Money Through the Ages (Part 2).

345 BCE: Origins of the Words Mint and Money.
In the centre of Rome a temple was built, dedicated to goddess Juno Moneta. Juno was the goddess of protection and Moneta is derived from the Latin monere, which means ‘to warn or advise’. It is said that Goddess Juno gave warnings or advice on at least a couple of occasions. First, when the Gauls sacked Rome in 390 BCE, Juno’s sacred geese gave Roman commander Marcus Manlius Capitolinus a heads up that the Gauls were coming, allowing him to protect the Capitol. Second, during an earthquake when a voice from the temple advised the Romans to sacrifice a pregnant sow34.
From 269 BCE, the Roman mint was located at this temple, and lasted some centuries. The English words ‘mint’ and ‘money’ are derived from Juno Moneta.

336–323 BCE: Gold to Silver Peg
Alexander the Great simplified the silver to gold exchange rate by declaring a fixed exchange rate of ten units of silver equal to one unit of gold. This peg eventually failed.
The Americans effectively tried the same thing in the eighteenth century at rates of 15:1 and 16:1. Later, we will discuss what currency pegs are, how they are managed, and how difficult they are to maintain. This is relevant today because there are a number of attempts to create a ‘stable coin’ cryptocurrency, some of which rely on an entity or automated smart contract to defend a peg by buying when the price is too low and selling when the price is too high.

323–30 BCE: Warehouse
Receipts—Representative Money
Ptolemy, a Greek bodyguard of Alexander the Great, established himself as ruler of Egypt. He created a dynasty which ruled Egypt until the demise of Cleopatra with the Roman conquest of 30 BCE. The Ptolemies, as the rulers were known, established a system of warehouse accounts where debts could be repaid by transferring the title to grain from one owner to another without physically moving the grain stored within.

118 BCE: Leather Banknotes
Square white deerskin leather with colourful borders was used as money in China. This is possibly the first documented type of banknote. China would later experiment with paper-based banknotes, then stop using them for a few hundred years before reintroducing them.

30 BCE–14 CE: Tax reform!
Augustus Caesar, adopted son of Julius Caesar, expanded Rome’s taxation of the provinces, regularising tax levies which, until then, had been decentralised to the provinces. He introduced sales, land, and poll taxes. These taxes weren’t universally unpopular, especially in the provinces, where taxes until then had been somewhat arbitrary. If you hate paying taxes, you probably hate paying arbitrary taxes at arbitrary frequencies even more. Augustus Caesar also issued new, almost pure, gold, silver, brass, and copper coins.

To 270 CE: Debasement and Inflation
Over the next 300 years, the silver content of Roman coins fell from 100% to 4%. Talk about debasement! But as we saw earlier, the US dollar has fallen in value by 96% in a third of the time35. Attempts by leaders such as Emperor Aurelian to purify coinage failed, as Gresham’s Law kicked in and people circulated their debased coins and hoarded the pure ones.

306–337 CE: Gold for the Rich, Debased Coins for the Poor
Constantine, the first Christian Roman emperor, issued a new gold coin, the Solidus, which was used successfully and without debasement for the next 700 years. That is quite some achievement. However he also produced debased silver and copper coins. So the rich got to use nice shiny gold coins that retained value while the poor got coins that steadily decreased in value. Is that surprising?

c. 435 CE: No More Coins for Brits for 200 Years
Anglo-Saxons invaded Britain and coins were no longer used as money for 200 years! Money, it turns out, can come in and out of fashion, depending on the politics at the time. Just because we grow up with one form of money, it doesn’t mean it will last forever.

806–821 CE: Fiat Money in China
Due to a shortage of copper, Chinese emperor Hien Tsung issued paper money notes for merchants who wanted to make large payments without the inconvenience of heavy coins. Over the next few hundred years there was much overprinting and inflation, causing paper money to depreciate against metals. This is a theme we hear over and over again.
Paper money spread to Europe via Marco Polo, a Venetian who travelled extensively and learnt of paper money from his travels in China from 1275–1292.
Paper money was only used in China for a few hundred years, during which time inflation soared due to uncontrolled printing of paper money. In the 1400s, they seem to have stopped using paper money for a few hundred years.

1300s: British Pennies Shrink Twice
In 1344 and 1351, on two separate occasions, King Edward III reduced the size and quality of the penny. The King owned the mints, so a smaller and less fine penny meant that the King could issue more pennies from the same amount of metal, meaning more profits or seigniorage for the King.
The debasement of all forms of money that is not commodity money seems to be a common theme in the history of money.

1560: Gresham’s Law!
Another year, another currency reform: this time Queen Elizabeth I recalled and melted coins, separating the base metals from the precious metals. Thomas Gresham became an advisor to the Queen and noticed that bad money drives out good.

1600s: The Rise of the Goldsmiths
Goldsmiths in Britain became bankers, as their vaults were used for coin storage, and their notes and receipts became a convenient method of payment.

1660s: Central Banking
The world’s oldest central bank, Sveriges Riksbank, was created in Sweden. Initially, the Bank was forbidden to issue banknotes due to lessons learnt from Stockholms Banco, Sweden’s first bank. Stockholms Banco issued Europe’s first banknotes but got carried away and issued more than could be redeemed, a money creation technique known as fractional reserve banking. Stockholms Banco failed when banknote holders wanted the underlying metal coins back. In 1668, Sveriges Riksbank was founded and later, in 1701, it was allowed to issue banknotes, then called credit notes.

It gained exclusivity over banknote The Riksbank is noted for its attitude towards innovation: in July 2009, it was the first central bank to charge money from commercial banks to maintain overnight deposits, rather than paying interest, pushing the overnight deposit rate down to -0.25% (annualised). It deepened this interest rate, as well as other associated rates, in 2014 and 2015. This was an effort to stimulate the economy by encouraging the lending and spending of money rather than hoarding, when quantitative easing was not having the desired effect.

