How Money was Born

Investment Analysis Clubs Macro Economic Trends and Risks
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John Mauldin published one of his best Thoughts from the Frontline. It tells how money was born even if that was not the intention…

Ironically, these transactions were originally recorded on clay tablets, which were broken when the loan was repaid.

When a loan was made, money (the clay tablet) was created. When the load was paid off, money (the clay tablet) was destroyed. Later money was made more complicated using gold instead of clay so it would be a store of value but it was double counting, the loan and the intrinsic value of the gold. No wonder no one gets it any longer.

John Mauldin also mentions two of my favorite economic characters,

  • Frederic Bastiat - libertarian or Austrian school economist
  • Pierre-Joseph Proudhon - anarchist

More interesting for Economic Fools is the critique of Central Banks, how they created the mess we are in.

Ironically, these transactions were originally recorded on clay tablets, which were broken when the loan was repaid. But numerous surviving unbroken tablets recording unpaid loans give us an idea of their loan terms, which often made today’s credit card companies look generous.

This is likely obvious to you. It certainly is to me. Yet it clearly isn’t obvious to everyone, and particularly to some central bankers and their advisors. This leads to many of the problems I discuss in these letters.

Time Has a Price

The Propaganda of Free Credit

https://www.mauldineconomics.com/frontlinethoughts/time-has-…

The Captain

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When a loan was made, money (the clay tablet) was created

This aligns with what David Graber says in “Debt: The first 5000 years.” Unlike many stories that money rises from barter, Graber says the archeological record shows money came from debt. Debt is very old in human society. Before the rise of civilizations, people kept track of debt through oral means or documents that don’t survive in the archeological record such as wood or cloth. It’s a fascinating book, I don’t buy everything he says, but why read a book where I already know what the author is going to say?

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It’s a fascinating book, I don’t buy everything he says, but why read a book where I already know what the author is going to say?

I’ve been trying for decades to figure out what money is. I read books by renowned economists like John Kenneth Galbraith and Niall Ferguson and they were unable to provide the answer. On my own I came to the idea that money is a measure of the net value people have contributed to the economy, in other words, what the economy owes them, DEBT! Said in other terms, money is just an accounting system. So far so good but I could not make the connection between this theoretical money and currency, dollar bills, euros, yen and others.

Debt: The first 5000 years. to the rescue! It is the best book about money I have ever read and I got it for free. Amazon has the Kindle version. Before buying I get the free sample. This free sample seems to have all I’m interested in! spinning, I’m your debt for this incredible find! The first chapter about money lending is interesting but way too long winded. I skipped Chapter 2 about the Myth of Barter and dove into chapter 3, Primordial Debts.

Primordial Debts has let me make the connection between abstract money, currency, and the role of government which closes the circle. The problem with abstract money, the clay tablets of antiquity, is the lack of standards. Adam gave John three cows. Perfect but what are the cows worth. If Adam wants to use his clay IOU to buy sheep from Zach, this becomes a problem. Zach might not want cows to redeem the IOU.

Before standards the economy was not efficient. If you produced 100 hand made muskets, each one required custom made spare parts. If instead you made muskets from identical parts repairing them would be a lot simpler. Markets work best with standard contracts.

The issuance of currency by governments is what creates the money standard with the added benefit of it being legal tender meaning that at least the government will accept it to pay your taxes. That Central Banks abuse the power of the press is another story. Governments tend to be abusive.

The Captain

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way too long winded

He is pretty long winded. The book would be better if it was half as long.

The issuance of currency by governments is what creates the money standard with the added benefit of it being legal tender meaning that at least the government will accept it to pay your taxes.

I recall Graber argues that coins were first circulated by early empires to pay their soldiers. These were the first civilizations with armies that ranged over long distances and soldiers needed to buy food and stuff wherever they were posted. Empires paid the soldiers in coins which they could easily carry and exchange for goods wherever they went. I’m not sure I buy the connection between coins and conquest, but I don’t really have any reason to disbelieve it either. I would be interested in your thoughts.

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I recall Graber argues that coins were first circulated by early empires to pay their soldiers. These were the first civilizations with armies that ranged over long distances and soldiers needed to buy food and stuff wherever they were posted. Empires paid the soldiers in coins which they could easily carry and exchange for goods wherever they went. I’m not sure I buy the connection between coins and conquest, but I don’t really have any reason to disbelieve it either. I would be interested in your thoughts.

