Current account

The current account summarizes transactions that fall within the categories of imports or exports of good and services, income earned abroad, domestically generated income belonging to foreigners, and unilateral transfers. The common denominator behind all these transactions is the involvement of an inflow or outflow of currency. Unilateral transfers include foreign aid and gifts of money from residents of one country to family members living in another country. Cross-country investments, such as buying and selling foreign stocks and bonds, also involve currency inflows and outflows, but are summarized in another account called the capital account. A third account, the official reserves transactions account, summarizes central bank transactions that involve an inflow or outflow of currency and that change official reserve holdings. A Federal Reserve purchase of gold with dollars is an example of the type of transaction covered by the official reserves transactions account. These three accounts make up the balance of payments.

The current account balance is considered a significant indicator of the economic and monetary health of a country. It is among the handful of indicators that the Economist magazine reports for major countries of the world. The Economist reports the current account balance both in absolute numbers and as a percent of gross domestic product (GDP).

On the current account, transactions that involve an outflow of currency are a debit item, and transactions that involve an inflow of currency are a credit item. Exports of goods and services are a credit and imports are a debit. The foreign expenditures of a U.S. family visiting Greece count as an export on the U.S. current account. The interest income that a resident earns on a foreign bond counts as a credit. The interest income that a domestic bond pays to a foreign owner is a debit. Money residents send to family members living abroad counts as a debit. If the money value of the debits outweighs the money value of the credits, then the outflow of currency outruns the inflow of currency, and a country has a current account deficit. If the credits exceed the debits, the country has a current account surplus.

Persistent current account deficits is often regarded as an indication that a currency is overvalued and therefore faces a heightened risk of future depreciation. The largest component in the current account balance is net exports (exports minus imports). A current account deficit is nearly always an indication that imports exceed exports. As the value of a country’s currency goes up in foreign exchange markets, foreign imports into that country become less costly while exports from that country become costlier in foreign markets. An excess of imports over exports suggests that a domestic currency is too strong and likely to weaken in the future. A current account deficit indicates that the currency outflow on the current account exceeds the inflow. If the excess outflow of currency from a current account deficit is not offset by an excess inflow on a capital account surplus, a currency will depreciate unless a government is able and willing to take action. Governments usually hold sufficient official reserves to defend domestic currencies against speculative attacks, but not against long-term downward trends driven by market forces.

Currencies can remain strong in foreign exchange markets for extended periods of time in situations where a large current account deficit is offset by a large capital account surplus. A capital account surplus indicates that the inflow of foreign capital exceeds the outflow of domestic capital to foreign countries. A net inflow of capital equates to a net inflow of currency. Countries with persistent current account deficits often maintain elevated interest rates. The high interest rates encourage the inflow of foreign capital, offsetting the tendency of a current account deficit to undermine the value of a currency.

Even with strong capital inflows, a current account deficit is regarded as a risk factor in foreign exchange markets. The components in the current account are not tightly linked to the volatility and varying psychology of financial markets whereas capital flows are tightly linked to conditions in financial markets. Capital flows are much more sensitive than exports and imports to changes in expectations, and can therefore be more volatile. A net capital inflow can quickly change to net capital outflow, leading to almost certain currency depreciation and crashing financial markets for a country with a current account deficit. Currency speculators are always closely watching countries using elevated interest rates to sustain current account deficits offset by capital account surpluses. If these speculators see signs that elevated interest rates are pushing a country with a current account deficit into recession, they will dump the currency of that country. The value of the currency will crash in foreign exchange markets, domestic financial markets will crash, and the country will likely undergo a full-blown economic collapse.

For several years, the United States has been able sustain current account deficits with little difficultly. That is because the United States holds a reputation as a safe haven for foreign capital. United States’ investments are considered among the safest in the world. Over the last 30 years, however, the Japanese yen has gained strength relative to the dollar, reflecting the fact that Japan usually has current account surpluses and the United States usually has current account deficits.

