This paper was given as the Keynote Address at the First Consult Hyperion Digital Money Forum 7th-8th October 1997, London, Digital Money: New Era or Business as Usual?
Money is apparently undergoing a revolutionary change with the introduction of e-money. Glyn Davies considered the significance of this transformation in the light of earlier "revolutions", as outlined in his book, A History of Money from Ancient Times to the Present Day.
See also Money in Fiction
Sometimes it is the accelerating, innovative forces making for greater flexibility and faster economic growth that are responsible for the breakdown of the monetary system, either through long term inflation or through the more extreme but unfortunately still common case of a sudden bubble. At other times over-emphasis on stability by the monetary authorities or social inertia tend to depress long term growth far below its potential - as in all of Europe in the 1930s and in most of Euro-obsessed Continental Europe today. This 20th century pattern repeats the neglected experience of previous ages, perhaps as far back as when global warming was a happy spur to innovation and not the harbinger of a new doomsday.
Positive turning points leading to sustained periods of rapid economic growth occur from time to time, particularly when technical innovations, e.g. in mining techniques,, combine with a supportive or expanding state authority. In such favourable circumstances the monetary consequences may then well become truly revolutionary. Examples range from the land-base empires of Alexander and Rome to the world's most extensive sea-based British Empire, culminating in the apparently ideal international gold standard based on the pound sterling. No one in this audience, and few outside can dispute that we are now poised at such a revolutionary turning point. The following startling statement made recently by two expert monetary analysts may not be an exaggeration: "Technical innovation, the massive scale on which transactions are now occurring and irreversible trends to financial deregulation and commercial globalisation mean the current decade will see more change in international payment systems than the preceding millennium". (Wood, D. & Erturk, I.(1996), European Payment Systems; p. 7-8, Payment, Past, Present & Future, APACS).
Before glancing at a few of the more outstanding turning points it is advisable to remind ourselves of some of the enduring monetary fundamentals which channel, limit and sometimes reverse the forces of financial revolution. Inertia among the more numerous users of traditional forms of money usually delays acceptance of the new.
Money is much more than a technical device or a mere commercial lubricant. It has, right from its varied beginnings, exhibited strong socio-political attributes. Rarely does money operate in a social vacuum. Because money is used daily by everybody changes which may appear to be purely technical not infrequently turn out to have unexpected serious social, political and constitutional consequences.
Today, when national sovereignties are threatened by e-moneys - whether regional Euros or global Electronic - that fact is forcing itself with awkward insistence, on public attention. But this in essence is nothing new. From earliest times money in some form or another has been central to organised living. Increasingly it moulds the economic and foreign policies of all governments. It is synonymous with power and shapes history in every generation.
In our technological age too many agree with Henry Ford's dictum that history is bunk, though he was far from thinking that money was bunk. Because of the difficulties of conducting experiments in the ordinary business of economic life, at the centre of which is money, it is most fortunate that history generously provides us with a potentially plentiful proxy laboratory where alternative policies may be analysed. Around the next corner there may be lying in wait apparently quite novel monetary problems which in all probability bear a basic similarity to those that have already been tackled with varying degrees of success or failure in other times and places.
Many economists, especially monetarists, tend to overestimate the purely commercial, narrow, technical functions of money and place insufficient emphasis on its wider social and psychological aspects. Yet money originated very largely from non-commercial causes: from tribute as well as trade, from blood-money and bride-money as well as from barter, from ceremonial and religious rites as well as from acting as the common drudge between economic men. Money, more than ever in our monetarist era (and policy lags behind theory), needs to be widely interpreted to include not only currency and banking, but also savings banks, building societies (if any), hire-purchase companies etc. In particular the fiscal framework frequently complements or conflicts with monetary policy. The Maastricht convergence criteria, with their emphasis on fiscal rectitude, reflect the long-ingrained habits of governments to fudge- i.e. to beg, borrow or steal as an alternative to simply printing money.
Even in medieval and earlier periods these wider aspects were of considerably greater importance than is conventionally assumed. There are therefore many insights to be gained from looking back at past monetary developments, where so-called primitive and modern moneys have overlapped for centuries and where the logical and chronological progressions have rarely followed strictly parallel paths. Even the most advanced experts should never neglect the rear driving mirror, nor the old bag of tools back in the boot.