The thesis goes like this: Emperors could just pay their troops in gold, obtained from gold mines which the emperors probably controlled. So why bother to stamp the emperor’s face on it?

The reason is that if you require taxes be paid in gold coins with the emperors face on it, and the soldiers are paid in gold coins with the emperors face on it, then the citizens need to sell provisions the army needs, because they need gold coins with the emperors face so they can pay their taxes.

So by stamping the emperor’s face on a coin and issuing that as a currency, instead of just using an equal weight of gold, you solve the problem of how to provision your army.

FWIW, financing war is how the modern banking system was created as well.

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I recall Graber argues that coins were first circulated by early empires to pay their soldiers.

How early are 'early empires," 600 BC or 7000 BC? The first coins that we know about date from 600 BC.

The world’s first coins appeared around 600 BCE, jingling around in the pockets of the Lydians, a kingdom tied to ancient Greece and located in modern-day Turkey.

https://www.livescience.com/2058-profound-history-coins.html…

syke6’s thesis is interesting but I don’t think archeology would support it. The first cylinder seals appeared in the Late Neolithic Period c. 7600-6000 BCE to authenticate documents.

https://www.worldhistory.org/article/846/cylinder-seals-in-a…

My thesis runs like this. Complex systems have ‘emergent properties’ that arise from new uses of existing things, what Stuart Kauffman call ‘the adjacent possible.’ In human systems we call them ‘inventions.’ Long before we invented coins we invented cylinder seals to certify the origin and validity of documents. The problem with gold is that the ancients didn’t have a way to tell if gold was pure or not. Archimedes’ Eureka moment was his invention to detect whether a crown was pure gold or adulterated, he lived from 287 BC to 212 BC. The engravings on coins are to certify their authenticity. As best I know Legal tender originated much later, in the common era. It does not force people to pay taxes in legal tender. It forces government and the people to accept legal tender in payment of all debts, taxes included. The universal acceptance of currency is what gives coins value.

The Captain

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How early are 'early empires," 600 BC or 7000 BC?

The world’s first coins appeared around 600 BCE

That’s a really good point. I don’t remember the details and the book is no longer at my local public e-library, but Wikipedia says he’s talking about 800-600 BCE. So at least he gets the archeology right.

I’ve recently become addicted to youtube videos on early civilizations. 600 BCE is after the late bronze age collapse, which was around 1000 BCE. From around 3000 BCE to 1000 BCE Western Eurasia was filled with city-states and empires. Egypt, Hittites, Mycenaeans, Minoans, Ur, Babylon, and the mysterious Indus Valley Harappan Civilization where no evidence of armies has been found. Each would last varying lengths of time, one king, or maybe a dynasty, and then someone from a nearby city-state, maybe a vassal of the previous empire, perhaps a long-time rival, would take over. Borders shifted and cities were sacked. Through it all trade networks extended from the Indus Valley to England. Googling found one academic saying that Western Eurasia was “a vast marketplace made by private merchants”.

They left lot’s of written records. Sacked cities leave piles of junk with nice radio-isotope dates. Smart underpaid graduate students painstakingly sift through the junk and deduce what life was like. If they used coins we would have found them. How the heck did they run a continent-wide marketplace without coins?

Then the civilizations and trade networks collapsed. There seems to be disagreement about exactly what the collapse was, what caused it, how far they collapsed, what collapse even means, enough to keep a room full of archeologists happy as clams. Whatever it was, within a few decades most major cities in the Eastern Mediterranean were violently destroyed and abandoned. The “Sea Peoples”, whoever they are, seem to have been involved.

A few hundred years later empires regrew. Now they had iron which changed warfare and the business of empire. Those groups who most quickly adopted and mastered iron, and who most quickly figured out the logistics of empire, became the iron age emperors. They minted coins.

Why did Iron Age empires mint coins but Bronze Age empires didn’t? Was it just a massive blind spot and Bronze Agers never thought of them? Really? Emperor after emperor along with their accountants and bureaucracies, across the continent, for two thousand years, and no one thought of coins? Were there cultural reasons that made coins less acceptable than however they ran their coinless economies? Is there a something about the kind of empire armies wielding iron weapons can build that makes coins more useful than in the kind of empire armies wielding bronze weapons can build?