See also: Balance of Payments, Currency Crises, Foreign Exchange Markets

Currency crises

A currency crisis occurs when the value of a currency crashes in foreign exchange markets, when holders of a currency stampede to sell it in foreign exchange markets out of fear that the currency is headed for lower values in the future. Foreign exchange markets determine the rate or price at which one currency can be purchased with another currency. An exchange rate of $1 per 10 Mexican pesos tells how many pesos it takes to purchase a dollar and how many dollars it takes to purchase a peso. While exchange rates are subject to market forces, certain groups have vested interests in exchange rate stability. One such group would be U.S. investors who have purchased Mexican peso bonds issued by the Mexican government. Bondholders who purchased Mexican bonds with dollars when the exchange rate stood at 10 pesos per $1 will experience a windfall loss if the Mexican peso depreciates to 20 pesos per $1. When they sell the Mexican bonds and convert the pesos back into dollars, they will receive roughly half as many dollars as they originally invested. Therefore, if holders of Mexican bonds expect the peso to depreciate in the future, they will try to sell their Mexican bonds for pesos, and convert the pesos back into dollars before the depreciation occurs. If large numbers of investors try to sell pesos for dollars all at once, the value of the peso in the foreign exchange market will crash.

Speculators may trigger a currency crisis if they think a currency is vulnerable to a sudden crash. If speculators think the peso may deprecate in the future, they will borrow pesos and sell them for dollars. If speculators borrow pesos to buy dollars when the exchange rate is 10 pesos per $1, then they can repay their loans and reap a profit if the peso depreciates to 20 pesos per $1. Speculative attacks can turn mere expectations that a currency will depreciate into a self-fulfilling prophecy.

The common denominator behind all currency crises is a current account deficit. A current account deficit most likely indicates that outflows of domestic currency from imports exceed inflows of domestic currency from exports. As long as outflows of domestic currency approximately balance inflows of domestic currency, the foreign exchange rate tends to remain stable. If the outflow of currency outruns the inflow of currency on the current account, then foreign investors must either be willing to hold financial assets denominated in the domestic currency, or the central bank responsible for the domestic currency must buy back the excess outflow with its holdings of other foreign currencies. Central bank holdings of other foreign currencies are called foreign exchange reserves. The more foreign exchange reserves a central bank holds, the less likely a domestic currency will suffer a currency crisis. A current account deficit and the associated excess outflow of currency lead to currency depreciation if the central bank does not buy back the excess currency outflow and if foreign investors do not find financial assets denominated in the domestic currency attractive. If, for instance, Mexico has a currency account deficit and the Banco de Mexico does not hold sufficient reserves of U.S. dollars to buy back the excess outflow of pesos, then excess supply of pesos will build up in foreign exchange markets and one of two possibilities are left. One possibility is that foreign investors will purchase the excess supply of pesos and use the pesos to purchase bonds and other investments in Mexico. If foreign investors are afraid of investing in Mexico, or find Mexican interest rates too low, then there will be pesos in foreign exchange markets that nobody wants, and the Mexican peso will depreciate.

Countries that run persistent current account deficits tend to run out of foreign exchange reserves. Speculators are prone to launch speculative attacks on countries with current account deficits and low foreign exchange reserves. If the attack is successful, the currency crashes.

A current account deficit usually indicates a large government budget deficit, but it can indicate a high level of domestic investment spending relative to domestic savings. Either way, the country is importing foreign capital. A currency crisis usually occurs when a country that has been experiencing a foreign capital inflow suddenly starts experiencing a foreign capital outflow, perhaps because foreign investors have lost confidence. 

See also: East Asian Financial Crisis, Current Account, Mexican Peso Crisis of 1994

Currency School

The currency school emerged as an important body of monetary thinking following England’s resumption of specie payments after the Napoleonic Wars in 1821. England had suspended specie payments from 1797 to 1821 because of the financial stress of wars with France. The fundamental principle of the currency school lay in the concept of a money supply composed of coin and paper money acting just as if all money was entirely metallic.

