seco, 2014
Elaine. Leper Colony Currency
Marr, Dennis. Leper Colony Coins, 2009.



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Worgl scrip, with seven 1% stamps

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Private US stamp scrip. Once it had 3 stickers it could be redeemed anytime before 1936. It does not say when stamps should be attached………
Now watch The essence of money (7 mins)

During the early 1930s many towns in Germany, Austria and USA issued their own local ‘scrip’ currencies. Scrip just means a substitute for legal tender, which would be literally in short supply in a depression

One celebrated town in Austria, Worgl used a design called stamp scrip, created by heterodox economist Silvio Gesell, in which the notes are only valid if this month’s stamp is affixed, the cost being a couple of pennies on each Schilling. Just like the bracteates, holders of the notes had more incentive to spend than to save, but the mechanism was different; instead of losing value over time, or being invalidated and recalled, this could be thought of as a maintenance charge, or a ‘tax on money’. For the short period that it worked, Worgl experienced full employment and lots of infrastructure improvements. 170 different towns and villages were considering adopting the model.

Many models were used in the US but the American economist Irving Fisher preferred another version of the stamp scrip had notes issued for free, and a 3c stamp affixed on each transaction. Rather than increasing the velocity this enabled a note to be redeemed for a dollar after 36 transactions, having been fully paid for, including 8 cents admin costs.

The soundness of stamp script was attested to by no less than 20th Century’s most influential economist JM Keynes in his ‘General Theory of Employment, Interest and Money’.
Governments on both sides of the Atlantic struggled with the depression, which you will recall is a shortage of money, but neither chose to support this decentralised money issuance. US President Franklin D Roosevelt understood these ideas because he was listening to Irving Fisher, but he rolled out the ‘New Deal’ program which banned scrip currencies and instead injected Federal Reserve dollars into the economy. Over in Europe the Austrian Central Bank outlawed scrip and Worgl famously sank back into depression.

Locally issued money had worked in the local interest, but in the 1930s national money turned unemployed energy to national and nationalist concerns.

Fisher, Irving, Stamp Scrip (1933)
Keynes, JM, General Theory of Employment, Interest and Money (1936)


Private credit

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Bank Note Reporters that would print what various known notes were worth

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Dollar bills from the US between 1837 and 186

What if anybody could issue their own money? Wouldn’t it be chaos? How would you know if a currency was worth anything? Why wouldn’t charlatans run the show? In Elizabethan England, shortages of the coin of the realm led to common tradesmen issuing their own metallic tokens for hyper-local circulation (Akerman)

There are a few periods in history when this has happened. In the free banking period between the end of the 2nd Bank of the United States and the Civil war, there were some regulatory barriers to gaining the right to issue bank-notes, but after that, any bank was allowed to issue as many as it would promise to redeem in gold. Each bank could compete in the marketplace for customers by building up a trustworthy reputation.

Some free market ideologists think that a free market in monies would see the most trustworthy succeeding and thus ensure the system is honest; banks which overissued would be weeded out by bank runs and the system would find an equilibrium, like in nature.
The interesting thing about free banking is that each bank’s credit is effectively its own currency because there is no government guarantee on it. Each bank therefore issues and redeems its own notes against its own specie deposits. This can make things very complicated though, especially before computing. As the bank notes travelled farther from their issuing bank and hence farther from their redeemer, they would be discounted more and more heavily. Partly because the risk about far away banks was less well known but mostly because of the increasing difficulty of cashing them in. Directories had to be published regularly advising everybody how to discount the plethora of bank notes circulating around the country.

While some experiences across the world are remembered positively, the US experience yielded many horror stories. Zarlenga alleges: “The primary game of banking by many bankers of this period was not just to charge interest on the bank note money they printed, but it was actually to spend the bank-notes into circulation, appropriating property from the accumulated wealth of the community.“

Recently though, that history has been subject to revision. Here is Federal Reserve chairman Alan Greenspan: “Recent scholarship has demonstrated that free bank failures were not as common and resulting losses to noteholders were not as severe as earlier historians had claimed.” (Greenspan, 1998). Greenspan’s extreme deregulation of banking led directly to the crash of 2008, but could he really be blamed if his ideology was grounded in history?