From among the many outstanding innovations which have radically changed the way we use money - and therefore the way we live - the following few examples are taken. First comes the invention of hammered coinage; secondly the invention of printing and its long-delayed application to bank notes; and thirdly, and perhaps most surprisingly, the slow emergence of simple, non-technical changes in accounting practices, even when some of these have depended on the use of the most ancient of devices.
In chronology China comes first, its miniature tool money mouldings appearing in common use, guaranteed by the state, by about the end of the second millennium B.C. However, 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. Literally, at a stroke, markets were speeded up and vastly extended: in a word, revolutionised. The chronology of Lydian and early Greek coinage has undergone thorough revision recently, the result of which is to accelerate the speed of change from crudity to perfection. "The extraordinary characteristic of Greek coinage is the speed with which it developed... By 550 B.C. the techniques were still primitive, (yet) the fifth century saw the minting of the most beautiful coins ever made." (Price, M.J., The First Three Centuries of Coinage).
Historians need to put in a good word for numismatists for they help to bring the past vividly to life. A brilliant instance of this took place at an auction at Sotheby's in July 1995 of some 200 ancient coins, estimated to fetch £1½m. but actually realizing over £2m. One single coin, minted in 460 B.C., went for £132,000. These costly examples eloquently remind us that for most of the last 2,700 years coins have been by far the most important form of money. At the end of the twentieth century it is, surprisingly, still true that more coins are being produced and put into daily use by more people around the world than ever before. In the struggle for the retail market Mondex, Digicash and their like face the entrenched defences of the longest-lived, most tried and tested kind of money known to civilised society.
For the vast majority of people coins remained by far the most important form of money , right up to 1914. (Scotland was an enlightened exception). British public policy in 1913 was still absolutely convinced on the virtues of gold coinage and wished to extend its apparently obvious benefits to India. This spurred the young Keynes into revolt against the majority conclusions of Austin Chamberlain's Royal Commission on Indian Currency and Finance. The world should not leave "the most intimate adjustment of our economic organism at the mercy of a lucky prospector, a new chemical process, or a change of ideas in Asia", (Keynes, J.M. 1913, Indian Currency and Finance p.101, Macmillan).
It was not however the exasperation of Keynes but the exigencies of war which just one year later led to the strategic turning point in the direction to which Keynes was pointing, for gold was withdrawn from circulation in most countries during the war of 1914-18. "Thus the long age of Commodity Money has at last passed away". By 1923, two years before Britain's abortive return to the gold standard, the precious metal had been prophetically and permanently devalued by Keynes: "In truth, the gold standard is already a barbarous relic" (1931 Essays in Persuasion, p. 184 & 208, Macmillan). So all coins now (with a few relatively unimportant exceptions) are not only mere tokens - but they are also of ever-diminishing importance in the total money supply. In the mid 1990s coins come to only one-tenth of notes and only one three-hundredth part of U.K.'s broad money, M4.
Yet in a perverse burst of energy they still defy their long announced death sentence. Macro-economically speaking they have a low, but still positive national income elasticity of demand. (Translation: countries want more coins). Thus the Report of the Royal Mint for 1993-4 shows that "the production of blanks and coins (at 3.5 billion), operating profit and export sales (to some 70 countries) were all substantially in excess of the best achieved in its long history" of over a thousand years. This surge will be eclipsed by the huge demand for the new Euro coins required by 2002. Even allowing for considerable slippage, the prospect discloses an unprecedentedly large, contemporaneous demand for coins by up to 370 million customers in the next decade. (For further details on the urgent planning for the Euro, see the frenetic pronouncements of, e.g. the Cees Maas Report (10 May 1995) of the Expert Group on the Changeover to the Single Currency, and One Currency for Europe (21 May 1995), the Green Paper on the Practical Arrangements for the Introduction of the Single Currency).