Before the development of paper money, domestic supplies of metallic currency fluctuated with the ebb and flow of foreign trade. Buying goods from foreigners caused metallic currency to flow out, and selling goods to foreigners caused metallic currency to flow in. A net outflow of metallic currency depressed domestic prices, rendering domestic goods more competitive at home and abroad, and a net inflow of metallic currency lifted domestic prices, rendering domestic goods less competitive at home and abroad. Economic competition between countries ensured monetary stability.

The resumption of specie payments—that is, the return to convertibility of the pound in 1821—had not ended fits of monetary and financial disorder and adherents of the currency school saw variations in the money supply as the culprit. England had suffered major crises in 1836 and 1839, a mere three-year interval that many regarded as a wake-up call. According to the thinking of the currency school domestic money supplies were fluctuating, not with the ebb and flow of international trade, but with variations in bank notes issued by banks. Everyone agreed that banks could expand or contract the supply of bank notes within a wide range without endangering their ability to convert bank notes into specie.

The currency school argued that fluctuations in money supplies were the major cause of economic swings, an idea that is commonplace now, and that banks were causing these fluctuations. The solution to the problem lay in establishment of a state authority exercising a monopoly privilege on the issuance of bank notes, a practice that is universal in modern monetary institutions. Unlike current monetary arrangements, however, the currency school contended that the issuance of bank notes should be kept strictly proportional to domestic metallic currency and bullion. A loss of gold to other countries should cause domestic bank notes to decrease an equivalent amount, putting downward pressure on domestic prices. A gain in gold from other countries worked in reverse. At that time in England hundreds of banks issued bank notes without coordination, and the principle of convertibility had not assured that gold flows would drive domestic money supplies.

Opposed to the arguments of the currency school was the banking school. The banking school argued that bank notes expanding and contracting with the needs of trade were not a source of instability and that an elasticity of currency was needed to pave the way for economic expansion. The banking school preferred leaving the management of bank notes to bankers whose discretion was tempered by the requirement of convertibility.

The Bank Charter Act of 1844 was a great victory of the currency school over the banking school. The act included provisions that would ultimately give the Bank of England a monopoly on the issuance of bank notes. The act also separated the Bank of England’s note-issuing authority from its other banking business. In a departure from the principles laid down by the banking school, the act left the Bank of England with some discretion to regulate the issuance of bank notes independent of changes in gold reserves.

The currency school shares with the modern-day monetarist school the idea that the money supply should be managed by fixed rules rather than left to the discretion of bankers and policy makers. Modern-day monetarists would agree with the currency school that management of the money supply is the foundation of macroeconomic policy. Imbedded in the thinking of both the currency school and the monetarist school was skepticism about the wisdom of government policy makers, and a preference for policies founded on fixed principles rather than subjective judgments made in the midst of economic disturbances.

Currency Act of 1764 (England)

The Currency Act of 1764 removed the authority of colonial governments in the middle and southern American colonies to issue legal-tender paper money for either private or public debts. The act passed Parliament following the French and Indian War (1754–1763) when colonial governments, particularly Virginia, freely turned to the issuance of paper money to defray military expenditures.

Parliament first acted to restrict the issuance of colonial paper money in the Currency Act of 1751. That act circumscribed the ability of New England colonies to issue paper money, and banned the circulation of paper money as legal tender for private debts. The Act of 1751 enabled governments to declare paper money legal tender for public debts—that is, taxes—but not for private debts. England’s Board of Trade moved to extend the provisions of the Act of 1751 to colonies south of New England, but the French and Indian War intervened, and the Board of Trade tended to wink or look away as colonial governments issued paper money to finance war expenditures. British merchants, however, saw the issuance of legal-tender paper money as a conspiracy of American debtors to defraud British creditors by repaying debts in depreciated paper money. They lobbied the Board of Trade and Parliament to stop the colonies’ issuance of legal-tender paper money. To be sure, the paper money invariably depreciated relative to British pounds, reducing its value to British merchants.

