Part One of a Three-Part Commentary into the Rise and Fall of the Gold Standard
“this man is not worth his salt?”
I’m sure we have all heard the phrase and not given too much thought to the depth of its meaning. It may surprise you to know that this colloquialism can be traced back over three thousand years. It is a powerful idiom which I will use to begin this exploratory essay into currency and the Gold Standard.
The term derives from ancient Greece where slaves were bought and sold for volumes of salt. A bad slave, it was said, would not be ‘worth his salt’.
The earliest form of trade took place in trading posts and were an essential part of the growth of civilisation. All cultures in some way tended to be centred around the temple and the trading post. The trade (or barter) that occurred there allowed its participants with an abundance of one commodity to exchange them for another.
Barter is an imperfect system however. You see, a cow is an awkward item to carry around and may not be easily divisible into the desired number of chickens required.
Another, and more important phenomenon of the barter system that led to its undesirability was what economists refer to as the need for a ‘double coincidence of wants’. A person with cows may desire another man’s chickens but there is no guarantee that the sentiment will hold true in reverse.
For trade to be effective a new exchange medium was required. One that would allow a person to convert their commodities to a recognisable value, store this value and use it to purchase goods and services.
Money, it would seem, is as innate a paradigm for humanity as religion is.
Currency is commonly considered to require six traits:
In ancient times salt satisfied these requirements by creating a store of value and a medium of exchange that could defeat the imperfections of barter.
In fact, the word ‘salary’ derives from the Latin word ‘salarium’ of the same meaning referring to weekly wages that were paid to workers in salt.
Over 4000 years ago the first taxes ever levied in China were all paid in salt, and until as late as 1812 American Soldiers were paid in salt brine when the government did not hold enough coin.
Not only could salt be used as a medium of exchange, it also possessed a useful purpose and could be used to preserve and add flavour to foods. In a world without fridges this was extremely valuable making salt, on the face of things, a better monetary system than its successor, gold.
While gold is very shiny and makes for nice jewellery, in ancient times it served no useful purpose. This has changed today and this ultra-conductive malleable metal is extremely handy in the world of electronics and cutting edge technology. In fact, each space shuttle that was built contained no less than 40 kilos of the precious metal in its design.
In ancient times though, salt was a far more useful a commodity and highly valued as such.
Trade items such as salt that served a useful purpose aside from a medium of exchange are commonly referred to as Commodity Currencies.
Another example of a commodity currency (one that holds an intrinsic value) are the deer skins that were used for trade in early America. They fulfilled the required characteristics of money and though less divisible and uniform than salt, they were a more portable means of exchange. The term ‘bucks’ as in 100 ‘bucks’ is derived from the use of deer skin as currency.
A different type of currency, one that served no useful purpose, were shells. Shells were a non-commodity based money used as a means of trade through ancient times and into the 19th century. While shells had no purpose, their scarcity endowed them with value. The higher currency units were represented by a number of shells beaded together. The slang term for money, ‘clams’, probably comes from the use of shells for this purpose.
Over time gold would become the accepted non-commodity-based unit of trade throughout the world. Though Gold did not really serve a purpose its scarcity was enough to give it value as a means of exchange.
Gold further developed in 560BC when the Greek state of Lydia first produced gold coins as a unit of currency. Later, Alexander the Great was the first to cement his vanity by imprinting his image on gold coins. Coins not only improved the uniformity of gold as a trade medium but also allowed the state to control and manipulate money supply.
While gold coins helped build great nations, corruption of the coin supply would eventually lead to the empire’s decline. As the Roman republic grew the state increased its money supply by decreasing the amount of gold in each coin that it minted. While this practice had some short-term gains, the reduction of gold purity from coins would eventually lead to inflation and financial instability. This early form of quantitative easing is in part credited with the fall of the Roman Empire and the birth of the Dark Ages.
Civilization would eventually get back on its feet and the age of enlightenment saw a smarter and more educated society emerge from the darkness. Over time the opulent would need to store their hordes with local gold merchants. They would deposit their gold in the trader’s vaults who would in turn give them a promissory note allowing them to redeem their gold as they wished. A fee was levied for this service.
These merchants were the first bankers (though as the renaissance banker was essentially honest some would say they were nothing like the bankers of today).
While paper promissory notes could be traded for goods and services, they were not legal tender. Legal tender is created by a government central bank printing paper promissory notes and creating the money supply that we know today.
Paper money changed everything. It was not backed by any tangible assets, just a promise from the government. Money like this that only has a representation of value that is backed only by a promise from a government is called fiat money. This is the type of money that we know today, a ‘smoke a mirrors’ concoction of promises they may eventually make the fall of the Holy Roman Empire seem like a bad day at the office.
I will leave Part 1 of this study into the Gold Standard here.
In Part 2 I will investigate the undisputed magicians of the money supply. I will explore the history of the country that was able to pull cash out of its federal hat with a wave of its magic wand then able to make it vanish into a puff of smoke just as easily.
I am of course, talking about America…