Bit Cowry
I’m completely befuddled by the current state of the economy. Nothing makes any sense to me at the moment. So I’ve gone down a rabbit hole to try and understand our present circumstances from a deep historical perspective, starting with money itself.
For thousands of years the primary currency was human promises. Between family members, friends, neighbors, and villagers there was an understanding that if I help you today you’ll be there to help me tomorrow. This is built on trust and reputation. Mutually beneficial cooperation, favors, and gifts (or the opposite - violence, theft, and treachery) were “traded” based on the words and deeds of individuals.
A collection of personal reputations within a community were both a medium of exchange and a store of value. These reputations could rise and fall as each favor and gift (or the opposite) transpired over time and were processed through as many filters as there were people in the group. Gossip, both favorable and malicious, was the arbiter of who was and wasn’t worthy. And that gossip itself would have greater or lesser value based on the individual source who would be known for either kindness or mischief, intelligence or incompetence.
In slightly more complex societies there are too many people for each member to have a direct intimate reputation with everyone else they may encounter or trade with. So cultures tend to settle on a system of physical objects that substitute these personal relationships. In order to be effective these objects must have certain qualities. They must be a medium of exchange and a store of value the way personal promises are. But in addition a currency must also be durable, portable, divisible, uniform, have a limited supply, and be broadly accepted by a diverse population.
Special sea shells such as the cowry were used as currency for centuries in many parts of the world. The cowry is a unique shell that’s strong, small and light weight, easy to divide up or group together for exchanges of lesser or greater value, fairly uniform, hard to procure beyond tropical shorelines, and broadly accepted by the population.
Absolutely anything can be currency if enough people agree on the particulars. I was in the Soviet Union during its death throes and bottles of vodka and cigarettes were being used quite successfully as currency. The point of any currency is to represent human promises. “I promise to give you one hundred cowry shells and you promise to give me a goat.” The promise is transferred from the individual to the external object of trust. The primary benefit is the ability to trade a generic thing now for specific things at some point in the future.
Salt was also used as currency in many cultures for thousands of years. Salt was a critical necessity in food preservation before modern refrigeration. It was a scarce commodity that had to be mined from deposits in the earth or dried in evaporation pools by the sea. It was durable, portable, divisible, uniform, had a limited supply, and was broadly accepted.
The English word “salary” comes from the Latin salis. In Roman times people were commonly paid in salt - hence the expression, “being worth your salt.” Salzburg, Austria (literally “Salt Fortress” in German) grew rich on the salt trade. In previous centuries people went to prison for smuggling salt the way people today go to prison for trafficking heroin or cocaine. And when Mahatma Gandhi decided to launch his Indian independence movement against the British Raj it was a salt strike and march that he chose as the most powerful issue to galvanize support. We take it for granted today, but historically salt was money.
Five thousand years ago in the Middle East grain was the real currency. Barley and wheat in particular could be grown, harvested, and stored for long periods of time in a way that meat, fish, or produce couldn’t. Grain was durable, portable, divisible, uniform, limited in supply, and broadly accepted. The introduction of agriculture and stored surpluses allowed populations to grow beyond what the natural landscape would normally support and early civilizations developed a new kind of problem. Societies became so large and complex that in order for agriculture to work there had to be a credible promise from crop to crop, season to season, that everyone would be fed.
Cuneiform clay tablets were created in order to keep detailed records of who was entitled to how much and under what circumstances. This gave rise to scribes, temple priests, accountants, lawyers, and administrative bureaucrats who were literate and numerate. It also brought taxes, armies, and state supplied subsidies. Cuneiform accounting techniques allowed grain rations and beer (liquid grain) to be doled out in exchange for work. This provided both a carrot and a stick to the peasant population as well as specialty trades people. Cuneiform tablets weren’t exactly currency per se, but were instead a kind of synthetic memory that allowed society to mange all the complexity effectively.
Metals such as iron, copper, bronze, silver, and gold were also used as currency by cultures all around the world for thousands of years. They were a medium of exchange, a store of value, durable, portable, divisible, uniform, limited in supply, and broadly accepted.