Unlike the Currency Act of 1751, the Currency Act of 1764 did not restrict the authority of colonial governments to issue paper money, but did ban the designation of any paper money as legal tender for the payment of either private or public debts, thus making the issuance of paper money impractical. The prohibition on the issuance of paper money as legal tender for public debts put colonial governments in a financial crunch. These governments issued paper money and then levied taxes payable in the paper money, automatically providing for the retirement of the paper money issues, and preventing paper money from depreciating in value. Government treasuries rather than monetary authorities, contrary to current practice, issued this paper money. In addition, the issuance of this paper money helped relieve a shortage of coinage that hampered economic activity in colonial economies. Therefore, the Currency Act of 1764 was the equivalent of England enforcing a tight money policy in the colonies in the aftermath of the French and Indian War.

The legal-tender provisions of the act seemed perplexing and ambiguous to the colonists, who found it difficult to understand how a government could issue paper money and not accept it as taxes. Also, several colonies operated loan offices that issued paper notes against the security of real estate. The Act of 1764 seemed to suggest that loan offices could not accept in repayment the notes they had issued. The colonial governments appear to have worked around the act and continued to accept their own paper money in payment for taxes, but the colonists lobbied with Parliament to have the legal-tender restriction on public debts lifted. The colonies needed the paper money to supplement domestic money supplies, which were limited and thus acted as a brake on domestic economic growth. The restrictions on the issuance of paper money added to the tension between the colonies and the English government. With the Currency Act of 1773, Parliament amended the Currency Act of 1764, and lifted the ban on paper money as legal tender for public debts.

Currency Act of 1751 (England)

The Currency Act of 1751 sought to restrict the issuance of fiat paper money and to ban its use as legal tender for the settlement of private debts in the New England colonies.

The beginning of the eighteenth century saw several New England colonies, led by Massachusetts, issue fiat paper currency. They turned to paper currency partly because of the financial pressures of wars involving the French and the Indians, and partly as a measure to relieve domestic shortages of acceptable mediums of exchange for financing business activity. Colonial governments issued paper currency on the condition that they would accept the currency as payment for taxes at a future time, perhaps within a year or possibly as long as seven years later. When governments issued more paper currency than they reclaimed in taxes, the paper currency lost value relative to British currency, and colonial prices inflated.

British merchants who had claims of debt against the colonists suffered because the depreciated currency they had to accept in repayment had less value than the credit they had extended.

The Act of 1751 opened by citing the failure of previous acts of Parliament to stem the tide of depreciating paper currency in New England, and by observing that because of the legal-tender status of this paper currency “all debts of late years have been paid and satisfied with a much less value than was contracted for, which hath been a great discouragement and prejudice to trade and commerce.”

The act provided that:

1. Effective 29 September 1751 governors, councils, or assemblies in Connecticut, Massachusetts Bay, New Hampshire, or Rhode Island, were forbidden to enact legislation authorizing the issuance of additional bills of credit (paper currency), and could not extend the period of outstanding bills of credit. Any actions along these lines were “declared to be null and void, and of no force or effect whatsoever.”
2. Colonial governments were required to retire all outstanding bills of credit at the scheduled date.
3. Colonial governments could issue bills of credit to finance current government expenditures if sufficient taxes were levied to retire the bills within two years.
4. In the event of unusual public emergencies, such as war or invasion, bills of credit could be issued in excess of what the government would reclaim in taxes within two years. These extra bills had to pay interest and be reclaimed by a tax fund within five years.
5. None of the bills issued after 29 September 1751 were to be legal tender in private transactions, and none of the bills then in circulation should be legal tender.

The act allowed governments to continue to issue bills of credit as an instrument of government finance, but prohibited the attachment of the legal-tender sanction for settling private debts. The Currency Act of 1751 was followed by the Currency Act of 1764, which applied the same principles to the remaining colonies. The latter act sought to deny the legal-tender status of paper currency even in the payment of public debts. This was a confusing point, however, and the colonial governments continued to issue paper currency that could be used in payment of taxes. The Currency Act of 1773 clarified the issue by specifically allowing colonial governments to issue paper currency that was legal tender for the payment of public debts. The 1773 act allowed the use of paper currency as legal tender for the payment of taxes but, in deference to British creditors, not for private debts.