Akerman, John Yonge, Tradesmen’s tokens current in London and its vicinity between the years 1648 and 1672
Zarlenga, Stephen, The Lost Science of Money, Chapter 16
Greenspan, Alan, speech to FR board, 1998,
Grignon, Paul, The essence of money
Pro free-banking video from
Note images from


Recurring banking crises

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 ‘Chase bank on Fire’ by Alex Schaefer

We have mentioned a few banking crisis in this lesson, starting with Friday 13th, and others involving the Bardis & Peruzzis, the Medicis, and briefly the 1929 crash and the depression of the 1930s, but recent history is replete with examples. According to IMF data there were 145 banking crises, 208 monetary crashes, and 72 sovereign debt crises between 1970 and 2010. These crises have hit more than ¾ of 180 IMF member countries, many of whom experienced them several times (Lietaer, 2012). Heterodox economist Bernard Lietaer argues that if a car had such a track record, you wouldn’t get in it! He says periodic crises are characteristic of the prevailing monetary system in which money is created as private debt by commercial banks. Certainly there seems to be no sign of the global economy stablilising as overall debt is increasing without the economic growth which would enable the maintenance of that debt.

You may have heard the expression that wealth ‘evaporates’ in these crisis, but what does that actually mean? Money can’t really evaporate but it can lose its purchasing power. Similarly debt-money vanishes when the principal of the loan is repaid if not replaced by new loans. But if money was wealth, then printing it could not lead to inflation. Wealth could be destroyed by aerial bombing, but in a banking crisis it is more likely transferred, and the question of who benefits from a banking crisis, and how, is not as explored as it could be. One study mentioned by the Positive Money (2014) campaign finds that the 375 billion pounds created by the bank of england through its quantitative easing programmes has mostely inflated the stock market, making the richest 5% of people in britain an average 128,000 pounds richer.

In lesson 3 we look at some the consequences of this unstable system for society. In lesson 4 we briefly look at how people and countries have responded to banking crises, as one way of discovering alternatives. Could they be opportunities to rebuild the monetary system? Or does panic and poverty make coherent responses unlikely? Despite a lack of knowledge amongst politicians and regulators, how could different systems be created today?

Money and Sustainability, Lietaeret al, 2012 pp51
Positive Money 2014


Eras of specie & credit

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Before we conclude this lesson and set the assignment, we want to quote at length from anthropologist David Graeber, who offers a very pleasing theory of money connecting specie with conflict, and credit with peace.

“In the case of money, one event stands out above all others: the invention of coinage. Coinage appears to have arisen independently in three different places, almost simultaneously: on the Great Plain of northern China, in the Ganges river valley of northeast India, and in the lands surrounding the Aegean Sea, in each case, from circa 600BC. This wasn ‘t due to some sudden technological innovation: the technologies used in mak­ing the first coins were, in each case, entirely different. It was a social transformation. Why this happened in exactly this way is an historical mystery. But this much we know: for some reason, in Lydia [Greece], India, and China, local rulers decided that whatever longstanding credit systems had existed in their kingdoms were no longer adequate, and they began to issue tiny pieces of precious metals – metals that had previously been used largely in international commerce, in ingot form – and to encour­age their subjects to use them in day-to-day transactions.

From there, the innovation spread. For more than a thousand years, states everywhere started issuing their own coinage. But then, right around 6oo AD, about the time that slavery was disappearing, the whole trend was suddenly thrown into reverse. Cash dried up. Every­ where, there was a movement back to credit once again. If we look at Eurasian history over the course of the last five thou­sand years, what we see is a broad alternation between periods domi­nated by credit money and periods in which gold and silver come to dominate-that is, those during which at least a large share of transac­tions were conducted with pieces of valuable metal being passed from hand to hand.

Why? The single most important factor would appear to be war. Bullion predominates, above all, in periods of generalized violence.

There’s a very simple reason for that. Gold and silver coins are distin­guished from credit arrangements by one spectacular feature: they can be stolen. A debt is, by definition, a record, as well as a relation of trust. Someone accepting gold or silver in exchange for merchandise, on the other hand, need trust nothing more than the accuracy of the scales, the quality of the metal, and the likelihood that someone else will be willing to accept it. In a world where war and the threat of violence are everywhere-and this appears to have been an equally ac­curate description of Warring States China, Iron Age Greece, and pre­-Mauryan India – there are obvious advantages to making one’s trans­actions simple. This is all the more true when dealing with soldiers. On the one hand, soldiers tend to have access to a great deal of loot, much of which consists of gold and silver, and will always seek a way to trade it for the better things in life. On the other, a heavily armed itinerant soldier is the very definition of a poor credit risk.

The economists’ barter scenario might be absurd when applied to transactions between neighbours in the same small rural community, but when deal­ing with a transaction between the resident of such a community and a passing mercenary, it suddenly begins to make a great deal of sense. For much of human history, then, an ingot of gold of silver, stamped or not, has served the same role as the contemporary drug dealer’s suitcase full of unmarked bills: an object without a history, valuable because one knows it will be accepted in exchange for other goods just about anywhere, no questions asked.

