-->Credit: 6,000 Years Old and Still Evolving Vigorously
By Glyn Davies
June 1996, pages 16-19

© 1996 Business Credit, NACM

Noah's Ark (if it was ever built) was probably floated and provisioned on credit, for by the time of the traditional biblical date of the Great Flood, 2349 B.C., sophisticated forms of credit had long been well established in the Middle East. The ancient Doubting Thomases who may well have been induced to finance Noah were finally liquidated in a double victory for Noah and his extended ecological family.
Be that as it may, there are numerous, fully authenticated facts to prove the common, everyday existence of credit instruments and transactions as old as recorded history itself, that is from roughly around 4000 B.C."Money," said Keynes in his Treatise,"like certain other essential elements in civilization, is a far more ancient institution than we were taught to believe. Its origins are lost in the mists when the ice was melting, and may well stretch back into the paradisaic intervals in human history of the inter-glacial periods, when the weather was delightful and the mind free to be fertile of new ideas in some Eden of Central Asia." (Keynes. J.M., 1930, A Treatise on Money, I, 13)

Credit and the Invention of Writing
It was from this lost Eden that money, recorded credit and banking, as well as writing and our duodecimal methods of counting time and space--and of financial accounting--originated. If one were to speculate as to how writing first appeared one might dreamily imagine that romantic necessity or poetic inspiration were the causes rather than the prosaic need to record debts and credits--which in reality turns out to have been the actual source."Writing was invented in Mesopotamia as a method of book-keeping. The earliest known texts are lists of livestock and agricultural equipment. These come from the city of Uruk c. 3100 B.C." (Oates, J., 1979, Babylon, 15) Literally hundreds of thousands of cuneiform blocks have been unearthed by archaeologists in sites along the Tigris and Euphrates, many of which were credit receipts and monetary contracts confirming the existence of banking and credit operations as everyday affairs, common and widespread throughout Babylonia. Categorical evidence regarding credit procedures is still available for our inspection in the Code of Hammurabi, inscribed some 3,750 years ago on a diorite block, over seven foot high, now in the Louvre in Paris.

Credit in Ancient Egypt: Grain and Banking
Credit development in ancient Egypt, although based at first on royal temples and palaces, grew in time into a distinctive form of giro-banking based on deposits of grain. Thus, although some rudimentary elements of a giro system of payment had developed much earlier in Babylon, the honor for the first fully efficient giro system, enabling a nationwide circulation and transfer of credit, belongs to the Egypt of the Ptolemies. The numerous scattered government granaries were transformed by the Ptolemies into a network of corn banks with what amounted to a central bank in Alexandria, where the main accounts from all the state granaries were recorded. Seed corn, the capital base both of the banking system and of the economy in general, was directly under the control of the 'economus', whose official duty it was to see that the seed corn would not be used for any other purpose. Grain may have been considered a rather primitive form of money--but the world's first giro system transformed it into an efficient method of credit with many of the most desirable elements of modern finance.
An expert on this period shows that these giro-bank accounts"are especially interesting because they show how popular recourse to the banks became with the people of Egypt. The system of paying one's debts through the bank had the additional advantage of officially recording transactions and thus providing important evidence in case of litigation." (Rostovtzeff, M., 1941, The Social and Economic History of the Hellenistic World ) At this point it needs to be emphasized that ancient banking emerged a thousand years before the appearance of a viable system of coinage, whereas in the case of the Anglo-Saxon and northern European world, coins preceded banking by a similarly long period of time.

The Invention of Coins and the Development of Coin-based Credit
Economics is the logic of limited resource usage, and money is the means by which that logic is put to work. Coins formed the basis on which most payment and credit systems have been built during the last 2,700 years. The matter of when coins were 'invented' depends very largely on whether one is concerned, as is the economist, with function, or, as is the numismatist, with outward form, appearance, and quality. Functionally speaking, the early Chinese 'tool-money' currencies-- miniature emblems of spades, hoes and knives--were in common use in China as early as the end of the second millennium B.C. Round coins, of poor quality, cast, and of base metal were produced in the next few centuries, by which time coinage of a far superior type, using precious metals and hammering techniques, had been developed in the Middle East.

