top of page


Big Bang.jpg

Yes, this is still a section about the history and future of money, so hang on, we're going to take a look at how gold and silver were created and why there isn't enough of it to be used as money.


In the standard model for the formation of the universe, it took between 100 and 400 million years for the first stars to form.  The initial light atoms had to become part of those early stars and go through the process of fusion to become the first round of heavier elements.  Round one might have gotten us up to metallic elements as heavy as iron (Fe - 26), cobalt (Co - 27), and nickel (Ni - 28).  Then those stars had to mature and die by going nova.  This was the end of what we call Population III stars.  Then matter coming out of these first stars had to coalesce into stars yet again and form even heavier elements.  It is thought that round two generated the rest of the naturally occurring elements, including the heavy metals.  Then these second generation stars had to die and go nova to provide the debris cloud from which our sun and solar system would form.  We refer to ourselves as being a part of Population I.

As the primordial earth formed, it began to rotate and work a bit like a centrifuge.  And, it was spinning fast, with a day lasting perhaps as little as two hours.  The heavier elements ended up in the outermost part of the crust, either on or very near what would become the surface, including the eventual continents.  This sorting worked particularly well on the continents, as the rocks which provide the bulk of the continental crust are lighter than the bulk of the material that went into sea floor crustal material.   


This can be a little mind bending, thinking of continents as floating on top of the mantle, but that's what they do, and they float higher than the sea floor, which is a good thing if you like dry land.

As one might expect in such a seemingly random process of distributing the primordial soup of which the earth is made, the distribution of heavy elements near the surface of the earth was lumpy, with similar elements tending to cluster together.  The surface of the earth is not homogenous.  There are large and small deposits scattered around for most of the common elements.  That's how gold and silver came to be where we could find them without our needing to know anything about geology.  Just remember two star cycles and a centrifuge and you've got the answer as to how gold and silver came to be somewhat easy to find.

Of course it is absolutely silly to suppose that the amount of heavy metals that would be either on or close enough to the surface where we could easily discover them would just happen to be in the exact quantities, and be discovered by us at the exact rates, that we humans would need to support our monetary needs.  Such a coincidence would have been an absurdity on its face, and of course it didn't work out that way.  If we were going to use that stuff as money, there was just one small problem.  There would never be anything close to enough of it once we really got going with our collective project to convert from a barter system to a monetized one.  The barter system was under no real threat at all by the emergence of the use of heavy metals as money.  Gold and silver as money for replacing the barter system simply cannot work anymore than one could take a shower with a thimble full of water.

There would be enough gold and silver to meet the monetary needs of urban markets in the ancient world up until the rise of the Roman Empire.  From their first use as bullion and on through the first few hundred years of being used in coins, the gold and sliver supply was about what was needed for early urban dwellers.  Then along came the Romans.


The Romans would build cities and move enough people into them who would require money for use in the urban markets to buy both luxury goods and the daily necessities of life that the supply of gold and silver could not keep up with the demand.  The Romans also would hire nearly 400,000 legionnaires who needed to be paid in gold and silver coins.  Because of these two trends in Roman economics, by the middle of the second century CE, there simply would not be enough crow bait to go around.  The loss of the ability to continue growing their cities and pay their legions was one of the major contributors to the decline and eventual fall of the empire.  Hard currency was a failing concept, but it would continue as the only solution to the need for monetizing barter economies until someone in China under the Song empire had a better idea - paper.  Too bad for the Romans, the western portion of their Empire would be long gone before that happened.  The eastern or Byzantine empire would last well into the beginnings of the invention of paper money in the west, but alas, by that time they had bigger problems and would not survive to take advantage of it.


The stuff that was traded using money in the urban markets of the ancient world might lead one to believe that everyone was using money.  And, everyone who went to one of those urban markets would certainly have preferred to use money as opposed to bringing along some goods to trade.  Taking your goods to market was fine for people selling things, but not so good for everyday consumers.  Thus, the ability to grow cities and their markets was limited by the the supply of heavy metals to be stamped into coins.  Plus, the ugly truth about the Roman empire is that the bulk of the wealthy urban dwellers did not produce much in the way of goods and services.  Roman society was critically dependent upon slaves and de facto slaves who were the nominally "free" people who worked on their massive rural estates.

