How did humanity come to accept rectangular pieces of pulped trees as something to spend eight to ten hours a day working for?
It's a pretty insane story.
This change from hard currency like gold or silver
is a really huge deal.
Without it, we couldn't possibly have the massive industrial
and post-industrial economies we know today.
This change revolutionized how we do business
and forever altered how governments were financed.
Learning about this massive sea change
in how we as a species thought about money
can help us reflect on our current historical shift
from seeing paper as money, to seeing bits,
seeing digital ones and zeros as money.
But before we can get the exciting story of people
trying to convince other people that paper was worth something,
to understand why this is such a huge deal,
we have to discuss a bit about how we thought about money before paper.
If we go way back to the beginning of society,
we find trade.
Before early humans even really settled down,
there's evidence that, when we met, we exchanged things we had made or things we'd found.
But as soon as humans started to cultivate the earth and form societies,
we started to specialize
and that meant that we not only loved to trade, we had to.
Now, often when we think of trade we think of long distance trade.
We think of caravans loaded with exotic goods.
But for our story, we have to talk about local trade.
Because here's where we run into the problem of Coincidence of Wants.
Or rather, we run into it everywhere.
But if we fail to solve this problem at the local level,
society breaks down
and we can't have the specialised trades we need to run anything
beyond the smallest gathering of people.
So what is a Coincidence of Wants?
It's the basis on which trade can exist.
Let's say that I make shirts,
and you grow food.
Well, if you want a shirt and I want food,
awesome, we can trade. But if I don't want
your stupid food, or if you're all full
up on shirts,
well, we can't trade, can we? And that
starts becoming a real problem for
society if i want food but you don't
want my shirts. Maybe I can find somebody
with some third good that you do want.
But that means that a lot of time is
consumed by trading. And if I can't find
some other good you want to trade for,
well, there's gonna be trouble. And this
problem runs even deeper than we
sometimes think about
when you consider the lack of
refrigeration and transportation. Imagine
I'm a fisherman and you're a farmer, and
let's say that we want to trade.
Well there's this problem; your harvest
only comes in once a year. I can't trade
you for a harvest you don't have yet, and
all of those extra fish I caught today
are going to be pretty rotten by the
time your harvest comes in. And while
this may seem like a very specific
example, trade for food was probably the
most prevalent trade of the ancient world.
So we need to find a third good that we
both want that we can trade for. But
wouldn't it be convenient if there was
some universal third good which
everybody wanted and would trade for?
So we didn't have to do some long chain of bartering every time we wanted something.
Enter, money. All money is is a third good
that doesn't spoil and that we all agree
has value, thus becoming a unit of
exchange; An intermediary good, by which
all other goods can be traded.
And while we often think of coins made
of precious metals for this purpose, the
truth is, so long as it's durable enough
and hard enough to procure, anything can
serve as money. Tangent time: Turns out
we have used a lot of weird stuff as
money over our history. For example,
cattle have often served as money. I mean,
they're fairly durable, they last for
years,
they're practical, and they're reasonably
scarce. When Europeans arrived in the
Americas, alcohol often served as
currency. You could literally drink your
paycheck. Cigarettes have often become
money of prisons and POW camps.
Back in ancient China, money in the shape of tools and then knives became some of the
first examples of precious metal money.
And, my personal favorite, on the island
of Yap, gigantic limestone donuts serve
as money. They are so huge that once they
are brought to the island,
no one even moves them. They just remember who owns which ones. In fact, all of these
stones had to be quarried off-island,
because there's no naturally-occurring
limestone on Yap.
And once when a crew was coming back
from a quarrying expedition, a storm hit and
sent their stone to the bottom of the
ocean. But the crew survived and told
everybody what had happened, and the
Islanders decided that "Eh, it still
counted." So to this day, somebody owns
that giant piece of stone money at the
bottom of the sea. And even though it's
not really in use today, for hundreds of
years that stone was used to buy and
sell things, even though no one had
ever seen it, giving Yap, in some ways, one of the most forward-thinking monetary
systems before the modern era. But if we
want to talk about the king of them all,
the form of money that has been used the
longest and over the widest expanse of
the globe, we have to talk about one
thing.
No, not gold. Although in fairness, that's
what I would have guessed too. Nope, it's
the cowry shell. It's durable, impossible
to counterfeit, and without modern
harvesting techniques it's not so easy
to acquire that inflation will run
rampant. Anyway, tangent over, back on
target.
We have lots of different possible types
of pre-modern money, including the gold
and silver coins that we so often think
of when we think of money of the past.
But all of these different types of
money have one thing in common: they are
what we call commodity money, because
their value is in the commodity
themselves. Even cowries were seen as
rare and beautiful, and can be used for
jewelry and the like, and so were thought
of as having intrinsic value. The same
way we feel gold has an intrinsic value
for its scarcity and its uses.
Now, that makes a lot of sense for a
currency. It feels secure and reasonable.
You can trust to the worth of that gold
coin in your hand.
I mean, after all, if you're used to
trading one thing for another,
why would you ever trade something
valuable like a horse for something
worthless like a pile of paper? But for
gold or for cowries, well that's
another story. But when your economy
grows, this system starts showing some of
its limits. For one thing, commodity money is heavy.
If you're doing massive deals, it gets
really hard to transport. And it's risky
to transport across lawless lands.
Commodity money is also often subject to
debasing, where somebody. usually the
person who should be responsible for
making sure the currency maintains its
value, waters down the whiskey, or takes a
gold coin, melts it down, and reforges it
with a bit less gold in it, and passes it
off as worth the same amount. But more
than anything, when you get to gigantic
economies, the very scarcity that makes
commodity money seem to have value
becomes your enemy. Like, let's take gold
and silver. What happens when your
economy grows to the point where you
just can't get enough of it?
We actually saw the effects of this in
our episode on the Opium Wars, where so
much English silver was ending up in
China in exchange for tea,
it was actually causing inflation, and
hampering basic economic transactions at
home. And this really comes into effect
when we get to more modern government
finance, and the financing of war.
What happens to a nation when it has to
make a sudden drastic uptick in its
spending, but can't get enough specie to
cover its cost? Even from those who are
willing to lend? As I am sure we will see
in future Extra History episodes, it
plays havoc with an economy, and even the ability to prosecute a war. And the
reverse of this is true as well.
Currencies based on scarcity are often
subject to changes in the scarcity of
the commodity on which they're based, which can be trouble when somebody finds a lot
more of your currency commodity. When
Spain started to important massive
amounts of silver and gold from the
Americas, all the precious metal-based
currency in Europe started to suffer
from inflation. After all, all those gold
coins weren't worth nearly as much since
somebody had just dumped a huge new pile
of gold on European shores. And as a
government, or even a financial sector,
when someone digging up a new pile of
minerals means that you can't control
your own fiscal policy, then that's bad
news. But those disadvantages are only
easy to see if you're a head of state or
working on the largest-scale
transactions. If you're just some average
person in the street, when some
well-to-do says that they want to take
your grain in exchange for this nice
slip of... is that paper?
Well, you would be forgiven for thinking
that you smell a rat. Join us next time
as we finally delve into the origins of
paper money, and start to address this
problem of people fearing to give up
their outdated gold.