Coins in Lydia and Greece
In quality, range of functions, and influence on the rest of the world, Lydia as the birthplace and Ionian Greece as the nursery of coined money have undoubted priority over China. Two interacting factors may account for Lydia's leadership, one on the supply side and the other relating to an unusually strong demand for media of exchange. Supplies of precious metals were locally available from alluvial deposits of?electrum', a mixture of gold and silver. As for the demand for money, the Lydians were the first to open permanent retail shops. Coins, credit and shops henceforward became inseparable partners--until the recent closely connected rise of plastic cards and supermarkets similarly indicated a fundamental change in payment systems. Lydia's first true coins date from around 640 B.C., comfortably consistent with the literary tradition of Herodotus and Aristotle, which gave 687 B.C. for the even earlier semi-coin electrum?dumps'. From Lydia to the Greek islands and mainland was a short but important step."The extraordinary characteristic of Greek coinage is the speed with which it developed. In 550 B.C. the techniques were still primitive, (yet) the fifth century saw the minting of the most beautiful coins ever made."(Porteous, J., 1980, The Nature of Coinage ) Such beauty was not simply of numismatic importance: it was equally important in its economic effects in stimulating a wider role for both money and banking throughout the widespread Greek colonies.

Gresham's Law
Credit multiplies money by supplying flexible dimensions of time, space and convenience of form, but all these depend vitally on the quality and strength of the money base, whether in ancient or modern times. Thus the famous Athenian silver 'owls,' first minted in 546 B.C. became by far the most widely used coins of that era and lasted almost unchanged in design and purity for 600 years. The supply of silver ore came conveniently from the Laurion mines, 25 miles south of Athens, where up to 30,000 miners were employed another example of the economic importance of coinage. When the Spartans captured Laurion in 407 B.C., Athens suffered a sudden and severe shortage of coin. She reacted first by minting 84,000 golden drachma from the statue of Nike and similar treasures but, when the shortage grew even worse, she issued bronze coins with a thin coating of silver, giving rise to the world's first public statement of Gresham's Law in Aristophanes' play The Frogs. The base coins were demonetized in 393 B.C. and Athens regained its reputation for fine coins; but it took until 330 B.C. to replace the golden treasures of the Acropolis. By that time the center of gravity of the military and monetary systems had moved north to the Macedonian empire of Philip and the even more spectacular empire of his son, Alexander.

Chancellor Kohl and Alexander the Great
The most important financial result of Alexander's imperial adventures was the monetization and diffusion of the vast, relatively dormant gold and silver reserves of the Persian empire. Alexander's armies, including many mercenaries, were well paid. They were big spenders--or as the modern economist might put it, they had a high marginal propensity to consume. A large multiplier thus intensified the effect of the high velocity of circulation of previously relatively stagnant reserves. Another factor which improved, simplified, and speeded up trade and payments was Alexander's insistence on a crystal-clear and easy 10:1 ratio of exchange between silver and gold, rather than the previously bewildering variety of ratios and the awkward 40:3 Persian system. (Chancellor Kohl's decisiveness in boldly choosing a 2: 1 rate between the ostmark and the deutsche mark, despite the opposition of the Bundesbank, bears the hallmark of Alexander).

Inflation Has a Long History
If the spread of Greek, Macedonian, Hellenistic and Roman money had depended solely on trade, the process would have been far slower and much more limited in extent. It was military conquest which forced the pace and range; but once the sword had initiated a novel or expanded need for coinage, commercial trade took over to become generally preponderant. Coins, however, have always been more than mere media of exchange. For long periods in Rome"the primary function of coins was to record the messages which the emperor and his advisers desired to commend to the population." (Grant, M., 1968, Roman History from Coins, 69) It may also be salutary to remind ourselves of the surprising degree of inflation suffered by the Romans for centuries, especially their hyper-inflation in the fifty years after A.D. 250. By 270 the silver coins were only four percent pure.
Some order was brought into this chaotic situation by Diocletian, 284-305, whose monetary reforms, including minting pure gold and almost pure silver coins were supported by far reaching fiscal and incomes policies. He introduced the world's first annual budgets and, in the form of the Edict of Prices of 301, the world's first prices and incomes policy. In retrospect the Edict can be seen to display much of the wishful thinking exhibited by more recent examples of state price controls.