Metals have to be extracted from the earth then refined into purer forms. The effort associated with creating metals generally prevented too much from circulating and therefore promoted trust. Individuals may not have always believed the promises of the strangers they dealt with, but they tended to trust that silver would be accepted by the next person they encountered.
Tally sticks were another form or currency that endured for many centuries in Europe, Asia, the Middle East, and Africa. There are records of tallies being used in ancient Greece. The Bank of England was founded on the use of tallies in 1697 as part of a tax collection scheme by King Henry I. The Napoleonic Code in France recognized tallies as legal court documents.
In its simplest form, a stick was notched to represent a specific debt between two parties and was split in half lengthwise with one of the halves being larger than the other. The larger half was called the stock and was held by the lender. The smaller half was the foil and held by the borrower. Because the natural irregularities of the break created a unique puzzle shape that matched the original notches it was difficult to alter or forge tallies. This system was especially pragmatic in pre-literate times since no one was required to read or understand mathematics for the transaction to be valid. Tallies were, once again, a physical record of human promises.
Things like sea shells, grain, clay tablets, salt, metal coins, and tallies were eventually supplanted by paper script. Paper currency isn’t new. Tang Dynasty Chinese were using it in the 7th century. Initially, wholesale merchants would exchange private promissory notes between each other that represented metal coins. The paper acknowledged that the coins existed, but would be held in a safe stationary place that was agreeable to all parties. This was easier than transporting large amounts of heavy coins back and forth over roads that were vulnerable to thieves. If coins were a physical representation of human promises, paper was an abstraction of those representations.
In 1928 credit plates were introduced at various retail establishments like department stores. These were metal tags with the user’s name and account number physically stamped on to them. Clerks would use the plates to make inked paper impressions of the information and customers would be billed monthly for their accumulated purchases. The system was entirely analog involving a lot of collating and human tabulators. And each plate could only be used at one specific establishment since they were issued by in-house credit programs.
In 1950 Diners’ Club was launched as the first credit card that could be used at all sorts of unrelated businesses. As the name suggests the system began by registering restaurants with the coordinated payment plan.
American Express began in 1958 and offered a credit card that could be used at any number of businesses that provided a wide range of goods and services. These cards were similarly run across carbon paper and tabulated by hand. As soon as computers were sufficiently advanced financial institutions began experimenting with processing ever larger volumes of transactions electronically. Along with the mechanical tabulation and billing, computers began to keep track of who did and didn’t pay those bills and were therefore more or less worthy of trust and additional credit.
Today the use of paper currency has nearly disappeared as digital terminals expedite our transactions. Increasingly there aren’t even plastic cards involved since our devices communicate directly with each other via PayPal, Venmo, Zelle, Google Wallet, Apple Pay, Square, et cetera. Magnetic impulses suspended in the great electronic ether now constitute most of what we think of as money. In fact, if anyone attempts to pay cash for anything above a certain price point it raises suspicions over where that money may have come from and sets off alarm bells in various agencies.
And that takes us to cryptocurrencies like Bitcoin and Ethereum. As with the previous iterations of currencies throughout the ages all that’s required for a currency to flourish is a general agreement among enough people. The idea behind these new forms of electronic funds is that it takes time, energy, and effort to create them. The “mining” of cryptocurrencies is often compared to mining metals (or gathering salt or harvesting barley...) This fits the model that insists that a currency be relatively difficult to create and therefore limited in supply.
There’s also the uninterrupted block chain ledger that records where each individual unit of cryptocurrency began and how exactly it changed hands as it worked its way through the larger economy. This is similar to the system of clay tablets or tallies or credit card records that function as external memories for all the complex human promises.
That gets me back to my original question about where we are today in the present economy that makes no sense. Here‘s a German 100 Reichsbanknote from 1908, front and back as well as a 100 Deutsche mark from 1920, also front and back. They’re both fairly ornate and dignified, representing the artistic movements of their eras.
These next two notes are 10 and 20 million Deutschmark notes from 1923. Notice the much smaller size of the bills and the lack of flourishes and color. They didn’t bother to print both sides because the cost of ink nearly exceeded the nominal value of the currency. The hyperinflation of Weimar Germany of the 1920s reflected the promises of German institutions that were not honored.