One solution to the growing shortage of gold and silver for coins in the 3rd century CE was to start using a lot more of the less rare lighter metals for lower value coins, and this was done.  As an aside, the heavier a naturally occurring element is, the later it formed in our two cycle fusion inside stars process, and as a result, there is less of it than the lighter elements.  And the distribution of matter across the periodic table is roughly logarithmic.  As the atomic weight goes up, scarcity increases quite dramatically.  Or looking at it the other way around and from the point of view of using heavy metals for hard currency, once you run out, the lighter metals are in too great a supply.  Once you believe that the only real money is made of metals, then there can't be enough gold and silver to do the job, and there is way too much of things like copper, tin, and iron.  Thus, as the need for money grows, satisfying that need with bits of metal will inevitably lead to a loss of value and faith in the the coinage of the realm.  What is a poor Roman emperor to do?  As Chinua Achebe would write about more recent times in Nigeria - "Things Fall Apart."

The Romans minted their lower value coins by the millions, but when value is tied exclusively to the scarcity of the metal of which they are made, and the relative scarcity has to be just right for the economic needs, and the metal has to be somewhat easy to work (i.e. malleable easy to melt at a reasonably low temperature, well the periodic table and the earth's continental crust just don't cooperate with that mix of requirements.  The shortage of more highly valued gold and silver was both real and not completely solvable by adding various alloys including bronze.  Just the right level of scarcity or difficulty of acquisition is required for everyone to trust a currency and freely use it for their transaction needs.  

The lighter metals that were easily accessed by mining were just too easy to come by in order to be sufficiently valued as options for raw material for making money the mints.  At their peak, the Romans had at least twelve mints that we know about, and it simply wasn't enough.  Even if it had been, the raw material supply was insufficient to keep them running at peak outputs.   The Romans in the western empire never did solve the problem, and when their silver and gold mines in what is now Spain began to fail, the western half of the empire started to collapse.  Now this leads us to an observation about attitudes toward money in the 21st century that is super funny.  This is because now we have gold bugs who insist that the only real money is gold.  History may not be a perfect science, but if we pay attention to what it has to tell us, it is possible that it will cause some of our silliness to subside a bit.

Paper money was not an option to the Romans for some of the same reasons that gold and sliver stopped working.  Roman paper would have been too fragile in the case of the stuff made from papyrus stock.  And, the stock of the "paper" used by the people in the city of Pergamon in what is today western Turkey, (parchment made from the hides of lambs and calves) was barely enough to cover their needs for writing materials, let alone serve as a currency.  Because they had a falling out with the Greco-Egyptians who cut off their access to papyrus, the Pergamese came up with parchment.  It was a super high quality material that was very durable.  It was highly prized and only used for the most important documents.  Even today we refer to receiving a college degree as getting one's sheepskin.   But alas, when it came to being a material with which to make money, it had the same problem as gold and silver.  It was impossible to produce enough of it.  It would have taken the hides of millions and millions of sheep and lambs to begin to meet the currency needs of the ancients.  There might have been another solution in the form of business contracts, but another thousand years would pass and the art of papermaking would make its way to Europe before anyone would figure that one out.


The emperors in the western empire tried legislating values for coins made from light weight metals, but it didn't go over.  This is an important thing about money.  It only works if people believe in it.  The material of which money is made, even it it is just ones and zeros in computerized ledgers, is irrelevant.  What matters is what people believe and trust, and in the ancient world the only thing they trusted were things that were bits of shiny heavy metals that were too scarce to work.  


The Lydians had sold the world on the idea that gold coins having a god certified value and metal content could be trusted, so everything else was evaluated against that.  The widely held belief that started with the Lydians and grew rapidly during the Greek and Roman periods was that all other forms of money were only worth whatever you could exchange them for in gold at the local temple - er bank.  We literally became stuck on something that by definition could not work because there would never be enough of it - except in China.

