“Ultimately any monetary system is backed by only one asset – Trust” ~ Anon.
The Invention of Coinage
By definition, coins consist of standardized metal discs, embossed with identifying symbols or letters, typically issued by sovereign authorities in order to represent a specific store of value in a convenient portable form. Coins are a convenient form of money for small transactions and have very ancient roots. Around the 7th century BCE coinage first started to come into circulation in the city-states of Asia Minor (modern Turkey) and Greece.
Coins were originally only struck from precious metals such as gold, silver or electron, but in time were also produced on mass from base metals, such as copper, brass or nickel. The discovery had been made that payment using coins was far easier than the original system of weighing out portions of gold or silver bullion in exchange for goods or services. Each silver or gold coin could be prepared beforehand in the state mint – each supposedly with exactly the same weight of precious metal in it. So for any transaction, the math and distribution was now easy -no longer needing measuring scales at the point of payment.
The invention of coinage is believed to have first come about as a practical solution to the vexing problem of facilitating quick payments to soldiers of mercenary armies. Of course, coins could also be used for any other payments for goods and services that had to be made on behalf of the state fiscus. In future a great deal of the wealth held in royal treasury houses would be converted into prepared coins, rather than simply stored as silver bullion bars or gold trinkets.
Of course, it was always an act of faith to take a coin in exchange for service rendered – but it was an imminently practical method and it worked for everyone. Contrary to popular opinion, coins in the ancient world are now believed to have only ever been minted for the purpose of facilitating state expenditure. The usage of coins in trade and exchange by the general populace was always just a secondary consequence of these initial state transactions. But once issued, the newly minted coins were quickly disposed of by the original recipients and put out into general circulation. However, the obvious advantage of coinage over barter trading was quickly understood by merchants and traders and the usage of coins soon became widespread. Although larger transactions, such as the settlement of inter-state tribute or bulk payment for ships’ cargoes, were still often concluded by the weighing out of bullion, it was universally appreciated that coins were imminently more suited for all smaller transactions.
Minting of Coins
How can we be so sure that the creation of money, in the form of coins was always initiated, not from trade, but from the requirements of state expenditure? The answer is a simply test of logic. As coins can only ever be issued by a sovereign authority – what would be the motivation for the rulers to have them minted, except to satisfy the needs of state expenditure? No state is ever going to freely distribute its precious store of silver amongst the general populace and get nothing back in return – not even to stimulate the economy and facilitate trade. If it did so, it would soon be bankrupt. States were jealous of the status of their coinage and usually embossed coins with images that had meaning for them, such as the portrayal of the face of the local (tutellary) deity on the obverse (heads side) and with the deity’s associated sacred symbols displayed on the reverse (tails side).
Incidentally, ancient coins are invaluable to the historian for dating purposes and the symbolism portrayed on coins and the context and provenance of their discovery are important primary sources for understanding the religious, political and commercial dynamics of the ancient world. Studies of coinage have revealed much that has escaped the extant literary record and provided historians with valuable primary and supplementary information about the issuing states, their economies and their inter relationships with contemporaries in terms of influence, trade and conflict.
Tax Collection
A significant spin-off for the issuing authority was that putting coins into general circulation made it easier to collect taxes and ensure a return of silver to the state coffers. As an asset class, silver coinage was a better proposition for storage than grain or other perishable commodities that were previously used for tax payments. Moreover, issuing coins gave a psychological boost to the status of the ruling regime, as it was tangible evidence of their stability, power and wealth. As with today’s financial systems, the acceptance of a particular monetary unit was entirely an act of faith. For the system to work, there had to be a general trust that the monetary unit (coin) represented a specific measure of value, in terms of purchasing power and also by way of its accepted exchange value with foreign currency units. The corollary was that the coin must always contain the set amount of precious metal that was implied or trust in the monetary unit (and the regime that minted it) would falter.
“Money is a terrible master but an excellent servant”. ~ P.T.Barnum
Bullion and Billon
Before long, ancient coins began to be issued in two genera. The higher denominations were the primary currency and were always minted from precious metal – either gold or silver, or in very early times from electrum (an naturally occurring amalgam of gold and silver) . They are called bullion currency as they were purported to have an intrinsic worth, based on the supposed quantity of bullion used in their manufacture. Lower denominations, used for minor transactions as small change, came to be manufactured from base metals such as copper, bronze or brass and had only a notional value, which was set in terms of the higher valued precious metal specie. The implication is that any base metal coin was actually just a token with an artificial value, as defined by the issuing authority, and backed by an (implied) repurchase offer for the more valuable bullion coinage at a fixed rate of exchange. This lower order of coinage is classified as billon coinage, from the French billet – token or ticket.