The Fall of Rome
These reforms did not eradicate inflation. What they did was to divide the rich and the public sector from the poor. The poor had to make do with 'pecunia', trashy, flake-like bits of coin. The rich could deal successfully in gold and were thus to a large extent isolated from the worst effects of inflation which devastated the poor, except where, as in Rome itself with its million inhabitants, they became increasingly dependent on state subsidies. Although it was the barbarian invasions that brought down Rome, the main underlying cause was the chronic financial chaos, the product of unproductive expenditure on defense and welfare. In the modern world, the corresponding division is a geographical one between the rich and poor nations, with the latter being usually the victims and perpetrators of hyperinflation. This glimpse at the origins and development of money in the ancient world should at least suggest that, although separated by a couple of millennia, our monetary problems are not all that different. Before turning to some of these modern problems, a brief look at medieval and early modern developments must suffice.

Aspects of Medieval and Early Modern Money
If the historical progress of money had followed the logical steps too often assumed by economists, then Gutenberg's invention of moveable type in 1456 would quickly have brought about the triumph of printed over minted money. Historical progress, however, laughs at the locksmiths of arid academic logic and frequently demonstrates a fascinating perversity in apparently backing the wrong horses with the wrong money.
Gutenberg's printing press was developed from the many different kinds of wine and olive presses used around his region of Germany and Italy. The improved presses were first used to produce better coins rather than to print notes a later development. Leonardo da Vinci's drawings included designs for mechanical minting in patterns adopted by the goldsmiths of Augsburg and Nuremberg to produce remarkably fine coins called 'milled' money. The indentations made possible by such strong presses gave rise to milled-edged coinage which finally proved effective against clipping. The making of milled money spread, via Paris, to the Tower Mint in London by 1553, though not until the 1630s were substantial amounts of milled money minted.

The Bank of England and Price Stability
By that time, London's goldsmiths were about to emerge as bankers. With the founding of the Bank of England in 1694 and the early prominence it gave to note issue, the total quantity of abstract paper money first overtook the quantity of commodity money. However, for the next two hundred years, the true value of this inverted pyramid of paper money was deemed to rest upon a metallic foundation, the essential ingredient of which was the circulation of full-bodied gold coinage, supplemented by the bullion reserves of the Bank of England. The obligation to convert Bank of England notes into gold at a fixed rate played a significant part in producing a remarkable degree of price stability from 1826 to 1914, with sterling becoming the most useful currency ever seen hitherto in world trade, so much so that Britain's gold standard became widely regarded as the ideal to be emulated by Germany, Japan, and the USA. But the world war of 1914-18 caused gold to be withdrawn from most countries' internal circulation. The long age of commodity money thus passed finally away, and by 1923, two years before Britain's abortive return to gold, the precious metal had prophetically and permanently been devalued by Keynes:"In truth, the gold standard is already a barbarous relic." (Keynes, J.M., 1931, Essays in Persuasion, 208) Sterling's world leadership slipped into the hands of the Almighty Dollar.

The Dollar: From Wampum to World Power in 150 Years
Colonial America offered a clean slate where the immigrants repeated their age-old European habit of swinging from an initial shortage of money to reach eventual inflationary excess. The most popular of the indigenous types of money, eagerly accepted as legal tender, was wampum. This was used not only for small retail trade but also for large credits such as the loan in wampum of over 5,000 guilders arranged by Stuyvesant in 1664 for paying the wages of the workers constructing the New York Citadel.
Tobacco later became the most important?countrypay money' for many states. However, much the most important result of the currency shortage was that it caused Americans to turn with the greatest enthusiasm to printing paper money, especially state-issued notes. As Galbraith inimitably puts it:"If the history of commercial banking belongs to the Italians and of central banking to the British, that of paper money issued by a government belongs indubitably to the Americans." (Galbraith, K., 1975, Money: Whence It Came and Where It Went, 45) This propensity to resort to the printing press quickly showed itself with the outbreak of the War of Independence when the 'Continental' notes quickly became almost worthless.