The city of Hangzhou, the capital of the Song dynasty in the 9th century, had grown to a population estimated to be around a million people - similar to what Rome had been six centuries earlier.  But, the Chinese had paper, and soon the merchants of Hangzhou came up with a way of using it as legal tender.  This solution would last for a couple centuries before it too would fall out of favor, but it did work for long enough for word of what they had done to spread back to the middle east.  And thanks to the Battle of Talas River in the year 751, the secret of papermaking made its way to the west as well.  And while the westerners did not attempt to use paper for money in the same way the Chinese had done, they did use it for something else that had the same effect.  It was called the bill of exchange.


Let's revisit what it is that makes money what it is.  As we discussed in the chapter on Markets and Taxes, money has the following properties:  

  • Money is stored work.

  • Money is a call upon the productive output of others.

  • Money has to have some agreed upon units of value (the fractional cow problem).

  • The total amount of money cannot not exceed the amount of things it can buy.

Also, in the last chapter on coins, we added the notion that money serves two functions that are at odds with each other in everyday use.  One is to facilitate transactions and the other is to serve as a storage vessel for the value that has been assigned to our stored work. 

Money is not only something that can be used by the person who "earned" it and has the value of their work stored in it.  It can also be lent or advanced to someone else so that they can use it, and then hopefully repay the lender at some acceptable future date.  In fact, some of those earliest clay tablets from Sumer are records of such loans.  This lending business creates an opportunity for another bit of math magic with money.  And, there is more than one kind of loan.  

A loan is a contract.  It is a commitment on the part of the borrower to make a specific financial transaction at some future date.  In the case of a common loan, it can be a simple repayment.  But the concept can be generalized a bit and then used for other things.  We create a record that says that the parties to the agreement are going to do something at the beginning of the term of the agreement, and something else at its end.  In that simple loan, the first act is an advance of funds from the first party to the second.  The second act is a repayment with the second party returning some agreed upon amount at some future date, usually more, so as to cover the cost and the risk associated with the deal.  The same general form can be used to order goods to be procured and delivered at some future date, and the values being exchanged include the money and the goods.

The idea that a contract can involve goods as well as money may seem obvious to us today, but that is not the way merchants and trade worked for a very long time.  Someone involved in buying goods in one place and then transporting them to a distant locale and selling them there for a profit was not typically doing it based on an advance contract for some specific amount of goods to be delivered at some specific price.  There may be an understanding that one or more eager customers would await the travelling merchant's return, and there may even have been sponsors or partners in the journey, but travel and exactly what would be available in distant markets were very uncertain propositions throughout most of history.  Plus, the goods that were transported great distances for sale in remote markets were typically luxury goods.  Let us remember, that only a very tiny percentage of the population was either urbanized or using money instead of bartering for their needs. 


The idea of a contractual trade agreement with explicit future performance commitments was something that did not appear until the 13th century CE at the dawn of the Italian Renaissance.  But these agreements had a kind of magical effect in terms of the money supply.  In effect, a signed agreement for future performance that is valued at some specific amount of money is money!  Just as a loan has the effect of doubling the money supply by the amount of the loan, contractual trade agreements or bills of exchange do the same thing.  Enforceable business contracts increase the money supply by the amount of the contracts. Of course contracts are riskier than gold in the hand, but they do have the potential to solve the problem of not enough gold.

Another fact of economics at the dawn of the Renaissance is that unlike the way things worked during the days of the Roman Empire,  the amount of precious metal in each unit of coinage in different cities was unique.  There was no emperor imposing a standard across all of Europe, and Charlemagne (ruled from 768 to 814) did not have paper, so he had the same shortage problem the late Roman emperors had.  As a matter of necessity, having a business that traded in the import of goods from afar also put one in the business of changing money between the two or more currencies involved.  This was not new. 