Incidentally, the bland designs for the euro currency, typical of the bloodless bureaucrats of Brussels, are obviously based on the belief that money is merely a technical device - a vivid contrast with the patriotic mottoes and emblems carried by coins ever since their creation. "I will conquer Greece with my archers", boasted the Persian kings, only to be overcome by the owls of Athens. Perhaps our Europhobes can see a hidden inscription: "I shall conquer England - or at least the City of London - with my euros". In reply our wise owls simply sit on the fence. The monetary reforms in the former Soviets point to similar substantial increases in new coinage, though, as in EC, politics, not economics, will be the deciding factor: what's new? Between 1993 and 1995 the Royal Mint had already found customers in Estonia, Mongolia, Turkmenistan, Croatia and the Czech Republic. In its Report for 1996-97, after drawing attention to "a surprising and remarkable growth in demand" (of over 23.5%) for U.K. coins it goes on to show that, as "the world leader in the circulating coin market" it is well placed to meet demand for the euro as well as that from the Third World.
It is this latter demand which, over time, is likely to be the largest of all, for a number of reasons. In economic terms coins are not merely inferior goods but also exhibit Giffen tendencies, where an individual's demand falls when incomes rise. Thus, above a very low threshold, the demand for coins by the poor tends to be much higher than that by richer people who have access to many other forms of payment. Secondly the size and rate of growth of population in poor countries far exceeds on average that in richer areas. Thirdly, allied to the above, is the younger age distribution in most poor countries. Fourthly, the infrastructural assets e.g. telecommunications essential for the full development of non-cash systems are not as available or as reliable as in rich nations. Fifthly, the reduction in inflation to what is believed to be sustainably and substantially lower levels than in previous years makes it economic, in view of their much greater durability, to withdraw small denomination bank notes in favour of new coins. Yet, as we have already noted, despite this enormous increase coins are more than ever merely the very small change in a modern country's total money supply, where abstract forms predominate.
Gutenberg was a brilliant inventor ... but not much good with money, being forced to accept finance from an overbearing local banker in order to launch the world's first book (with movable type) the Great Psalter, in Mainz in 1457. Its impact was truly revolutionary, acting as the engine of the Renaissance, with 1,700 printing presses turning out around twenty million books by the end of the century. The connection between the new invention and monetary innovation is however startlingly different from what might logically have been expected. Gutenberg cannot be blamed for the inflationary sins of subsequent generations of note makers obsessed with the limitless potential of the printing press. Historical progress laughs at the locksmiths of arid academic logic and frequently demonstrates a fascinating perversity in apparently backing the wrong horses with the wrong money.
If the historical progress of money had followed the logical steps assumed by, among others, some of the fashionable alternative historians, then Gutenberg's invention would quickly have brought about the triumph of printed over minted money. It took not decades, but rather hundreds of years for this logical conclusion to establish itself. In actual fact, in an early but classic example of what later became known as the sailing-ship effect, the powerful new presses then being developed, of which printing was but one type, led first to a revolution in minting to provide coins in quantities with less cost and human effort than before.
Leonardo da Vinci, a young contemporary of Gutenberg, produced detailed designs for mechanised minting to produce faster and more uniform coins, including a water-powered mill driving seven hammers, a pattern later adopted by the goldsmiths and coiners of Augsburg and Nuremberg to produce the remarkably fine coins known as milled. The indentations made possible by such stronger presses gave rise to the milled-edge coin giving greater protection against clipping - hence the motto "Decus et Tutamen" (an Ornament and a Safeguard). The making of milled money spread via Paris to the Tower mint by 1553, though it was not until the 1630s that the first substantial amount of milled money was produced, in Britain.
By that time the London 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 (compared with other banks), the total quantity of abstract paper money was eventually beginning to show its irreversible pattern of exceeding in an increasing degree that of solid, concrete, hard cash. All the same, for the next two hundred years the true value of this inverted pyramid of 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 remarkably thin reserves of the Bank of England. The vast superstructure of abstract money rested, right up until 1914, on this solid, traditional golden foundation. And we, still worry about sending our gold reserves - and our sovereignty - to Frankfurt, the Fort Knox of the EU.