No Shortage of Paper
Excessive issues were not confined to state notes, for the strong movement towards 'free banking' allowed banks, however small or weak, to issue their own notes. By 1859, according to Hodges' Genuine Bank Notes of America--an essential stand-by for every banker and shopkeeper wishing to avoid being saddled with dud notes--there were at least 9,916 different notes in circulation, mostly confined to their own localities. The Civil War naturally gave further reasons for excessive issues, particularly by the South, where Confederate notes repeated the sorry precedent of the 'Continentals', until some semblance of order and discipline followed the adoption of the 'Greenbacks' and the more uniform National Bank Note system.
No account of the development of the American monetary system, however brief, should ignore some reference to the climax of the bimetallist campaign exactly 100 years ago--notably the same time that NACM was born. It was William Jennings Bryan, a gifted lawyer, journalist, orator, and tireless political organizer, who stimulated, bullied, cajoled, and inspired all the disparate factions interested in the cause of silver into fighting single-mindedly for the official preservation of bimetallism. In his bid for the presidency in 1896, he traveled over 18,000 miles in one of the first 'whistle-stop' tours, visiting 37 states and making 600 speeches, almost all of which included his famous declamation:"You shall not press down upon the brow of labour this crown of thorns, you shall not crucify mankind upon a cross of gold."

Bank Failures
Nevertheless his was a lost cause. World gold supplies rose rapidly, with the USA's gold stock doubling between 1890 and 1900 when, belatedly, with the Gold Standard Act of March 1900, the United States legally reached this apparently ideal goal. The crisis of 1907 demonstrated all too clearly that the obvious need for an 'elastic currency' was not guaranteed merely by adherence to the Gold Standard. After studying the world monetary picture, the Federal Reserve System was introduced in 1913, and under Governor Benjamin Strong, it grew to be of world importance by 1928. Nevertheless, the boom and bust spectacular of the following five years again demonstrated the blatant weaknesses of the American financial system. Altogether, some 13,366 banks failed between 1920 and the end of 1933, including 8,812 in the four years from 1930 through 1933. After the reforms of 1934-5, bank failures dropped significantly. In the 32 years from 1943 to 1974, failures were always below 10 annually.
However, in the eight years following 1985 the annual failures averaged 160--and this despite many being certified by their auditors as 'no problem' or even 'excellent'. Similar concern has followed the enormous costs for the U.S. taxpayer in bailing out failed and weak savings and loan associations, reckoned by the General Accounting Office at $1,000 per household. Partly as a result of such problems, it is not unlikely that as the twentieth century comes to a close, the USA will experience the biggest merger boom in banking history as its 11,000 banks furiously coalesce towards a few thousand or fewer in a nation, at last, without effective banking barriers. Although America has officially enjoyed a single currency since 1790, it has not yet achieved a single banking market. It is one of the ironies of history that Europe, or most of it, reached the goal of single market by 1992, though a single currency by the year 2,000, as already planned on paper, appears highly doubtful.

The End of Inflation?
Well over 90 percent of the world's current population have spent all their lives in an age of inflation, open or suppressed, unprecedented in degree, extent, and duration. Even the advanced countries have experienced rates which in the previous century would have been a cause for concern rather than congratulation. Nevertheless, the published statistics for twenty of the most advanced nations during the 1990s provide a basis for believing that, for most of the rich countries at least, the problems of inflation which have afflicted them for half a century look within sight of solution. Associated with and in part responsible for the marked reduction in inflation in recent years has been the greater degree of independence enjoyed by a number of central banks and a general consensus that they should concentrate single-mindedly on the supreme goal of price stability, which, since most price indexes tend to overstate inflation, in practice means low (rather than zero) inflation of around two percent. In this way, true consumer sovereignty can be exercised without the distortions produced by inflation.

Inflation and Vigilance
However, the liberty conferred by stable money requires eternal vigilance by the monetary authorities, especially by the Federal Reserve System, the Bank of Japan, and the new European Central Bank as they co-operate with the other 150 or so central bankers in ridding the advanced countries of the scourge of inflation and in providing a firm anchor to limit the slippage in the values of other currencies.
Yet, in the near future, billions of fingers, at the touch of a button in a borderless world, will keep the august monetary authorities on their toes, as new definitions of money and of monetary sovereignty and control will be dictated by the as yet unknown demands of the electronic age. For the computer chip with its phenomenal memory enables us practically to turn Blake's poetic vision into virtual reality:

To see a World in a Grain of Sand...
Hold Infinity in the palm of your hand
And Eternity in an hour.

I wish to thank the University of Wales Press for permission to include extracts from my History of Money. --Glyn Davies, April 23, 1996.

<ul> ~ Credit: 6,000 Years Old and Still Evolving Vigorously</ul>