The Currency Act of 1751, and its sister act, the Currency Act of 1764, contributed to a shortage of circulating money in the American colonies, adding to the discontent that led up to the American Revolution. The American colonies were not blessed with the abundance of gold and silver mines found in the Spanish colonies. The hard specie that was won by exporting goods to Europe had to be used to import the numerous European goods needed in the American colonies. Entrepreneurs in the American colonies enjoyed practically unlimited supplies of natural resources, but harnessing these resources required a rapidly growing domestic money supply, with opportunities for borrowing money as the need arose. Because the availability of money fell far short of the business opportunities afforded by such a land, the colonists tried to find ways to invent their own money supply. The failure of the British to appreciate the need for an elastic money supply in a land of boundless resources contributed to the tension that resulted in revolution.

Culture of Money

The effects of money and coinage on Western culture began to make themselves felt in the sixteenth and seventeenth centuries. Up to that time money and coinage rarely played a pivotal role in works of art or literature. It was quite beneath the pride of the tragic heroes of antiquity to struggle over money or coins, nor would a medieval epic poet find considerations of money a suitable backdrop for moral conflict. Greek tragedies and medieval epics explored themes of war, love, hate, revenge, power, and honor but money was rarely, if ever, the grist for the mill.

In Shakespeare the pursuit of money and wealth appears as an issue worth addressing in dramatic conflict.

The Merchant of Venice perhaps goes further than any other Shakespearean play in making money its central focus. Changes in attitudes toward money can also be detected in the works of artists. Sculpture and paintings of antiquity emphasized religious and mythological themes, a trait that continued through the Italian Renaissance. In paintings of less exalted themes, people were shown with some possessions—for example, dogs or horses—but not with a view toward idealizing the luxuries that money could purchase.

Interest in money and coins as artistic themes of money. The seventeenth century saw coins from all over the world flow into the Bank of Amsterdam. As capitalism took hold in the large nation-states, and the middle and working classes made a bid for power, larger questions loomed on the horizon during the eighteenth century and artistic focus shifted away from money. It is hard to imagine either the American or the French revolutionaries being interested in pictures with scales weighing gold, or tables with gold coins. For a trading society such as the Dutch, however, money genuinely was the lifeblood of the economy.

Wealth may be more idealized today than ever, perhaps because highly commercialized societies such as the United States and Britain survived the major wars of the twentieth century and won their antagonists over to their way of thinking in economic matters. In a world based on economic competition, money has become a way of keeping score, replacing the medals, badges of honor, stripes, and other symbols of achievement associated with military and feudalistic regimes.

Although wealth continues to be highly idealized, mediums of exchange such as coins or bank notes hardly hold the aesthetic interest today as they did to the Dutch. People have been cheated by inflationary paper money too often, and with the gaping income inequality of modern capitalism, flashing money around might be seen as an invitation for poorer individuals to ask for help, or for one’s workers to strike for higher pay or form a union. Perhaps it is revealing that the Dutch workers, who were among the highest paid in Europe, never made a bid for political power, as did workers in other centers of capitalist development. As with the proverbial saying about children, today’s motto for money is that money should be heard (i.e., “money talks”), but it should not be seen. Nevertheless, symbols of wealth are as important as ever, but today these symbols represent wealth in a less liquid form—such as expensive tennis shoes, automobiles, luxurious houses, and other trophies of conspicuous consumption.

“Cross of Gold” Speech

In one of the epochal orations in United States history, William Jennings Bryan won himself the 1896 Democratic nomination for president in a spellbinding performance castigating the gold standard. The speech came to be known as the “Cross of Gold” speech because of a reference to crucifying humanity on a “cross of gold.” Bryan made unsuccessful bids for the presidency in 1896, 1900, and 1908, mounting a serious challenge to well-financed Eastern money interests with his populist message, which struck a cord with debtors, farmers, and workers.