Spread of Billon Coins
In 1996 an interesting theory was put up, by the historian Martin, for solving the riddle of why there was archaeological evidence of a much faster spread of base metal billon coins in Greece, as opposed to the slower adoption of similar low denomination specie in the Persian empire and other parts of the Ancient Near East, where gold and silver coins were still the norm.
Starting with the premise that ancient coins were only ever minted for the specific purpose of making payment for goods or services rendered to the state, Martin then hypothesized that the reason for the early adoption of low denomination coins by the Greeks was that free citizens in the democracies and even in the oligarchies of Greece always had meaningful civic rights and could therefore demand to be paid – even for minor services rendered to the state. Payment in the low designated billon coinage was initiated in Greece as a convenient way of obtaining these mundane services from a free citizenry, without depleting the state’s precious store of silver coin. On the other hand, the despotic Asian monarchies were all-powerful and could coerce their subjects into supplying forced labour to carry out day-to-day public works or alternatively they could simply employ state owned slaves for these tasks. Persian gold Darics were too valuable to use for such mundane purposes and whips were cheap.
Debased Coinage
The intrinsic value of the higher denomination gold and silver coins was guaranteed and self regulating. This was because the commitment to ensure that these coins were always made of pure precious metal of fixed weight was generally honoured by the issuing authorities. The value was maintained by the widespread trust that the coins could always be melted down and reconverted back to the appropriate weight of bullion, which was always in demand as a scarce commodity. Unfortunately, the deliberate debasement of the precious metal content of the bullion coins eventually became commonplace in the Roman empire from around the start of the third century AD – with disastrous results.
SILVER DENARIUS: Severus Alexander
Due to deliberate debasement of the coinage for their own expedient reasons by various of the emperors, the Roman denarius and other higher denomination coins, which were originally of pure silver or gold, essentially came to be no better than the common “billon” currency they were supposed to be supporting. They were so lacking in precious metal content, because they had been adulterated with base metals, that eventually they also came to have only notional value. As there was no longer a reliable “silver standard” to back the currency, this notional value had now to be set in terms of strict price regulation of various key commodities. These prices were fixed from time to time by direct edicts of the emperors. In effect the Roman coins had now become unbacked “fiat” currency – from the latin word for edict - literally “make it done”
Inflation
These desperate efforts to prop up the currency, simply by the issuing of government decrees for fixing prices, were nevertheless doomed to failure. The reason was simple - as all money was now distrusted, no one wanted to take the worthless currency in exchange for tangible goods. The result was a sick economy plagued by shortages and runaway inflation. As has been proved over and over again in the modern era (e.g. most recently in Angola and Zimbabwe), attempts to prop up a sick currency through price controls is always futile and unenforcable.
AFTER THE REVOLUTION WE WILL MAKE YOU ALL MILLIONAIRES
Lacking trust in the coinage, in order to to satisfy their basic needs, the 3rd century Roman populace avoided the price controls, by engaging in black marketeering or they simply reverted to barter. This undermined the respect for the currency even further, creating more inflation and unrest, to the detriment of the state and the fiscus suffered badly in consequence. The lesson was simple – any monetary system must run on trust and, as in modern Zimbabwe, the trust had been squandered. The legacy for the later Roman emperors was that they had to wage a constant battle with runaway inflation and mutinous troops, always unhappy with their wages. All this was the direct result of the inability to control real prices. There was no easy solution for this dilemma, which was entirely caused by the initial meddling with the integrity of the coinage.
Faith in the coinage was never effectively restored. This was despite valiant attempts to bring back genuine gold and silver coins into circulation by one or two of the stronger emperors such as Constantine the Great. An aggravating factor was that by now much of the silver and gold in circulation had left the Empire to pay for luxuries from the far East. Eastern traders would not accept adulterated Roman specie and always insisted on settlement in precious metal. Inexorably the situation drifted from bad to worse as the currency continued to weaken. In time this trend completely undermined the authority of the state and led to the collapse of the economy and widespread social instability, and was the main cause of the fall of the Roman Empire. Don’t throw good money after bad – anon.
Caracalla
CARACALLA (AD 208-217)
To bolster his fading popularity the brutal Roman emperor Caracalla (AD209 – 217) undertook vast public works, such as his famous bathing complex in Rome, and simultaneously began to pay huge donations of cash to the troops on the borders to ensure their loyalty to his person. But to make ends meet for all this extravagance, he found it expedient to add such a large proportion of base metal to the “silver” coinage that it eventually became almost devoid of silver. The predictable result – utter loss of confidence in the coinage, prices rushing out of control, spiraling inflation and food riots in the streets of Rome. Sadly, the emperor had to learn the hard way that you cannot buy loyalty with bad coinage. His disgruntled troops eventually turned on him and put him to the sword.
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