A massive reset of the global economic system is coming. It’s just a matter of time. Best case scenario – the American and global economies will continue to stagnate and putter along for another few years before the bottom drops out. Worst case scenario – the dominoes may already be falling and one morning soon the entire planet will wake up in a brave new world. Many experts from the financial sector are stunned that the American (and global) economies have made it this far without a massive meltdown. The big crash, they say, is already long overdue.
When the crash happens – and it will – most people will not understand why because they have little to no understanding of money, finance, and the economy. Inevitably when the time comes, politicians, pundits, and academics will stand before the masses and propose their solutions. Without a working knowledge of the corrupt and unsustainable monetary system that has just crashed, the average person will be ill-equipped to know the difference between a suitable replacement system and another nightmare waiting in the wings.
What follows is by no means a comprehensive or even a scholarly history. It is a broad overview for the layperson, not a white paper for an economic think tank.
In the more ancient epochs of human history the economy was agrarian based and there was no such thing as money or currency. Commerce and trade was conducted using a barter system. If Abraham needed a goat he would find someone who 1) had a goat and 2) was willing to trade the goat for another item of value. Abraham would go to Ishmael, who had the goat that he desired, and exchange it for say 10 of his own chickens. Like any system in a fallen world, this system was subject to corruption – more willful and aggressive citizens could take advantage of, dominate, and impose their will upon the more simple minded and less assertive. Additionally, the barter system was inefficient – if Abraham didn’t have any items that Ishmael needed then he would have to go and find someone else willing to trade their goat and begin the negotiations again. Alternatively, Abraham could go and trade for an item that he knew Ishmael wanted and return to make the desired exchange.
Medium of Exchange
To overcome the awkward nature of the barter system, societies agreed upon a medium of exchange to facilitate economic transactions. Investopedia defines a medium of exchange as:
…an intermediary instrument used to facilitate the sale, purchase or trade of goods between parties. For an instrument to function as a medium of exchange, it must represent a standard of value accepted by all parties.1
What the medium of exchange actually is really makes no difference – it is completely arbitrary. The important thing is that the item’s value is agreed upon and that society has confidence in the system. Some examples of objects used as a medium of exchange historically include beans, feathers, pieces of wood, shells, blankets, beads, fish, and cattle. An item like a cow was of course cumbersome and inefficient, which is an important observation.
Using an item as a medium of exchange that is inherently worth very little or nothing means that the entire economic system is a confidence game. If the people lose confidence in the item being exchanged or in the system itself the jig is up.
Currency vs. Money
Many people use the terms currency and money interchangeably – but they are not strictly speaking the same thing. The characteristics of currency are as follows:
- medium of exchange (agreed upon by all)
- unit of account (the value of an item is priced according to the currency)
- portable (easy to carry around – not cattle!)
- durable (not easily destroyed)
- divisible (various denominations, ability to make change)
- fungible (interchangeable, the currency of person A equals the currency of person B)
Money shares all of the characteristics of currency and has an additional attribute – it is a store of value over a long period of time2. Keep this in mind.
From Coins to Money
As many as 5,000 years ago the ancient Egyptians were the first to begin using gold and silver as the medium of exchange. Gold and silver coins were valuable, portable and durable but they lacked standardization. Egyptian coins were irregular in terms of size, shape, weight, and purity.3 Egypt’s system was superior to barter or beans, but it still lacked fundamental efficiency. Then in the seventh century BC the Lydians (Western Asia Minor / modern day Turkey) minted standardized coins – they all had an equal size, shape, and weight. There is a debate as to whether or not the Lydians actually invented standardized coinage, but it is interesting that their “first coins were neither gold nor silver but an alloy of the two called electrum4”. The important thing is the Lydians had created truly sound money!
The Lydian concept of standard coinage soon spread around the region, including to Athens. Historian and author Mike Maloney encapsulates this important development:
“Athens was the first society to have a working tax system and free markets. This enabled them to rise to the pinnacle of civilization. Their prosperity allowed them to create great works of art and achieve a level of architecture and engineering that the world had not yet seen.”5
Athens, often called the cradle of democracy, benefited greatly from sound money and free markets. In the present time people still marvel at what they were able to achieve in diverse disciplines including philosophy, math, science, and public works. But all great empires that rise eventually fall. How the party ended in Athens is a crucial lesson from history.
In the fifth century BC the Athenians began to war with the Spartans. As a result of the Peloponnesian Wars (as they are now called), Athens lost access to its gold and silver mines. Additionally, they had to pay their troops as they traveled away from Athens to wage war. The combination of these two factor caused the supply of coinage in Athens to contract, which in turn caused deflation. To solve this problem the government began to melt down existing coins (incoming tax revenue) so that a mix of copper could be added to the coins’ composition. More coins were thus in circulation but the new coins intrinsically had less value than the original coins. This was the world’s first currency/money debasement. It was also a case of deficit spending – there was more going out (being spent) than was coming in (tax revenue). Naturally, the people of Athens figured out what was going on and began to keep the original coins that were worth more. The more valuable coins ceased to circulate, compounding the problem. What’s more, Athens foolishly continued to pursue grand public works projects despite the economic strain. An example of this was the erection of the magnificent Temple of Athena Nike. Eventually the partially copper coins became entirely copper coins and the economic writing was on the wall. By 404 BC Athens surrendered to Sparta and was soon after relegated to the role of a Roman proxy state.6
Greed, empire, war – government steeling from citizens to fund its own avarice – this is a pattern that has repeated itself throughout history. The money powers have always been at the nexus of political intrigue and corruption. History shows that whoever controls the power of the purse has been able to buy off politicians and use economic pressure to accomplish their own private agendas. It was this reality to which Mayer Amschel Bauer Rothschild was referring when he famously crowed, “Permit me to issue and control the money of a nation, and I care not who makes its laws!” Part II
1 Investopedia definition, Medium of Exchange http://www.investopedia.com/terms/m/mediumofexchange.asp
2 Investopedia definition, Store of Value http://www.investopedia.com/terms/s/storeofvalue.asp
3 Mike Maloney. YouTube Video, ‘Money vs Currency – Hidden Secrets Of Money Episode 1’
4 Lydia. Wikipedia. https://en.wikipedia.org/w/index.php?title=Lydia&oldid=733356527
5 Maloney, Hidden Secrets of Money