Bryan’s answer to the depression of the 1890s was the free coinage of silver, replacing the gold standard with a bimetallic standard. To the charge that the gold standard was necessary for the prosperity of the business interests, Bryan answered in rhetoric that was music to the ears of hard-pressed farmers and manual laborers. Here are a few select morsels from his 1896 “Cross of Gold” speech:

[T]he farmer who goes forth in the morning and toils all day, who begins in the spring and toils all summer, and who by the application of brain and muscle to the natural resources of the country created wealth, is as much a business man as the man who goes upon the Board of Trade and bets upon the price of grain; the miners who go down a thousand feet into the earth, or climb two thousand feet upon the cliffs, and bring forth from their hiding places the precious metals to be poured into the channels of trade are as much business men as the few financial magnates who, in a back room, corner the money of the world.

(Birley, 1943)

After setting the mood, Bryan took up the “paramount issue”:

[I]f [tariff] protection has slain its thousands, the gold standard has slain its tens of thousands. No private character, however pure, no personal popularity, however great, can protect from the avenging wrath of an indignant people a man who will declare that he is in favor of fastening the gold standard upon this country, search the pages of history in vain to find a single instance where the common people of any land have ever declared themselves in favor of the gold standard. There are those who believe that if you will only legislate to make the well-to-do prosperous, their prosperity will leak through to those below.

(Birley, 1943)

Bryan closed his speech in a rising crescendo of oratory that would lift him from an unknown member of Congress to the leadership of the Democratic Party at the age of 36:

If they dare to come out in the open field and defend the gold standard as a good thing, we will fight them to the uttermost. Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.

(Birley, 1943, emphasis added)

The Eastern establishment saw Bryan as a reckless demagogue, spreading a message—abandonment of the gold standard—that held no charm to respectable financiers during the heyday of the gold standard from 1875 to 1914. Nevertheless, Bryan’s message was in step with the forces of history, and most of the world abandoned the gold standard in the 1930s. Although Bryan was ahead of his time on many economic issues, his stances on other social issues have received a less clear verdict from history. He ended his public career prosecuting a schoolteacher charged with teaching the theory of evolution against state law in the famous Scopes trial in 1925.

Cross Coinage: 1180–1554 (England)

Cross coinage, so named because it depicted a cross on one side, prevailed in England for a period of three and one-half centuries. During that period it appeared in three different versions. The so-called short cross coinage was minted from 1180 to 1247. The void long cross coinage made a brief appearance from 1247 to 1279, and the long cross coinage lasted from 1279 to 1544.

By the twelfth century production of English coinage had slowed to a trickle, and England and much of Europe virtually reverted to a barter and subsistence economy. In 1180 Henry II, king of England, ordered a major recoinage and recruited a Frenchman, Philip Emery, from the famous mint city of Tours, to direct the effort. The obverse side of the new coins bore an image of the full-faced king; bearded, wearing a crown, and holding a scepter. The king’s name was inscribed on the coins as “Henricus” even during the subsequent reigns of Richard and John. The king’s portrait was not true to life. By 1205 the coins had become sufficiently worn and clipped to necessitate another recoinage. King John ordered a recoinage using the same design. The government supplied at its own expense the extra silver needed to bring the coins up to standard weight, a feat that proved expensive and was not repeated by future governments.

In 1247 King Henry III ordered another recoinage, this time at the expense of those who held the worn and clipped coins. The obverse side retained the image of the king’s face, but the reverse side bore an image of a cross that extended through the legend. The legend identified the mint and the moneyer (the individual who physically struck the coins). This English practice of identifying the maker of the coins probably helped to maintain the quality of English coinage. This coinage is called the voided long cross coinage because of its double cross design. It lasted only until 1279.