It is worth noting here that the Chinese did and have had a strong central authority for longer than anyone.  Sometimes this has worked in their favor, and sometimes it has been disastrous.  It has all depended on how wise the emperor and his or her court have been at any one time.  And being humans, being all wise all the time has proven to be just as impossible for a Chinese emperor as has for an American president.  Mistakes get make, and because of the strength of the Chinese central authority down through the ages, their bigger mistakes have been amplified more than they would have been in a less efficient form of government like republican democracy.  So when the Ming emperors decided to take the country back to its traditional ways and get rid of paper money, they had to power to make that happen, and it had the expected disastrous results.


Returning to the west where the Chinese idea of paper money would be adopted in a more cautious and sustainable way, and become something impossible to stamp out, the seeds of what would become modern banking took root.  Currency trading had been a thing since the Lydians had invented coins.  As we described earlier, in those early days of the Greco-Roman period, currency trading tended to be done someplace either at or near the local temple.  By the time of the Italian Renaissance it had moved to more convenient locales, near where the wealthy banking families had their offices.  Religion was out of the money changing business, but not out of the taxing one, which was cleverly disguised (not) as tithing.

Athenian Treasury at Delphi

One can visit the ruins of those first ancient Greek banks, and I've been to several of them.  What the Greeks did was for each city to build a branch temple or treasury in the places where they needed to conduct money changing transactions.  The two largest banking centers were at Delphi and Olympia.  To be sure, these branch treasuries were as much about showing off the wealth of each city as they were about being banking repositories.  But it is easy to see why it became so natural for the coins produced by each city to bear the symbols of the primary cult or god of each.  For example, the coins from Athens always had an owl on them, which was the symbol of Athena.

The thing that was new during the Italian Renaissance was that the bankers were also in the business of producing and selling luxury goods from afar, doing so under contract, and those contracts specified the currency to be used in settlement.  Thus profits could be made in the currency exchange transactions, even though by that time the church had banned the charging of interest because it was supposedly forbidden in scripture as the evil of usury.

Despite the popularity of money as a substitute for barter transactions, and how quickly new ideas about money would spread, money was not for everyone.  If fact, it wasn't for hardly anyone at all.  This was its single biggest limitation, and the one that is almost totally ignored in almost all histories of money and economics..


For the better part of the next 2,000 years after the Lydians invented coins, the world of the barter economy would grow as fast or faster than the world of money.  What can be said for certain, is that the monetization of markets quickly became the reality of urban life once the Lydian concept of using god certified crow bait for money took off.  With the exception of the pre-Columbian cities of North and South America, hard currency became the standard for market transactions.  But even in the cities of the Americas we have anecdotal suggestions that some form of a monetary system had developed, especially in the Valley of Mexico.  It's just that in the Americas it was not based on crow bait.  However, prior to about 1830, less than 10% of the world's population was urbanized, and prior to 1500 it was probably less than 1%.  Monetization of rural economies did not become significant until the end of the medieval period, roughly at the end of the 15th century.  The use of money and cities grew together.  Some nice charts provided by the website "Our World In Data" on the distribution of population between rural and urban areas can be found here.  One of these charts is particularly revealing.

This is the part of the history of money that virtually never gets told. I keep saying that, but it's something that I find rather amazing about the way we teach economics.  We simply ignore most of it.  Most tellings of this story present a picture that suggests that money is something ancient that has been a meaningful part of most people's lives for the past 2,500 years, and that is simply not the case.  Even today, there are hundreds of millions of people who live in non-monetized economies. 


That the history of economics and money should be badly distorted and have a focus that is almost exclusively about what was happening in that ultra thin layer of urbanized humanity should not be surprising.  That is true of all history.  We know the stories of kings and queens, of empires and wars, of great monuments and periods of exploration.  We have the names of a few of the ancients from most civilizations, but as a percentage of the whole of humanity, this is but a surface layer of noise.  For every Narmer or Alexander the Great, there were hundreds of thousands of people whose names and lives we know almost nothing about.  Except for that oh so brief period right at the beginnings of money in ancient Sumer, money had nothing to do with most people.  Money for everyone is something quite modern that began to be recognized as a necessity with the Industrial Revolution at the end of the 17th century.

