Glyn Davies
Professor Emeritus of Economics
University of Wales
Cardiff
UK

and

Roy Davies
Assistant Librarian
University of Exeter
Stocker Road
Exeter EX4 4PT
UK
e-mail Roy.Davies@exeter.ac.uk

Sovereignty and Money: Past, Present and Future

by Glyn Davies and Roy Davies

based on material from:

Davies, Glyn. A history of money from ancient times to the present day, rev. ed. Cardiff: University of Wales Press, 1996. 716 pages. ISBN 0 7083 1351 5. http://www.ex.ac.uk/~RDavies/arian/llyfr.html

Authority and Money

Power and authority have always been bound up with the matter of money as demonstrated by the well-known incident in which the Pharisees attempted to discredit Jesus with the question "is it lawful to give tribute unto Caesar or not?" and his statement, after his questioners had been forced to admit that the image and inscription on their coinage was Caesar's, "render therefore unto Caesar the things which are Caesar's; and unto God the things that are God's" (Matthew ch.22 v.15-22).

Authority, secular and religious, was involved in the development of both money and banking. Although the inconvenience of barter was a factor in the adoption of money it was just one factor among several. Tribute to priests, chiefs or kings, compensation by bridegrooms to the parents of the bride for the loss of their daughter's services on marriage, compensation for crimes such as murder, and rituals involving competitive exchange of gifts, were all governed by laws and customs which often specified the forms and amounts of payments and it was for such purposes, rather than for the everyday exchange of goods, that money was originally developed in most societies.

Religious and secular authorities were also responsible for the invention of banking. The temples and palaces of Mesopotamia served as safe places for the storage of grain and later other goods including cattle, agricultural implements, and precious metals. These deposits came to be used in settling debts and eventually private banking houses were also formed. Laws governing banking operations were included in the Code of Hammurabi - a sign of the importance banks had attained 3,800 years ago.

Coinage and Sovereignty

Many commodities have been used as money including cattle, grain, cowrie shells, tobacco ... and precious metals. Their durability, ornamental uses, and high value relative to volume are qualities which have made silver and gold widely used as money for most of recorded history: but these metals have the disadvantage that their purity can be difficult to gauge - a problem that does not arise with cattle or cowrie shells! Coinage developed in Lydia in Asia Minor or modern Turkey out of the practice of stamping blobs of electrum, a naturally occurring amalgam of gold and silver, as an official guarantee of their purity. As the skills of the metallurgists improved and these proto-coins became more regular in size and purity the stamps became a guarantee of weight as well as purity, and hence of value - true coinage had arrived. This was by about c. 640 - c. 630 BC.

The use of coins spread rapidly across the Aegean Sea to mainland Greece where the various city states took great pride in their own coinage which was first and foremost a civic emblem. To strike coins with the badge of the city was to proclaim one's political independence.

Coercion played a role in establishing monetary uniformity. In 456 BC Athens forced Aegina to take Athenian `owls' and to stop minting her own `turtle' coinage and in 449 BC Athens issued an edict ordering all `foreign' coins to be handed in to the Athenian mint and compelling all her allies to use the Attic standard of weights, measures and money. The conquests of Alexander the Great brought about a large degree of monetary uniformity over much of the known world. His father, Philip, had issued coins celebrating his triumph in the chariot race in Olympic games of 356 BC - an early example of the use of coins as propaganda.

The Roman emperors made even more extensive use of coins for propaganda, one historian going so far as to claim that "the primary function of the coins is to record the messages which the emperor and his advisers desired to commend to the populations of the empire." Coins were by far the best propaganda weapon available for advertising Greek, Roman or any other civilization in the days before mechanical printing was invented.

In Britain with the failure of Queen Boadicea's revolt against the Romans in 61 AD, independent Celtic coinage came to an end. Nearly 4 centuries later, in the anarchy following the departure of the Romans and the invasions of the Anglo-Saxon, coins ceased to be used as money for nearly 200 years. Elsewhere in Europe although the effect on minting was much less pronounced, the collapse of the Roman Empire resulted in the abandonment of banking for the best part of a thousand years.

The re-emergence of coinage in the Saxon kingdoms of England was greatly stimulated by the Viking invasions and the need to pay for armies, or, alternatively, Danegeld to buy the invaders off. Athelstan, by re-conquering the Danelaw, became the first king of a united England and by the passage of the Statute of Greatley in 928, he established a single national currency. Whereas France had a short-lived single national currency for a brief period during the reigns of Pepin and Charlemagne, England's currency has had an unbroken history of over 900 years and these differing historical legacies have consequences even today.

There has never been a "new pound". In contrast most other major European countries were rather late in establishing their national currencies and have changed them at least once. Not until the political unification of the German states in 1871 did Germany acquire a single currency, the Mark, and it lasted not much more than 50 years before being replaced by first the Rentenmark and then the Reichsmark in the aftermath of the First World War. Within a generation this was replaced by the Deutschemark and Ostmark in West and East Germany after the Second World War. Thus, most European countries have relatively recent experience of adopting new currencies and consequently to them monetary union would not be such a revolutionary step as it would be to Britain.

