Updated: Jun 29
This article was originally published in Blockchain Industry Review - a Crypto Curry Club Magazine published monthly and available in soft copy and the printed version.
Written by Guest Contributor, Jilian Godsil
Editor In Chief and Founder of the publisher, BlockLeaders.io
Croesus, King of Lydia (now western Turkey) was rumoured to have descended from King Midas himself. A patron of artists, he is now more famous for inventing money, or sovereign currency ,to be precise. Before Croesus, no sovereign power had ever issued its own standardized currency or linked its value to a given weight of gold.
Of course, coins were in circulation. But in 564 B.C, Croesus issued a coin with
a very special feature: A promise of value underwritten by a King, or sovereign. Hence the term “sovereign currency” and the appearance – on coinage in monarchies like Britain and Spain – of the monarch’s head on the coin.
Look at a Sterling ten-pound note, and you will see the words “I promise to pay the bearer.” That promise - originated in the days when ten pounds sterling would actually have bought a significant amount of gold – gave the holders of currency the confidence that if they needed to, they could go to the King’s treasury and redeem their currency for gold. Gold, silver and bronze coins soon proliferated around the Mediterranean.
It is rumoured by some that Homer’s Odyssey and the story of Helen – the face that launched a thousand ships – was really an allegory for what happened next: Competing to creating new currencies, regional Kings and cities launched a thousand ships to mine gold, silver and copper and tin (both of which made bronze) to issue their own currency. The world’s first great age of monetary innovation had begun. And a system of regulating trade was created.
By acquiring a net influx of foreign currency– the ability to exchange it for gold led successful export economies to be able print more of their own currency. Correspondingly countries that were net importers would lose currency. With more currency in circulation, prices in an economy would tend to rise as there was more money chasing the same amount of goods.
With less currency in circulation the reverse would happen. Thus, a self-correcting system of balancing payments problems between nations was born. That standard – the gold standard – endured for over two thousand years and only ended in our lifetime when the dollar was cut loose from gold.
Now a new consumer economy backs money with something else: Confidence.
Confidence in the ability of a standard unit of money to command purchasing power over thousands of products and services that now constitute the real underlying value of an economy and its productive power. And when that productive power breaks down – as in war time – other substitutes have arisen: Cigarettes and Nylon stockings during wartime, for instance.
But we’re moving too fast. A thousand years or so after Croesus another monetary innovation occurred on the other side of the world when under the Tang Dynasty of China merchants enduring long journeys on the Silk road sought a way of avoiding carrying large bulky heavy bags of copper and silver coins.
The answer? A paper certificate in the Emperor’s name. This innovation greatly helped bring in an era of prosperity and flourishing trade that – for over a thousand years – made China the world’s largest economy. Some 1,300 years later, China is now pioneering financial innovation of a different kind, with its government embracing blockchain and cryptocurrency as official strategy in a way that echoes Croesus 2,500 years ago. Likewise, China’s economic hegemony may also be about to return.
But with money comes the ability to abuse money. In between Croesus and the Tang Dynasty and their inventions of new forms of money there arose an empire that would rule for a thousand years: The Roman empire. Where the Greeks invented money and the Chinese made it more efficient, the Romans created the first imperial economy in which money circulated widely and was produced on a large scale. Too large a scale by the third century.
Needing to pay restless troops an increasing amount of money to avoid assassination, Roman emperors of the third century BC found themselves having to print ever more of it. The rising tax burden on citizens – and ever-growing demands for increases in soldiers’ pay – became politically impossible for emperors to reconcile. At first Roman citizenship was extended to all non-slaves in the empire by emperor Caracalla, not as a democratic reform but as a way of increasing the number of taxpayers. But that didn’t work. So eventually, the Roman mints created more money by reducing the gold and silver content in coins issued.
For a while, it worked. But by the 280s AD, few had confidence in a Roman coin whose silver content was now a fraction of what it had been a century before. Barter returned and, under the reign of Diocletian, a sort of distributed ledger system was introduced to keep track of the relative values of goods in relation to each other. Necessary to enable to raise taxation in kind, this system was a kind of ancient blockchain which also enabled the restoration trade. After Diocletian, the system broke down and Constantine issued the “solidus”, a gold coin of impeccable integrity that re-established a trusted standard. Trouble is, it only benefited the rich (sound familiar?).
On and off and with interruptions due to war, famine and other crises, the Gold standard established by Constantine was replicated and sustained for over 1,600 years. By 1914 the gold standard was led by Britain, then the world’s greatest economic and political power. Taking the pound off the gold standard during war, Britain returned to gold in 1925 but made the error of returning at the earlier value. But the war had altered the balance of economic power. America, not Britain, was now top dog.
A British pound’s weight in gold was no longer, relative to the dollar, worth the British economy’s ability to produce goods and services. Low interest rates were a temporary sticking plaster. But that in turn led to overinvestment in other assets contributing to the 1929 crash. It was to take a world war to restore prosperity after the failed economic and political experiments of the 1930s.
That economic experts meeting after the war could do little better than rebuild Croesus old system – albeit with some significant improvements – was telling. At the Bretton Woods conference of 1946 economists like John Maynard Keynes created a system of fixed but monitored exchange rates backed – just as twenty-five centuries before under Croesus – by gold. But there was a difference: Relative shifts in productivity – such as those that arose in the First World War – were monitored to check that currencies were in sustainable relationships with gold and each other. Exchange controls were also introduced to ensure the system was not undermined by sudden shifts in wealth from one currency to another.