Now let me back off from that a bit.  The expansion of the Roman empire did create the conditions that might have led to the idea of money for everyone.  Certainly the legions and new cities that the Romans were building were making their mark across a very wide area, and they used money.  But, Rome was overtly a slave society and it was deeply embedded in what I like to call the estate system.  This became even more the case as the empire went into decline, and wealthy Romans who formerly lived in their cities moved out to the countryside to live in fancy villas, a precursor of the medieval manor houses and castles.  But even as the Romans spread out, most of the people they ruled were either slaves (i.e. overt property) or effectively slaves by being tied to the farming estates where they produced the food everyone ate.  Slaves and serfs lived mostly outside the monetized economy, except for what they could purloin and stash out of the sight of their owners or "betters."

The rise of cities enabled by monetization of the urban economy in the classical Greek and Roman worlds had another effect.  A monetized urban economy enables individual specialization.  The larger the city and the more it uses money instead of barter and slavery to support its size, the more people there will be in it who become more deeply skilled at every more narrowly defined specialties.  This enablement is critical to the discovery, invention, or creation (pick your favorite term), of ever more complex or advanced technologies.  When first the Greek and then the Roman worlds went into their deurbanization process with wealthy people moving out into the countryside with their ever more lavish manor houses supported by self sufficient estates, the variety of goods and services, and their complexity necessarily declined.  The advancement and sustainment of technologies requires a commensurate size of monetized urban society.  This particular attribute of what came to be described as either capitalist republican democracies or socialist dictatorships is important to understand.  Though very different in their organizing structures, there is enough similarity in their monetization coefficients, that they are capable of similar levels of technology.  A monetized urban culture is spreading its monetary wealth deeply through its ranks will out invent one of the same size that is spreading its wealth less thoroughly.  This is axiomatic, as it is money that enables the specialization that fuels inventiveness.  Reduce the number of people who have deep specialization, and the invention rate will go down accordingly.  Capitalism only works to the extent that each individual in the society is a capitalist and not a merely working to sustain themselves and their families.  This should be dumb obvious, but for some reason a whole lot of people who claim to be capitalists behave a lot more like the upper classes in pre-monetized ancient societies where it was the exercise of brute power instead of access to money that was the key to wealth.

This relationship cannot be stressed enough.  Monetization of society as a whole is the key to urbanization and human specialization.  Decrease the degree to which society as a whole is monetized, and both the cities in which they live and the level of technologies being produced by that society will go into decline.  Unfettered greed by the few is just as toxic for us today as it was for the Romans in the latter days of their empire.

One of the biggest changes that has occurred since 1980 is the transformation of much of China and India into monetized economies, which is something that is yet to happen in much of sub-Saharan Africa.  But, the monetization of urban areas did have an immediate impact on rural areas in another way.

Monetization of markets throughout Europe, Asia, and North Africa happened in tandem with the beginning of large scale poverty as we know it today.  This was probably not a cause and effect relationship; but, these two trends almost certainly reinforced each other.  Because there wasn't but a small fraction of the needed money supply, most people (meaning people living in rural areas), started to lose their ability to meaningfully participate in the markets where the latest products of human ingenuity were available.  There were two responses to this problem.  One was to treat it as unsolvable, which is how things went down in the west.  The other was to come up with a way to expand the money supply beyond crow bait.  And as mentioned above, the Chinese got there first, but failed to build upon or even sustain their solution.  It was the merchant bankers of the Italian Renaissance who laid the structural foundations to make it possible to contemplate a world in which most of the barter economies had become monetized.

Alternatives to hard currency or crow bait were needed, and so humans came up with some solutions.  By the way, hopefully by now it is clear that I have a very dim view of all of the nonsense one hears about hard currencies being the only real currencies.  That's just so many mindless fish snapping at lures.  But before we go there, let's take a closer look at the estate system.

bottom of page