When money consisted mainly of coins, money creation was largely a government monopoly, offset to a limited extent by the activities of counterfeiters. Monarchs took advantage of this.

Because of the convenience of royally authenticated coinage as a means of payment, and with hardly any other of the general means of payment available in the Middle Ages being anything like as convenient, coins commonly carried a substantial premium over the value of their metallic content, more than high enough to cover the costs of minting. Kings could turn this premium into personal profit; hence the regular wholesale recall of coinage first at six yearly, then at three-yearly intervals, and eventually about every two years or so. In order to make a thorough job of this short recycling process it was essential that all existing coins should be brought in so as to maximize the profit and, in order to prevent competition from earlier issues, the new issues had to be made clearly distinguishable by the authorities yet readily acceptable to the general public.

These recoinage cycles were far more frequent than was justified by wear and tear on the coins but the profits from minting supplemented the revenue that English monarchs raised from the efficient systems of taxation introduced by the Normans. However, revenue from minting depended on public confidence in the coinage and consequently an elaborate system of testing was introduced.

Anyone who had occasion to handle coins of silver or gold in any volume, whether merchants, traders, tax collectors, the King himself, the royal treasury, or the sheriffs, required reliable devices for testing the purity of what passed for currency. One of these methods was rough and ready - the use of touchstones which involved an examination of the colour trace left by the metal on the surface of a schist or quartz stone. The other, the Trial of the Pyx, was a test held in public before a jury. This Trial involved the use of 24 "touch needles", one for each of the traditional gold carats, with similar test pieces for silver.

The profits made from minting were one reason why governments jealously guarded their monopoly of coin production but when coins were made of precious metals it was natural that they should circulate beyond the borders of the issuing countries, and shortages of bullion have occasionally forced governments to swallow their pride and grant legal tender to foreign coins. Such was the case in the United States where, before independence, foreign coins, especially Spanish and Portuguese ones, had enjoyed a wide circulation long before independence and it was not until 1857 that their legal tender status was removed.

In 1797 Bank of England notes were made inconvertible and remained so for the duration of the Napoleonic Wars. That same year, because of a desperate shortage of silver coins, half a million pounds worth of Spanish dollars issued by Charles IV were overstamped with a small engraving of George III, resulting in the popular description of "the head of a fool stamped on the neck of an ass." A more successful issue of Spanish coins with their designs completely erased and replaced by the words "Bank of England Five Shilling Dollars" was made in 1804.

In the British colony of Singapore although the official currency was the Indian rupee, dollars from Hong Kong, Mexico, Bolivia and Peru were all made legal tender in 1867 and seven years later the Japanese yen and the US dollar were added to the list. To meet the demand from its far eastern colonies for dollars Britain started minting them in Bombay in 1894 but not until two years after the introduction of the Straits Settlement (Singapore) dollar in 1902 were foreign coins demonetized.

Paper Money and Sovereignty

Technical improvements in the media of exchange have been made for more than a millennium. Mostly they have been of a minor nature, but exceptionally there have been two major changes, the first at the end of the Middle Ages when the printing of paper money began to supplement the minting of coins, and the second in our own time when electronic money transfer was invented... The first stimulated the rise of banking, while the second is opening the way towards universal and instantaneous money transfer in the global village of the twenty-first century.

One of the most significant but insufficiently noted results of these two major kinds of invention is the fundamental reduction they bring about in the degree of governmental monopoly power over money. When coins were the dominant form of money, monarchs were jealous of their sovereign power over their royal mints. Paper money allowed banks to become increasingly competitive sources of money, a development which led not only to significant macro-economic changes but also facilitated contemporary revolutionary constitutional changes. It was no accident that the Whigs, who supported the limited constitutional monarchy of William and Mary were prominent in promoting the Bank of England.

By that time the fact that more than half of the total money supply was now being created, not by the mint under the dictate of the monarch, but rather by the London money market and provincial bankers gave rise to the most profound constitutional consequences. First, in order to carry out his more burdensome civil and military duties, the monarch, after a painful but vain struggle, had been forced to call parliaments annually. Secondly because of the state's need to supplement taxes regularly and substantially with various forms of short-, medium- and long-term borrowing, the state had been forced to take into account the views and interests of the moneyed classes and the nature of the institutions which its borrowing had very largely brought into being. The national debt not only created the Bank of England but also virtually created the London money and capital markets in recognizably modern form long before an equity market in industrial shares became of importance.