As a result, while credit systems tend to dominate in periods of relative social peace, or across networks of trust (whether created by states or, in most periods, transnational institutions like merchant guilds or communities of faith), in periods characterized by widespread war and plunder, they tend to be replaced by precious metal. What’s more, while predatory lending goes on in every period of human history, the resulting debt crises ap­pear to have the most damaging effects at times when money is most easily convertible into cash.”
Graeber, David, 5000 years of Debt (2011) Chapter 8. Audio is here:, The First 5000 Years/5000-debt-08-Credit-Versus-Bullion,-And-the-Cycles-of-History.mp3



Can you detect any recurring themes in monetary history?

Develop your own theory on the main factor influencing monetary history, and turn this into a law (i.e. theory) enabling you to make predictions relevant to our current situation.

Provide examples from monetary history, using examples from this lesson, other sources if required, such as Glyn Davies book (PDF)

When you have formulated your law, and justified it from examples, write it up in no more than 500 words and post it in the forum, then comment on and vote up and down the laws of the other students.

We started the lesson by mentioning how some financial historians think that monetary history is the backstory for all history. If history is a story of different interests struggling for power over themselves and each other, then do you think monetary science is shedding light on that struggle?

In this lesson we have seen how often the faction that controls the medium of exchange has great power over the faction that uses it. This power is not forceful and thus not obvious to its victims. Rather it is the power of story. How might that insight give us fresh perspective on today? Could stories like ‘irresponsible borrowers’, ‘debt to society’. ‘irrational exuberance’, ‘efficiency’ and ‘recession’ divert the attention of the impoverished away from the paradigm and the policy makers towards blaming themselves for their situation?
If we understand money as a social construct, as we discussed in lesson 1, is technological advance particularly key to understanding how money has changed over time? If not, will it be the key issue going forward? What else might be important?
We don’t have the answers for you. In this lesson, we’ve sought to give you a broad overview of monetary history through the use of little vignettes. Sociologist Georg Simmel believed that monetary systems are not the conscious creation of political entities, but rather, they are the unintended product of social evolution. Yet what might the factors behind this evolution be? Could some be considered political? If we might venture a “monetary game theory” that can explain the effect of money on society, we suggest there are three parties to watch out for. The sovereign or government, which has the legal power of taxation, the merchants/bankers, who control the flow of resources (commodities and money) and everybody else – the value producing classes. Yet this is far from a theory of monetary history, or a “law” of key factors that shape the evolution of money.
From this lesson, and your own readings, can you detect any recurring themes in monetary history?

For the assignment, please develop your own theory on what is the main factor influencing monetary history, and then try to turn this into a “law” which will enable you to make predictions relevant to our current situation. You don’t need to include all factors you think are important and the ‘law’ you propose doesn’t have to apply in all situations. However, please provide examples from monetary history, either from this lesson, or other sources. We recommend you use an online version of Glyn Davies book as a resource to search for examples to explain or test your theory.

When you have formulated your law, and justified it from examples, post it in the forum and vote up and down the laws of the other students. Your reading for this lesson is therefore any of the links from these slides, or sections of Glyn Davies book, that you decide are relevant for you to develop a theory on monetary history.

After the forum, tune in to the webinar where we will discuss the assignments and discussions of both lessons 1 and 2. The date and time for webinar, and the link for joining, is listed on the MOOC website.

In building your own theory on monetary history, check your assumptions and sources. Just as we challenged the “myth of barter” there are numerous bogus quotations attributed to Nathan Rothschild, Josiah Stamp, and other figures in banking history, that have been used to argue particular views on financial history. Base your arguments on accurate sources wherever you can.


Further reading

Book: Davies, G (2002) The History of Money
Lavish documentary & Book: Ferguson, N (2008) The Ascent of Money, Penguin Books.
Radio series: Promises, promises, David Graeber
Audio from book: Graeber, David, 5000 years of Debt (2011) Chapter 8 (audiobook).
Book: Zarlenga, S (2002) The Lost Science of Money, a historical defense of government issued fiat money.
Book: Martin, F (2014) Money: The Unauthorized Biography.

There is still time to sign up to the related certificate, with 5 days in London. See:

Kindly remastered by Ken Royall. This lesson can be used for non-commercial purposes if clearly stating:  Adapted from Bendell, J and M. Slater (2015) Money and Society,  free course,


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