Here are examples of paper dinars from Yugoslavia. These bills were issued by a country that no longer exists. In the early 1990s Eastern Europe’s economy and political structures imploded. The institutions that had made promises in the form of paper money simply evaporated and the dinars became nothing more than bits of colored paper, hence the 50,000,000 dinar bill.
Here are Zimbabwe dollars. The first batch has a 1 dollar bill, 5 dollar bill, 10 dollar bill, and so on. Pretty standard stuff. The second batch has 100,000,000 dollar bills, 200,000,000 dollar bills, and 500,000,000 dollar bills. The third batch has 1 billion dollar bills, 5 billion dollar bills, 10 billion dollar bills, 20 billion dollar bills, and 50 billion dollar bills. Eventually Zimbabwe printed 100 trillion dollar notes. Zimbabwe still exists, but its currency doesn’t. The country has since adopted various foreign currencies, primarily the US dollar. Zimbabwe’s promises were broken.
As I researched past forms of currency what I discovered, much to my surprise, is that all currencies ultimately fail for the same underlying reason. The abstraction of money detaches from underlying reality and people make promises to each other that they can no longer keep. In some instances the devaluation and/or abandonment takes decades or centuries. In others the collapse is rapid.
This was true in Mesopotamia thousands of years ago when grain was the dominant currency. But people didn’t actually trade barley or wheat directly as much as they used contracts that represented the grain. The real currency was the philosophical concept, not the grain itself. Those contracts could then be bought, traded, and sold as derivatives - abstractions that leaned on each other in complex ways involving loans with interest, counter party risks, and so on.
This worked well in the early stages as the economy grew. But inevitably those promises broke down as leverage expanded, interest compounded, and real returns couldn’t deliver relative to calculated projections. Everyone is a financial genius until the crops fail and the cattle begin to die in a drought. Then trust breaks down, there’s a systemic crisis, a reset occurs, and old debts and promises are extinguished in an unpleasant manner.
Rome’s dominant currency was the silver denarius, equivalent to a typical day’s wages of that era. Rome required that taxes be paid in this coin so the population was compelled to earn and accept them if for no other reason than to meet this ongoing obligation. In the beginning the coins were nearly pure silver. But over a period of four hundred years the silver content was incrementally decreased. Near the end Rome’s source of silver had been cut off by invading forces and the denarius became a debased coin of inferior material with a thin exterior silver wash.
The Roman system made promises that were easy to keep in the beginning as the empire expanded and conquered new territories. But as the empire aged the responsibilities and obligations accumulated while the influx of fresh assets from the periphery diminished then turned negative. In the late stages of its empire Rome had simply made too many promises relative to the underlying physical nature of what could be deliver. The ruined currency was one expression of those broken promises.
The Song Dynasty (960–1279) was a golden era of prosperity, science, art, and literature in China. New varieties of rice allowed crop yields to increase and the population more than doubled from 50 million to 118 million. China was by far the richest and most advanced part of the world at this time. The Song’s paper currency the jiaozi 交子 was part of its initial success. Paper currency and the associated national banking network allowed commerce and trade to expand dramatically.
But every currency in history has ended in more or less the same way. Finance allows the economy to grow based on ever more complex promises. Derivatives proliferate. Abstractions of representations of promises come to dominate the economy. And this is good - in the early stages - because it permits growth, innovation, and the kind of complexity that raises living standards. But eventually physical limits are reached. At some point all the contractual agreements become far larger than what the underlying material world can support and the currency fails. Or more to the point, society fails and the currency is one of the casualties.
Our modern global economy is heading for a currency reset. I see a lot of promises that can’t be kept and it may not matter whether the economy shrinks back down to a realistic size in a deflationary depression or if the currency is made to inflate away all the bad debts. The results are quite similar on the ground. The opposing teams of the culture wars are two sides of the same coin. People get angry at all the broken promises. What people don’t understand is that these cycles are a built-in and unavoidable part of civilization that play out regardless of the particulars of any age or specific characters. We’ll eventually make our way to the other side of this brewing crisis and settle on a new collection of institutions and a new currency. But historically this is never fun. Just sayin’.
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