Edward I returned from the Crusades to find English coinage had suffered badly from wear and clipping. In 1279 he ordered a recoinage, and reduced the weight of each coin as a way of sparing the government or the people the expense of bringing the coinage up to standard weights. Edward I was the first English monarch to mint coin denominations higher than the penny. The obverse side bore a profile, as opposed to a facial, view of the king—shorn of his beard, but wearing a five-point crown. The reverse side bore an image of a broad simple cross, and the legend identified the mint but not the moneyer. This design, called the long cross design, lasted until Henry VIII’s debasement of the coinage during the years 1542 to 1551.

Edward I’s long cross design became synonymous with sound currency and was widely copied, particularly in the Low Countries.

Croesean Reform

Croesus, king of Lydia from 570 to 546 b.c., reformed the Lydian currency by suspending the coinage of electrum and introducing the rudiments of a bimetallic system based upon gold and silver.

Lydia is credited with inventing coinage between 640 and 630 b.c. These first coins were struck from electrum, a naturally occurring mixture of gold and silver, sometimes called white gold. Lydia owned vast deposits of electrum and the export of electrum, often in the form of coinage, was a major industry.

By mid-sixth century other cities along the coast of Asia Minor were striking gold coins that competed with Lydia’s electrum coinage. King Alyattes, Croesus’s father, had sent Croesus on military expeditions in areas where these gold coins were popular, and he returned convinced of the importance of gold coinage. By then Lydian metallurgy had progressed sufficiently to enable the separation of the gold and silver in electrum. King Alyattes continued the coinage of electrum but did begin the coinage of gold.

Croesus, succeeding his father as king, undertook a major reform of the Lydian currency. He abandoned the coinage of electrum, which ceased to circulate as coinage in Asia Minor, and he established a currency system of gold and silver that would later supply the model for the currency of the Persian Empire.

The gold unit was called a stater, and the Greeks called the gold stater the Croesean stater. It bore the images of a bull and a lion, thought to have been introduced by Croesus. The Greek historian Herodotus wrote that Croesus sent two gold staters to each of the citizens of the Greek city of Delphi because of a prophesy that he—mistakenly, as he learned later—took as favorable for his prospects in a war against the Persians. Herodotus also recounts in detail many gifts of gold and silver objects that Croesus gave to the oracle of Delphi, many of which were still extant when Herodotus wrote in the fifth century. According to Herodotus, Solon, the famous lawgiver who reformed the monetary system of Athens, visited Croesus, who displayed to him his vast treasures, and hinted that Solon must regard him as the happiest man alive because of his wealth. Solon demurred, citing the many hazards that any living person faced, and after Croesus was overcome by Persia, he expressed admiration for Solon’s wisdom.

The gold stater was made of 130 grains of pure gold, and smaller coins equaled one-third, one-sixth, and one-twelfth of the full-size coin. A silver stater was made of 220 grains of pure silver. The silver stater equaled one-tenth the value of the gold stater. Smaller silver coins equal to one-half, one-third, and one-twelfth of the value of the silver stater were also struck. The smallest silver coin equaled one-twentieth of the gold stater, providing a range of coins to handle transactions of varying sizes. All the coins were full bodied, making no use of cheaper alloys. Relationships between coins of the same metal were based upon the duodecimal system, while relationships between coins of different metals were based upon the decimal system. The duodecimal system uses 12 as the base number, as opposed to the decimal system, which uses 10.

Croesus is credited with introducing the world’s first bimetallic monetary system. He did not invent either gold coinage or silver coinage, but perhaps because Lydia’s electrum deposits held both gold and silver, he furnished the world with the first coinage system based upon both metals. A bimetallic monetary system was the prime rival to the gold standard in Europe during the late nineteenth century.

Crime of ’73 (United States)

The Coinage Act of 1873, a piece of legislation that caused hardly a political ripple in Congress, subsequently acquired the odious title of the “Crime of ’73.” The act rather informally dropped the bimetallic standard in the United States in favor of the gold standard, an action that incurred the wrath of debtors and western farmers as deflationary trends gathered force in the late 1800s. Since the days of Alexander Hamilton the United States had been on a bimetallic standard combining gold and silver in a fixed ratio. The Crime of ’73 made it into the folklore in the United States, including references in the famous book, The Wizard of Oz.