1727: Overdrafts!
The Royal Bank of Scotland was founded, introducing an overdraft facility where certain applicants were able to borrow money up to a certain limit and were charged interest only on the amount drawn, rather than on the full amount. This was a form of FinTech.

1800-1860: Cowrie Depreciation
Here is a powerful example of how the supply of money causes price inflation: When cowrie shells were first introduced to Uganda around 1800, a woman could typically be bought for two shells. Over the next 60 years, as more shells were imported at scale, prices rose, and by 1860 a woman commanded a price of one thousand shells.

Rai Stones
No history of money would be complete without mentioning the Rai (sometimes called Fei) stones still in use on the island of Yap.

Yap is a small island in the Federated States of Micronesia, approximately 2,000km east of Manila, Philippines. It is known for its superb SCUBA diving and its Rai stones. Rai stones are large, circular stone discs with holes in the middle, to help transportation. They are made with stone quarried from Palau island, about 400 km away, brought back by canoe with some effort, and still are used as money today.

John Tharngan, Historical Preservation Officer of Yap, in an interview with the BBC37, explains the origin of the Rai stones:
Several hundred years ago, some people from Yap went on a fishing trip and got lost and arrived accidentally in Palau. They saw the limestone structures that occur naturally on that island and thought they looked great. They broke off a piece of stone and did a bit of carving on it with shell tools. They brought home a stone that was shaped like a whale, which is called ‘Rai’ in Yapese and that is where the word comes from.

Rai stones come in all sorts of sizes, from a few hand spans to over 3 metres in diameter, and have a value mainly based on their history, but also on their size and finish. According to monetary economist JP Koning’s excellent blog Moneyness38, W.H. Furness, who spent a year on the island, wrote in his 1910 book The Island of Stone Money, Uap of the Carolines:
A rai spanning a length of three hands and of good whiteness and shape ought to purchase fifty ‘baskets’; of food—a basket is about eighteen inches long and ten inches deep, and the food is taro roots, husked coconuts, yams, and bananas;- or, it is worth an eighty or a hundred pound pig, or a thousand coconuts, or a pearl shell measuring the length of the hand plus the width of three fingers up the wrist. I exchanged a small short handled axe for a good white rai, fifty centimeters in diameter. For another Rai, a little larger, I gave a fifty pound bag of rise… I was told that a well-finished rai, about four feet in diameter, is the price usually paid either to the parents or to the headman of the village as a compensation of the theft of a mispil [a woman].

In terms of recording the of ownership changes of these unwieldy pieces, Tharngan comments:
There’s no problem in knowing who owns which piece because all the pieces next to a dwelling tend to belong to that house. All those which are found on dancing grounds—their ownership does shift from time to time, but the shift is always done publicly in front of chiefs or elders, so everyone remembers what belongs to whom.

There is also the case of a large stone that was lost at sea, recorded by Furness who heard the legend recounted by a local fortune teller and exorcist. The fortune teller told Furness that a few generations ago a large stone was lost at sea, and even though it is not physically present and no one can see it, claims on the stone continue to have value.

This particular Rai stone is used by some economists as an example of fiat money existing in primitive societies. However, Dror Goldberg argues in a 2005 paper, Famous Myths of Fiat Money39 that this is not fiat. There was no evidence of this stone being used in trade, as ownership remained in the family, and the value of the lost stone was agreed by the community, not by any legal decree. Goldberg argues that Rai stones have legal, historical, religious, aesthetic, and sentimental value, and are therefore not fiat, and furthermore, there are no good examples of fiat money existing in primitive societies.

1913: Birth of the US Federal Reserve System
In 1913, the Federal Reserve Act was passed into law in the USA. This created the Federal Reserve System, the central banking system of the USA. The act was drafted by influential commercial bankers and gave the central bank the monopoly on the price and quantity of money, and had the mandate to maximise employment and ensure price stability. The system has public and private sector components, and the regional Federal Reserve Banks are owned by large US private banks. The Federal Reserve is discussed in greater detail in the Appendix.
The US dollar remained on a gold standard for a period of time under the Federal Reserve System, as we will see in the section about gold standards.

1999: The Euro
On 1 Jan 1999, the Euro officially became the currency of the member states of the European Union: Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, and Finland. Euro notes and coins came into circulation in 2002. The currency is now the official currency of nineteen of the current twenty-eight EU states, six non-EU jurisdictions, and a number of other non-sovereign entities.

2009: Bitcoin!
On 3 January 2009, the first Bitcoin was brought, or ‘mined,’ into existence. How does Bitcoin relate to money? We’ll discuss Bitcoin in a lot more depth later on, but it was first commonly described as a ‘cryptocurrency’. And simply because of the word ‘currency’ people start thinking… Is it money? Does it fulfil the traditional three functions of money? What is money anyway? Does Bitcoin count?
Defining Bitcoin is a popular activity for regulators and policymakers who need to determine if bitcoins fall under their purview or not. I suspect things would have worked out differently had Bitcoin been originally described as a ‘cryptocommodity’ or a ‘cryptoasset’. It turns out that Bitcoin is hard to shoehorn into existing categories, so perhaps it, along with other crypto-things, belongs in a new asset class.

That fact is, for our purposes, the definition of Bitcoin doesn’t matter. It doesn’t matter how you define money, it doesn’t matter it Bitcoin fits the bill or not. Bitcoin has some properties that make it appear from one angle like money, and from another angle like a commodity such as gold.
Money is in the eye of the beholder. Nowadays, we have so many different forms of money, all with slightly different characteristics and trade-offs, that Bitcoin and its siblings can, and will, sit alongside the other forms.