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Ancient Money: Insights from the beginning

The transition to digital money now seems inevitable. Understanding the history of money; exactly what money was and wasn’t and how it has changed will provide a framework for thinking about digital money. In a three part series we explore the evolution of money and its future.

What is money: Ancient Money (Part 1) 

With the blockchain potentially ushering in a new era of money, now is as good a time as any to get a handle on exactly what money is: particularly as its construction and therefore purpose isn’t always what people think it is.

It is most succinctly described as, a store of wealth, a unit of account, legal tender and a convenient medium of exchange (i.e. it is relatively portable and durable), likely evolving in exactly that order, though some of this evolution is conjecture as it took place before history began (i.e. before humans started recording events in writing).

Money as a store of value

Amongst that artefacts of hunter-gathers, long before the first settlements and cities, anthropologists discovered pretty objects, far from their source of origin, that seemed to have little practical value, such as sea shells, obsidian and other naturally occurring and relatively rare stones and materials.

Their relative rarity, at least to one of the trading parties, likely made them valuable but beyond their beauty, they are also durable. Given evidence that our ancestors’ lives were often starkly divided between feast and famine, it is conceivable that the exchange of perishable goods (such as meats and fruits) for a durable and rare object, such as obsidian, made economic sense. If you were fortunate, that obsidian could be exchanged in the future, in leaner times, for food. Thus, a hunter gatherer would have translated excess and eventually rotting supplies into potential food in the future.

Money as a unit of account

Tablets from ancient Sumer, circa 3000 BCE indicate that barley used to account for the value of goods and services, and to measure debts. This practice, though using cocoa, was discovered in Latin America when the Conquistadors encountered the Aztecs and Incas. I.e. many early stage civilizations, prior to the use of metallic money, relied upon one or a few perishable goods to determine the value of other goods and services in the economy. This makes sense, as it helps standardise the value of goods and services, but secondly this money has a utility value - at worst you can eat it. It is conceivable that it was this perishability, was a major deterrent to one vice of capitalism: greed. Afterall, not only can’t you take your money with you (as the saying goes today), but if your money is perishable, you can’t even keep your savings for very long - the idea of inter-generational wealth doesn’t work when your enormous stash of cocoa beans will have gone off in a month. Whilst this may discourage the vices of capitalism, it also impedes the benefits: it limits the capacity to store the fruits of one’s labour for future grander projects, and potentially more valuable endeavours.

Money as legal tender

Over four thousand years ago, King Hammurabi set out the statutory law for penalties related to various infringements. Taxes and levies were settled, by royal decree, in silver. With the rise of settlements, and particularly cities and empires, the rulers of those territories extracted taxes through pre-specified legal tender, often rare metals, though as we saw earlier perishable goods would likely also have been included as legal tender. 

For most of history money and legal tender has been made up of rare (and some less rare) metals. Gold in particular, given its rarity, has consistently held its value against comparable essential goods for thousands of years of years, and so has been an excellent store of value. 

Rare metals are the most enduring form of money. Its earliest recorded use is in the Hammurabi Code of ancient Mesopotamia, circa third millennium BCE, and it has been in use right up until the 1971 when the world’s reserve currency, the U.S. Dollar, finally ceased to be linked (and convertible) to a gold standard. Whilst there have been frequent forays into purely paper money (or Fiat currency), these have often been in times of distress (linked to conflict and economic distress) and they have rarely lasted. 

Our current most recent foray into Fiat currencies (after the end of the gold standard in 1971) is the subject of fierce criticism from some economists, such as those who follow the Austrian School of Economics. Many of these critics also endorse the rise of independent digital assets as a counterbalance (and perhaps even a substitute) to ‘government manipulated Fiat currencies’.

Money as a medium of exchange

Finally, metal money is durable and portable, so has been the most convenient medium of exchange. Gold in particular has always held substantial value (relative to a comparable basket of non-discretionary items, such as land, food, clothing, etc), and is unusually portable (i.e. a small quantity of it stores a lot of value). 

Contrast that with the wheat or the cocoa of the past or even metals like copper used widely in the middle ages, whose comparable weight to the equivalent of gold, would be several kilograms. Silver of course is the runner up, though today there are a number of industrial metals and rare earth metals, that also have notable rarity and thus value. 

While goldbugs (a rare but obstinate class of investor with a notable affection for the yellow stuff)  vociferously promote their favourite store of value, to fully appreciate why, of all the commodities, gold has endured longest, it is best to hear from a physicist. As Professor Brian Cox explains in his books (and videos), gold is chemical element, and like all chemical elements, we believe they were created during and in the immediate aftermath of the Big Bank and the proportions in which they were created are likely equal throughout the Universe. 

This means that even if we were to discover an abundance of gold in a new world (say America, or today on Mars), whilst it would initially suppress the value of gold (due to the sudden excessive supply from the new world), as the other assets of the new world become fully accessible (specifically, land, commodities and other commercial utilisation), gold’s value would eventually settle, most likely, at its age old comparable basket of real goods. 

Conclusion and looking forward

For most of human history, money has constituted the most durable (at the very least it lasted longer than food), portable and rare commodity that was available to a society and it was around that commodity that other aspects of an economy were defined and built. It’s creation wasn’t controlled by any central authority, and so whilst not always convenient, it was, for the most part, trusted.

In many senses digital money is an attempt to recreate this ancient, trusted, commoditised type of money, though to fully understand the digital revolution, we need to explore credit and paper money - the monetary monarchs being usurped by this tech rebellion. Join us in our next article, What is money: Credit and Modern Money, to explore this subject.

How does this help litigators?

In the upcoming litigation about digital assets we expect there to be much debate about the fundamental value of the tokens and coins that are used in the industry to transfer value. It is essential to understand the fundamentals of what assets hold value and why to consider whether litigation has merit or not. Whether something is a Ponzi scheme or the next big economic idea, depends upon the applicability of these fundamental ideas. Follow our LinkedIn group to be notified of future articles on these issues.

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