Some of the most important changes in the monetary basis of our economy have come about, not as the result of dramatic inventions like the printing press, computer or laser, but simply through gradual, humdrum modifications in the use of money in carrying out its age-old function of being a unit of account in which debts and credits are calculated. Our first example is the development of double-entry bookkeeping, originating in the cradle of Renaissance Italy, popularised by the first printed book on the subject by a close friend of Leonardo da Vinci, Friar Luca Pacioli, published in 1494. While allowing for some exaggeration the point was well put by Werner Sombart: "Capitalism without double-entry bookkeeping is simply inconceivable ... With this way of thinking the concept of capital is first created". (see my History of Money 234-50).
Our second example is the tally. From time immemorial notched sticks had been used for keeping a record of messages, especially payments, but nowhere did the use of the tally develop to such an extent as in Britain, even after the arrival of modern banking methods and cheap paper had long rendered them redundant. One authority on the history of the Treasury has stated that "English medieval finance was built upon the tally" (Steel, A. 1954, The Receipt of the Exchequer 1377-1485, Cambridge). It developed into a sort of wooden bill of exchange, helped to build up an embryo money market in London and thus effectively considerably increased the money supply beyond the limits of minting.
Almost incredibly the Treasury Tally lasted officially until 1826 when masses of redundant tallies were stored in the House of Commons. In 1834, to save space and economise on fuel they were fed into the ovens. "So excessive was the zeal of the stokers that the historic Parliament buildings were set on fire and razed to the ground. The tallies perished in a blaze of defiant glory" (see my History of Money pp. 147-52, 251-2, 663). This backward glance is a further reminder that fundamental monetary changes rarely leave the political constitution unmoved: perhaps the computer will chip away what remains of Parliamentary sovereignty in matters of finance.
When official money was made only by the monarch then controlling it was conceptually simple, though even then difficult in practice, for there always tended to be too much or too little in relation to changing demands. Furthermore the government's supposed monopoly was always threatened by competition - by counterfeiters, dealers in bills of exchange and increasingly from the seventeenth century onwards by banks whose money-creating powers eventually came to dominate the total money supply. In these circumstances governments were reduced to trying to control the quantity and quality of moneys created mainly by others - in effect by any Tom, Dick or Harriet in banks scattered around the country, responsive to local businesses, not centralised in London. The Bank of England did this very successfully between 1844 and 1914 through Bank Rate and Open Market Operations. Afterwards these worked badly.
Although the power of bad money over good had been observed from the time of Aristophanes (405 B.C.) - and therefore the essence of the quantity theory of money, - it was not (incredible as it may seem) until 1970 that official money supply figures were published by the Bank. Even then they failed at first to include the deposits in building societies, despite the fact their retail savings exceeded those in the banks, that the societies were growing daily more bank-like and were repeating the history, a century later, of indulging in a merger mania bound to lead to a more integrated and potentially more inflationary financial system. Belatedly and hesitatingly building society deposits were included as the Bank experimented in producing a rash of money supply definitions - Ml, M2, M3, Sterling M3, M3C, M4, M4C, M5, PSL1, PSL2, DCE etc. - surely a case of the uncontrollable in pursuit of the indefinable. Inflation running at 27% in the mid 1970s proved that if anyone was in control of the money supply it was brother Jack Jones of the TGW Union and not the then Governor of the Bank of England, Sir Gordon Richardson.
Subsequently, thanks to Thatcherism, Reaganomics, recession and a more mature realisation by the public of the evils of inflation, by the mid 1990s inflation in most advanced countries seemed to be well under control. However, widespread "fudging" by the major European governments in order to meet the Maastricht convergence criteria is simply a macro-economic variant of old-fashioned currency debasement, such as can weaken the credibility of even the apparently strongest currency (see the Monthly Bulletin, Deutsche Bundesbank, June 1997, p. 5-7, for its spirited attack on Chancellor Kohl's request for it to re-value its gold reserves, deeming this unequivocally as "an infringement of the Bundesbank's independence" and "counter to German tradition". Stable money requires eternal vigilance by the monetary authorities together with - vitally - the co-operation of an informed public who handle powerful new tools. 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, 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. |