This is only Western Eurasia. China and Africa and the Americas have their own histories of empires and economics.

Thanks, Captain!

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Through it all trade networks extended from the Indus Valley to England. Googling found one academic saying that Western Eurasia was “a vast marketplace made by private merchants”.

Then the civilizations and trade networks collapsed. There seems to be disagreement about exactly what the collapse was, what caused it, how far they collapsed, what collapse even means, enough to keep a room full of archeologists happy as clams.

And people think globalization is a modern phenomena! :wink:

People think the supply disruption was caused by globalization and this is false. The problem was that excessive efficiency (just in time inventory/manufacturing) made the system fragile and a black swan triggered the collapse. The tension between efficiency and sturdiness is present in all economic systems. Each one of us experiences it in our portfolios. The collapse of the bronze age, the end of the then globalization, is most likely a black swan that triggered the collapse of a system that had become too efficient, too fragile. I doubt that archeologists are looking for signs of efficiency/fragility. What kind of physical traces would efficiency/fragility leave behind?

If they used coins we would have found them. How the heck did they run a continent-wide marketplace without coins?

Why did Iron Age empires mint coins but Bronze Age empires didn’t? Was it just a massive blind spot and Bronze Agers never thought of them?

Anything can be ‘money,’ cigarettes, animal pelts, sea shells, tobacco, giant stones, pretty bits of paper, clay tablets, coins, endorsable bank checks, bonds. The only requirement is that people accept it as money. The innovation brought about by government issued currency is standardization which I mentioned earlier. I’m pretty sure that the bronze age had various forms of currency in addition to clay tablets, not necessarily recognizable as such in archeological remains. Written records would be needed. It’s very hard to find things that you don’t know you are searching for. How familiar are archeologists with economic theory? Money is easy to use but a very difficult meme to understand.

This is only Western Eurasia. China and Africa and the Americas have their own histories of empires and economics.

If the stories are to be believed, the Conquistadors though gold was valuable while the Americans thought gold was just good for making jewelry. Money to the Conquistadors, a commodity to the Americans. Memes matter!

The Captain

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I once did a deep dive into the bronze age pre-collapse cultures and concluded that that the most likely “currencies” were copper (especially the “arsenical copper” of the Kopet Dag of northern Iran), tin, gold, and slaves… None of them were “money” so much as they were low volume high value entities that could reasonably be transferred in guarded convoys. Other trade items (grain, ceramics, textiles…) moved in less guarded forms, usually for shorter distances or by ships.

The bronze age is amazing both in its similarity to iron age cultures and its extremely huge differences.

david fb

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If the stories are to be believed, the Conquistadors though gold was valuable while the Americans thought gold was just good for making jewelry. Money to the Conquistadors, a commodity to the Americans. Memes matter!

The Captain

Yet it was silver that vaulted Spain to European leadership?

Why was silver so important to the Spanish Empire?

Spanish silver financed the expansion of the Roman Empire, supplying up to 200 tonnes of silver a year at peak production. These were the largest silver mines in the world, until the Spanish conquest of Central and South America. In 1545, Spanish conquistadors discovered the massive silver deposits of Potosi, in Bolivia.

https://www.gainesvillecoins.com/blog/history-of-silver

The History Of Silver: Timeline and Infographic

We were discussing streaming companies very recently, my personal fav is “Curiosity Stream”. An annual subscription is ~ US$20 and I can always find a wide variety of interesting stuff there.

Tim

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Thank you for recommending this post to our Best of feature.

I once did a deep dive into the bronze age pre-collapse cultures and concluded that that the most likely “currencies” were copper (especially the “arsenical copper” of the Kopet Dag of northern Iran), tin, gold, and slaves… None of them were “money” …

david fb

While spending some time in Malta during our 13 year sojourn in Europe wife and I took a boat ride to Gozo Island (where the archeologist claim the oldest copper mines in the world existed). There wasn’t a lot to see but the very old lady guide was a font of knowledge on the subject. The free standing buildings were made with very large rocks.

Tim

What is the history of Gozo?

Gozo was occupied by the Carthaginians, who raised a temple to Astarte on the islands. It was probably annexed by Rome around 218 BC and minted its own bronze coins in the 1st century BC.