Economics: Money and Credit


Figure 1.--.

The history of money and credit is in large measure the history of civilization. This is because civilization began with settled agriculture and the creation of wealth beyond what hunter gathers could accumulate. This also involved a specilization in labor. With the specialization of labor pure bartar was akward leading to the development of money. The development of writing appears to have developed out of a need for accounting records. Early money was metal coins which had intrinsic value. Money was invented in Mesopotamia. The next step was credit. Modern banking traces its origins to the Templars. Christian pilgrims needed a way of transfering money to the far away Middle East and the Templars established a system to do this. It was the Medeci in Florence that established the foundation of modern banking (15th century). Banking was contrained in Europe because of the Church procriotion against paying interest which was consider usurious. For that reason Jews were commonly involved in lending money during the Middle Ages. From early times there has been a populist reaction to money lenders and banks. This was an element in European anti-Semitism. Even the Medici faced a populist uprising led by Savanarola. He is best known for his religious teachings, but populist sentiment was an important factor in the rising against the Medici. Populist sentiment against banking has continued to this day. While populist has generally blamed banks for economic problems, throughout history it has been the lack of an efficent banking system that has impeded economic growth, not the presence of banks. The Dutch took the next step in inventing capitalism which was adopted by the British. An efficent banking and economic system is an important factor in the victory of the English speaking people over Catholic absolutists (Spamush and French), the hegemonic German Empire and 20th Century totalitarians (NAZI and Soviet). Along with money and credit has come economic cycles and financial bubbles. These have included the South Sea Bubble and the Dutch tulip bubble. Bubbles of course are not just historical. Americans are familr with the dot.com bubble (2001) and the credit bubble (2008).

Money

The history of money and credit is in large measure the history of civilization. This is because civilization began with settled agriculture and the creation of wealth beyond what hunter gathers could accumulate. This also involved a specilization in labor. With the specialization of labor pure bartar was akward leading to the development of money. The development of writing appears to have developed out of a need for accounting records. Early money was metal coins which had intrinsic value. Money was invented in Mesopotamia.

Precious Metals: Gold and Silver

Humans for as long as there were records were enfatuated with gold and silver. The first discoverer of gold is lost in the mists of time. A human, perhaps a child, and probbly before the evolution of modern man. It was found as shiny nugget in a creek, washed down from rocks buried in the eth. This occurred thousands of years ago, and the humanity was immediately attracted to it. Gold is found around the world. Gold was discovered in its natural state, in inumerable streams. Eventualy humanswoukd go up those streams to discover the source of the gold. This occur in the stone age. Gold was surely the first metal known not only to humanity, but to early hominids. Every culture has seen gold as something very special. Every known culture trasured gold in one form or the other. Gold unlike many metls is dispersed widely over the earth's surface. Thus it was discovered by countless different peoples. And all of these societes wgich found it wre awed by it and wanted more. There are various reasons that humans were attracted to gold. There is the alure of the color, luster and sparkle. And the fact that is so stable, the element and not compunds are found it nature. And it is easily worked, extrodinrily malble and has a low melting point, an unlike silver is resistt to tarnish. This it can be worked with the most basic tchnology. The gold-silver ratio has varied over time. It formally dates back to 3100 B.C. The code of the first pharaoh, Menes, set the ratio at "one part of gold is equal to 2 1/2 parts silver in value." The emergence of gold as physical money took place in the form of the Lydian merchants' electrum coins -- 63 percent gold and 27 percent silver (about 700 BC). There are few valubles that have sustained their value for as long as money made out of precious metals have.

Credit

The next step was credit. Modern banking traces its origins to the Templars. Christian pilgrims needed a way of transfering money to the far away Middle East and the Templars established a system to do this. It was the Medeci in Florence that established the foundation of modern banking (14th-15th century). Banking was contrained in Europe because of the Church procriotion against paying interest which was consider usurious. For that reason Jews were commonly involved in lending money during the Middle Ages. From early times there has been a populist reaction to money lenders and banks. This was an element in European anti-Semitism. Even the Medici faced a populist uprising led by Savanarola. He is best known for his religious teachings, but populist sentiment was an important factor in the rising against the Medici. Populist sentiment against banking has continued to this day. While populist has generally blamed banks for economic problems, throughout history it has been the lack of an efficent banking system that has impeded economic growth, not the presence of banks. One historian writes, " ... poverty is not the result of rapacious financiers exloiting the poor. It has much more to do with the lack of financial institutions, wih the absence of banks, not their presence." [Ferguson]