The creation of the Bank of England and the national debt in 1694 were both the result of an external challenge to the sovereignty of the English government which was desperately short of cash for the war against Louis XIV, the most powerful ruler in Europe. The lending resources of the goldsmiths combined with taxation, including new forms of taxation copied largely from the Dutch, could not supply the money needed. If the English government could raise a perpetual loan at a rate of interest acceptable to it, then instead of having to repay the capital only the interest would ever be repaid and the additional taxation required at any time would be just a fraction of the total loan. The lenders agreed to these terms because of various benefits to themselves that were attached to the deal. This, and other official borrowings, formed the "national debt" because it was not the personal debt of the monarch, which might be repudiated as Charles II did with his infamous "Stop of the Exchequer", but the debt of the government itself, guaranteed by parliament.

The role of the Bank of England was not confined simply to enabling the government to raise the money needed for the prosecution of the war. Michael Godfrey, the Bank's deputy governor (who was killed by a French cannonball during the siege of Namur in 1695) succeeded in establishing a system whereby the army received its funds promptly. After an interval of 4 years of peace a fresh war against Louis XIV broke out, the war of the Spanish Succession, and Britain and her allies were completely victorious, thanks largely to the military genius of John Churchill, Duke of Marlborough (an ancestor of Winston Churchill).

Paper money was also at least partly responsible for the loss of British sovereignty over its American colonies which, owing to a chronic shortage of official coins, made extensive use of this form of currency. Gradually the British government began to restrict the rights of the colonies to issue paper money, particularly when some of them, especially Rhode Island, issued excessive quantities of paper money causing inflation. Finally, in 1764 a complete ban on paper money (except when needed for military purposes) was extended to all the colonies. The resentment engendered by this ban was a major factor in the chain of events leading to the American Revolution.

During the 19th century bank panics and failures in the United States, Britain and other European countries were sufficiently common for governments to introduce laws regulating the activities of commercial banks and restricting some of their freedoms. The appearance of banknotes reflects these legislative changes. Nowadays they are normally issued only by central banks with a few exceptions (both Scotland and Hong Kong have note-issuing commercial banks) that are hangovers from an earlier era.

Currency Unions

During the 19th century there were a number of attempts in Europe to create currency unions. In 1834 the various German states formed a Zollverein or customs union as a first step in unifying their currencies, weights and measures. This was followed in 1857 by the Münzverein or coinage union a step towards the wider acceptance of different currencies. However, it was not until political unification was achieved and Germany became a single country in 1871 that a common currency, based on the gold standard, the Mark, was adopted.

Just before and after these developments in Germany two international currency unions were created. The first, in 1865, was the Latin Monetary Union comprising France, Italy, Belgium, Switzerland, and later Greece. The gold and silver coins of each country were legal tender throughout the union. It officially came to an end in 1926 but had in fact faded away some years earlier. In 1873 Denmark, Sweden and Norway formed the Scandinavian Monetary Union. It was similar to the Latin one but based on the gold standard and was dissolved in 1924.

The currency union resulting from the sacrifice of sovereignty by the German states endured, despite several changes in the national currency since its creation. In contrast the Latin and Scandinavia Monetary Unions which were achieved without the surrender of sovereignty did not. Thus it is not surprising that supporters and opponents of the new European single currency due to be created in 1999 tend to be distinguished by whether or not they are in favour of a greater degree of political unification. The economic arguments for and against are secondary to the political ones.

Money and Liberty

In the era of electronic banking `national' moneys are becoming increasingly anachronistic as millions of customers, irrespective of their country of domicile, are eagerly offered a variety of competing financial institutions in a variety of competing currencies. They are spoiled for choice - and national money monopolies are thereby also being `spoiled', in the sense of being reduced in effectiveness. The monetary authorities always try to reassert their monopolistic power - in economic jargon, to make sure that money is exogenously created - as opposed to money supplies produced elsewhere by the working of market forces - or `endogeneously' as economists describe the process.

One notable economist Friedrich Hayek advocated the "de-nationalisation" of money i.e. the removal of all legal obstacles preventing individuals using whatever form of money they wanted. In that way, so he claimed, the market would produce the best forms of currency. Although Hayek was an important influence on many right-wing politicians, including Margaret Thatcher, no government has been willing to go that far in giving up the state's control of money. However, there has been a lot of speculation recently that the advent of electronic cash could lead to privately issued currencies competing with official state currencies.

In general, the more regimented and "planned" that a society is, the smaller is the role played by money. An example of this was the nations of eastern Europe and the Soviet Union before the collapse of communism. A much older, more extreme example was the Inca empire. The Incas were unique in that they managed to achieve a high degree of civilization without the use of money, though paradoxically they possessed a superabundance of what has generally been regarded as by far the best material for money - gold and silver.

Thus there is a close connection between money and freedom or, in the words of Dostoevsky, "money is coined liberty." Consequently, the ramifications of changes in forms of money may ultimately extend to all forms of economic activity and have profound implications, beyond the purely economic arena, for every country of the globe.

For more information on the themes discussed in this essay see the History of Money web site URL http://www.ex.ac.uk/~RDavies/arian/llyfr.html

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