The very best inventions solve the most fundamental problems, and money solves a problem so primitive that the original problem barely impinges on our consciousness anymore. Money creates a unit of measurement to compare incomparables. Swapping a goat for a pig seems like a reasonable barter, but how many ducks must be lined up before they are worth a dam? Money solves that particular problem by translating every good or service to figures that can be compared and managed.
The origin of specie
Any form of money has value for four reasons. Most primally, there is the intrinsic value of what goes into it. The metal in a coin, for example, or the salt that formed part of a Roman soldier’s pay (hence ‘salary’), or the rice used to pay samurai. Secondly, because an authority guarantees its legitimacy, by weighing and stamping the metal in each coin, or punishing forgers. Thirdly, it has value as a store of buying power that can be set aside for future use. Finally, it has value because its users ascribe worth to it and are willing to act based on their estimate of what that worth is. This last feature strongly defines the value of forms of capital beyond money – brands, for example – and is the reason why anything from cigarettes in prison to cowrie shells can evolve into a medium of exchange. (The cowrie, in particular, has a startlingly distinguished history. This minute sea-shell is the eponym of the Ghanaian cedi, the source of the Classical Chinese ideogram for ‘money’, and the idiomatic parallel to a ‘red cent’ in Hindi.)
In time, noble metals like silver and gold proved useful stores of value, remaining essentially unchanged through generations. Thieves might break through and steal as usual, but at least moth or rust could not consume them. These coins were only as valuable as the metal actually in them, the weighing guaranteed by being struck off the same die and stamped with the face of the sovereign, or in Islamic countries, a verse of the Qur’an.
The enormous stone discs (the Bank of Canada’s lobby in Ottawa has a seven-foot specimen) used as money in the Yap islands are an extreme example, but most commodity money was a hassle to carry, if not outright infeasible. Ten cubic inches of gold, about the size of a folded wallet, weighs around three kilograms, or one cat. In time, receipts made for stored quantities of these commodities began to be accepted as money, vastly improving its portability.
The Japanese of the Tokugawa period were an early example. Tokugawa Ieyasu forced the feudal lords of Japan, the daimyos, to house their families in Tokyo (then Edo) as a form of insurance against mutiny. Separated from their paddies in the countryside, the aristocrats of Japan needed a way to spend money in a country where rice was currency. Enterprising rice brokers set up warehouses in which the lords could deposit rice in exchange for scrips or receipts, which they could carry in lieu of rice and use as money. Thus the rice brokers separated the physical presence of a commodity from its value as currency. A sack of rice could quietly sit in Osaka while its scrip travelled from transaction to transaction across the country. It was now possible to carry and use quantities of money that would be unthinkable in rice.
Meanwhile, the Yuan dynasty in China had realised that the first of the four legs – intrinsic value – could be removed entirely. Kublai Khan’s administration issued paper money that had no commodity backing it at all. This money had value only by virtue of the emperor’s say-so and it performed every function that metal coins or bags of rice (or a receipt for a faraway store of said coins or rice) performed elsewhere. Europe adopted the idea of paper money after Marco Polo’s account of its use in China, but the subtlety of it being established by fiat rather than being backed by a metal was lost along the way.
Following the Second World War, the Bretton Woods conference established the price of an American dollar in terms of gold ($35 was worth 1 oz. of gold) and other major currencies in terms of dollars, putting most of the world on a gold standard for around three decades. As European economies recovered, they needed to artificially suppress the values of their currencies to honour the exchange rate. West Germany left the Bretton Woods system and let its currency ‘float’, i.e. let the value of the Deutsche Mark be decided purely by market demand and supply. Other countries began demanding gold for their dollar reserves. Switzerland and France returned a quarter billion dollars between them, claiming over two hundred metric tons of gold in return. More dollars were owned by foreign countries than America could pay for in gold. A run on America’s gold was a distinct possibility. In response to this danger, the Nixon administration unilaterally converted the American dollar to fiat currency in August 1971, breaking Bretton Woods irrevocably. For the first time in recorded history, most money worldwide was fiat, not ultimately backed by gold or silver or salt or rice or anything that was useful in its own right. The most mundane of all considerations was now an abstraction, conjured purely from trust and consent.
Fiat currency has its advantages, but also its challenges. The government can print as many dollars (or pounds or yuan) as it would like, meaning that over time the total supply of money in the economy rises, devaluing the worth of one unit. A dollar bought more thirty years ago than it does today, and there were fewer dollars in the world then than there are now. This continuous increase in the money supply makes this loss of value, known as debasement, inevitable under fiat currency. Linking it to a finite resource like gold puts a natural floor on the value of one unit.
Returning to the example of the rice brokers, privately-issued currencies are common through history. Hong Kong’s dollar is issued by three separate banks, two of which are the private HSBC and Standard Chartered. Several cities and communities, including Toronto and Calgary, have experimented with local currencies to boost local business. Canadian Tire money and Steam tokens are also a form of currency. The difference between these and legal tender is that one, the government only accepts taxes and fines paid in legal tender, and two, merchants are within their rights to refuse payment in private currency, as much as they are within their rights to refuse payment in foreign currency.