Interest Rates

Interest rates or the the cost of debt have for several years now been the lowest levels in recorded history. And using a little creative assments, this means going back to the very begnning of civilization in ancient Mesopotamia. And even more syrprising, never has there many so much debt. And this oes not mean just failed states like Veneuela and Zimbabwe. The American national devt has just exceeded the $20 trillion mark. And huge debt exist around the world, including all the major money centers: Britain, the European Union, China, and Japan. And we even have the phemonenon of negative interest eates for the first time with lebders ctually paying govenments to take their money. Two academic have claimed to find a U-shaped interest rate cycle for every major civilization. He finds high interet rate befor a civilization begins to mature. At the top left of the 'U', interest rates begin a downward trnd as avivilzation develops and gains strength. And as interest rates fallm the level of civilization rises. Civilizational heights bring heroic deeds, great achievements, and golden ages. This pattern can be detected ith Babylon, Greece, Rome. The researcher observes “a progressive decline in interest rates as the nation or culture developed and throve.” Near the turn of the turn of the 20th century, Austrian economist Eugen von Böhm Bawerk glimpsed the same phenomenon. Bawerk declared that the cultural level of a nation is mirrored by its rate of interest: The higher a people’s intelligence and moral strength, the lower the rate of interest. Here Bawerk is speaking about real market interest rates and not central banker imposed rates. Then rates start rising off the bottom of the 'U'. The pace of civilization slackens and the flame of achievement fades. Debt is often the the water that douses the civilization flame. Ccivilizations fatten on cheap debt. And when interest rates begin rising, the burden of that debt also rises. At this point, each civilization declins and eventually falls. Civilization rises with falling interest rates. Drunk with debt, civilization falls with rising interest rates. [Homer amd Sylla] Interest rates have plunged since their 1981 peak. And the national debt has exploded:

Capitalism

The Dutch took the next step in inventing capitalism which was adopted by the British. And no one adopted capitalism more dervently than America. Two critical developments too place in 1776, both critical steps in the gistory of freedom. We all know tht America declared its independence in 1776--essenilly a declaratiom of political freedom. The other key development was Adam Smith piblishing The wealth of Nations the primer on capitalism or economic freedom. At the time, more than 85 percent of the world's population lived on the equivalent of less than a dollar a day. Today less than 15 percent do. And what is even more startling is that in only a songle generation,a group of countries (the Asian Tigers) reinvented themselves from poor countries to economic powerhouses. At the time the Communists were claining that they had the key to the futur, but chieved only economic stagnation and national poverty. The Aian Tigers on the other hand achieved phenomenaleconomic success. Even Maoist China took note and when they also insytituted market reforms achieved the same results. What was responsible for the enormous spike in material prosperity? Of course science and technology played aole, but the Soviet Union had plenty of sience and technoloy, but little economic success. What is the historic secret of capitalism and the post-World war II market reforms in transforming the starteling increases in living standards. The answer could not be more simple -- the profit motive. Adam Smith wrote in The Wealth of Nations in 1776, "It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard for their own interest." Contrary to popular thought, the overnment doesn't provide us with food, clothing, shelter, healthcare or Apple Smartphone. Businesses do. And in the process of meeting economic wants and needs, public and privately owned companies develop employee job skills, build careers, support local communities, contribute to charitable organizations, pay billions in taxes and provide financial rewards for owners and shareholders, including labor retirement plans. The Progressive/Socialist argument is that capitalism is all about selfishness, greed, and exploitation and thus a faulty if not evil system. This is not entirely incorrect, except that these are chararacteristics define humanity, at least in oart. Capitalism in essence harnesses human nature and thus the creativity of the human mind. It isn essence economic freedom. Capitalism is about voluntary exchange for mutual benefit. Unlike government, business is about freedom and individual choice, not coercion. If you don't like a particular company or its policies, you don't have to work for them, sell to them, buy from them or own their shares. The results have been astonishing. Americans turned awilderness iinto a beacon od freedom and an ecnomic and scientific powerhouse. An efficent banking and economic system is an important factor in the victory of the English speaking people over Catholic absolutists (Spanish and French), the hegemonic German Empire and 20th Century totalitarians (NAZI and Soviet).

Financial Cycles

Along with money and credit has come economic cycles and financial bubbles. These have included the South Sea Bubble and the Dutch tulip bubble. Modern cycles have been studies in great derail. This isespeciall true of America because the United States is such an important part of the world economy. Bubbles of course are not just historical. Americans are familiar with the dot.com bubble (2001) and the credit bubble (2008).

Monetarisn

Milton Friedman isapostle of monetarism. He argued that the supply of money is the key to managing the modern economy.

Sources

(von) Böhm Bawerk, Eugne.

Ferguson, Niall. The Ascent of Money.

Homer, Sidney and Richard Eugene Sylla. A History of Interest Rates 4th ed. (Rutgers University Press: 1996), 688p.









HBC






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Created: 2:50 AM 12/26/2008
Last updated: 6:17 AM 9/15/2017