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Having developed government to the
point that it was ruling many villages
and several small cities, rulers began
to desire more profitable trade. There
were many problems with the diversity
of the commodities being used as media
of exchange. It was difficult to compare
the value of two particular items since
they might be quite different. If the
region was using salt as its medium
of exchange, for example, there might
be sand mixed in with the salt. One
pound of salt might be dirty and another
clean. This made trade more difficult
and led to conflict in the marketplace.
About this time, the development
of metal technology was getting started.
Tin, copper, and other metals were
found to be useful for tools, weapons,
and decorations. The people of the
government would almost always be
willing to accept metals for the
citizen's taxes. But there were problems
with metals as well. Was the metal
pure? Was it in the form of ore or
refined metal? Was it really this metal
or actually that metal.
These problems existed for centuries
but because metals lasted and were
so useful for things the rulers wanted,
they came to dominate (along with
salt) the various things being used
as money.
Then someone got a brilliant idea
and sold that idea to some important
ruler in the middle east. What if
the government cast metal into disks
of a standard weight of metal at
a standard purity and put the ruler's
image on the disk. That way the traders
would know at a glance what they
would be accepting for their products.
Trade would be facilitated and the
economy would flourish.
This was a great breakthrough. It
enabled government to get even bigger
and gave the rulers a strong motivation
to convert some of their store of
metal into coins instead of making
weapons or tools of that metal. But
it was found that some metal was
better for making tools than other
metals. Some metals were soft when
pure and some would corrode and so
on. It was found that gold and silver
were not very good tool metals because
they were too soft. In fact, gold
was so soft that it was almost useless
when pure. But gold was in short
supply and it did not tarnish as
silver did. It was nice and shiny,
like silver, but it stayed shiny
when handled. It didn't turn one's
skin green as did copper. So, gold
became the coin of choice with the
highest value but silver was also
valuable as decoration and was in
great enough supply that it could
serve as coins of lesser value and
for those smaller and more frequent
trades. Other metals were also used
but silver and gold coins were the
most valuable per unit of weight.
In fact, for most people, gold and
silver were useless except as
coins. Most people were too poor
to have gold or silver jewelry, and
bodily decoration came from other
materials. But because gold and silver
were so useful as money, the value
people assigned to those metals increased
far beyond their usefulness in making
goods for consumption. Money, once
a commodity which helped trade, was
becoming a commodity in its own right
regardless of its physical properties.
But this new and improved money
- coins, while better than what had
been used before, still had problems.
Governments and others were tempted
to mix other metals with the gold
or silver to increase the supply
of coins. This was a form of inflation,
of course, but also a form of counterfeiting.
The average citizen had to come up
with various tests of the coins to
be sure they were the right metal
and weight. Did a coin "ring
true" or did it have the wrong
sound when dropped. If you bit the
gold coin, was it soft enough to
have a high gold content or was it
so mixed with some other metal or
metals that it was too hard to have
much gold? Did the coin meet the "acid
test" of purity? And, of course,
did the coin weigh the right amount
on the scales? Even specie (metal
coins) was not without its problems.
But there were more problems than
the acceptability of coins in trade.
There was the problem of money supply.
Sometimes, the amount of coins increased
and sometimes it decreased for various
reasons. If a conqueror came through
and the soldiers took all the money
they could find, the local economy
not only suffered from the depredations
of the troops in destruction of capital
goods and merchandise, it also suffered
after the soldiers left in that people
had no coins to use in trade. The
populace was forced back into barter
which simply doesn't work well enough
to keep cities going. On
other, less common, occasions, the
supply of money increased (as when
the soldiers came home from successful
conquest) and the prices of goods
and services shot up. These fluctuations
in the supply of money were independent
of the supply of goods and services
for sale, of course, which made things
difficult for everyone.
This was especially true for those
who loaned or borrowed money. If
the value of the money was changing,
then either the borrower or the lender
was being cheated. If inflation was
taking place, the lender was being
repaid in money that was worth less
than the money which was loaned out,
even if the units of money were the
same as agreed. If the supply of
money was dropping and prices were
dropping, the borrower had to repay
the loan in money that was worth
much more than it had been
worth when it was borrowed.
But on a larger scale, the supply
of money had become a limiting factor
in the operations of government and
the rich and powerful. Those building
projects (like city walls and palaces)
and those wars were very expensive.
Unless there was plenty of coin available
one couldn't pay the army nor the
workers who built the ships and fortifications
and palaces. In some nations (like
Rome) it was even difficult to get elected unless
one could pay the citizens (those
who could vote).
Clearly something else was needed.
Previous: A Brief History of Money: Part I
Next: A Brief History of Money: Part III
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