Under this well policed system war ravaged economies were transformed into the most prosperous and stable places on earth.
But war and politics were to disrupt events once more. The US of the 1960s was a very different place from that of the 1930s. A new generation had been given unprecedented expectations for prosperity and success. But by the 1960s America’s productivity and exporting prowess was in decline. And it was engaged in a costly war in Vietnam and a costly space race with the USSR. Under pressure to print money to finance election related spending, America found it could no longer sustain the dollar at fixed gold exchange rates and in 1971 the gold standard was abandoned forever. With it a golden age of sustainable post war expansion came to an end.
Worse was to come. With the gold standard and exchange controls abandoned there was no longer a break on money creation. From the North Star of gold, the world’s monetary compass was cast adrift resulting in something akin to what contributed so much to the decline of the Roman empire: printing money at a much faster rate than the economy was producing goods, resulting in rising prices, inflation, spiralling wage demands, declining productivity strikes and social discord.
Trade and prosperity were also affected as differing inflation rates caused exchange rates to fluctuate (investors moving money from high to low inflation currencies). The currencies of well-run economies – Germany, Switzerland, Japan – came out on top. A sharp correction – monetarism – occurred in the 1980s, followed by efforts to keep inflation and exchange rate fluctuations to a limit and, eventually, to create a common currency in Europe for the first time since the Roman empire, the Euro.
Now an exciting but dark and dangerous sea where computer technology, financial innovation and globalization were to defy any attempts at regulatory navigation. New forms of money – checking accounts and money market funds – supplemented hard cash. Computer technology not only increased the complexity of money but also the speed at it could be moved and used.
The Euro dollar market, for instance, was a market for investments denominated in US dollars but held abroad. King Croesus and the Romans simply had to ensure their coinage was being printed at a stable rate and with a stable content in precious metals. Modern sovereigns must keep track of a myriad of economic, financial and regulatory features of modern money.
St. Louis Federal Reserve Bank chairman Frederic Mishkin (Mishkin, 2010) described America’s financial regulation as “a crazy quilt of multiple regulatory agencies with overlapping jurisdictions”. The onset of Derivatives – Credit Default Swaps – were a key cause of the Global Financial Crisis.
The idea was that if a bank had taken on a risky loan and someone else was – for a price – willing to absorb that risk they could do a deal. A bank could enter into a Credit Default Swap contract and in exchange for paying a regular fee to a less risk averse party, receive a guarantee that if the repayments due to it on one of its loans went bad, they would be compensated for default. But unlike two traders in ancient Greece exchanging coins for olive oil, the traders of Credit Default Swaps had never met, lived in different jurisdictions and could not really judge the quality of each other’s merchandise or money.
Pouring investment into overpriced property investments – against a backdrop of low interest rates for safer investment in government bonds – global banks created a bubble that burst in 2008. Those low interest rates were a key cause of the problem. Thirty years before tough Fed chairman Paul Volcker, Fed rates rose in a virtuous battle with inflation during the late 1970s. But from the late 1980s and for two decades they fell significantly, driving up real estate prices in the process.
So, a combination of loose money and overly complex and poorly regulated derivatives created conditions for the world’s last financial crash. Bad economic policies and human stupidity (and greed) did the rest.
One particularly bad contributor was the fact that the US agencies tasked with guarding the standard of US mortgage securities – the Federal Home Loan Mortgage Corporation and Federal National Mortgage Association – were, like the Roman mint of old – doing a poor job before the last crash in keeping an eye on the “gold content” of the assets they were endorsing. The rest is history. Literally. an Central Bank economist.
It was French economist Frederic Bastiat who wrote that “With the exception only of the period of the gold standard practically all governments of history have used their exclusive power to issue money to defraud and plunder the people”.
Where are we now in this story? A very exciting place as it happens. Taking the initiative out of the hands of governments, the financial technology industry (FinTech) has created a myriad of cryptocurrencies whose underlying value is, essentially, the new value proposition of the information economy – data and networks of information. From a one dimension - coin and then paper, to two and three dimensional definitions of monetary value in the last 50 years we are now moving to incredibly complex multidimensional definitions of monetary value that correspond to an increasingly material and sophisticated world in which human appetite and desire – the ultimate bedrock of what money can do (if you want it you will work to acquire anything with the proven ability to buy it).
This journey is only beginning and is beyond the scope of this history.
But we should beware: As American writer Mark Twain warned, even if history doesn’t exactly repeat itself, it does rhyme. Whatever form money has taken, one iron law of monetary economics holds true: no economic system can endure for long an uncontrolled expansion in sovereign debt. Already expanding rapidly pre COVID, the COVID crisis is pushing more and more governments to borrow to fund their economies at the cost of future generations. As COVID reduces the productive power of those economies and the amount of the amount of debt increases, doubtless the next major turning point in the history of money won’t be far behind.
Marc Coleman is Founder Octavian Economics Policy & Public Affairs consultancy and author of the world’s first book on the COVID crisis “An Economic Response to COVID-19. He has authored several leading bestselling books on economic recovery and is a former senior manager with IBEC, Ireland’s largest business representative body, and a former Irish Times Economics Editor, Newstalk national radio presenter and European Central Bank economist.