A movement of economic and social protest lifted William Jennings Bryan to the leadership of the Democratic Party, and inspired his famous “Cross of Gold” speech, which compared the gold standard to the crucifixion of mankind on a cross of gold. Debt-ridden farmers and unemployed workmen quite rightly pointed the finger of suspicion to the unforgiving discipline of the gold standard, and saw something sinister in quietly removing silver from the monetary standard without the airing of a public debate. With vast holdings of silver in western states, coinage of silver could have infused additional monetary reserves in the economy, raising prices and easing pressure on debtors.

The offensive portion of the act downgraded the silver dollar to subsidiary coinage of the same proportional weight and fineness as the half dollar, quarter, and dime. These silver dollars were legal tender in amounts up to $5 but in 1877 the Treasury discontinued minting the silver dollars, due to a lack of interest.

Before the act silver owners could sell silver to the mint for $1.292 per ounce, but the market value of silver was $1.298 per ounce, creating an opportunity to melt down minted silver and sell it for a profit, causing silver dollars to disappear from circulation. The high market value of silver in 1873 probably accounts for the lack of public controversy at the time Congress passed the Coinage Act of 1873. The discovery of additional silver reserves in the western states, coupled with deflationary trends, pushed the market price of silver below the mint price. As deflationary trends made themselves felt, culminating in the depression of the 1890s, the silver interests missed the Treasury market for silver and depressed regions saw silver coinage as the answer to economic woes.

Abandonment of the bimetallic standard and cessation of silver as a monetary standard of value were in step with international currents at the time. Europe was rapidly turning to a gold standard that was associated with England’s commercial success. The failure of William Jennings Bryan to win a presidential bid assured that the United States would remain on a gold standard, which became official with the Gold Standard Act of 1900. The discovery of new sources of gold relieved the monetary tightness of the late 1800s, effectively defusing the silver protest, and letting the Crime of ’73 fade into political oblivion.

Credole and Tratte

Credole were warehouse warrants for grain that circulated as money in sixteenth-century Sicily. At that time Sicily was a major exporter of grain and home to a major Mediterranean grain market. The ports of Sicily were the sites of vast grain elevators called caricatori. Landowners brought their grain to the caricatori and either sold it immediately or received warehouse warrants, or credole, if they wished to sell it later. Moneylenders accepted credole as security from landowners who needed advanced payment for grain.

The credola system came unraveled toward the end of the sixteenth century. Grain speculators purchased credole from landowners at heavy discounts, and some landowners felt swindled when the market for grain improved. Many preferred to let their grain rot rather than fall into the hands of speculators. Forgeries of credole entered into circulation, sometimes with the complicity of the magazinieri (the owners of the caricatori) and government officials. Nonexistent grain was sold and some magazinieri wound up in bankruptcy. The government tried to stem the tide of scandal by threatening to send offenders to the galleys, demanding declarations of sincerity, and forbidding futures trading. The government also banned contracts that involved wagers on the future price of grain.

During the same period Naples also issued a paper money instrument related to export trade. The viceroy of Naples sold tratte, which were licenses to export cereals and vegetables. The tratte were sold in advance and in much greater numbers than were needed, precipitating a depreciation in value. Venetian merchants claimed to have saved up to 32 percent in customs duties by making payment in depreciated tratte.

The Sicilian and Neapolitan experiences with credole and tratte show how natural it is for paper money to come into existence and that, while paper money comes in many forms, it always entails the same risk—overissuance.

See also:

Cowrie

The cowrie enjoyed a longer history as a circulating medium than any other type of money, stretching back to the dawn of history in China, and rivaling modern currencies in twentieth-century Africa. The I-Ching, among the oldest Chinese books, makes references to the use of cowrie money. For thousands of years, Africa, the Middle East, and the Far East swept up money from the shallower areas of the Indian Ocean and Pacific Ocean, home to a mollusk whose ovoid shell was called a cowrie. Perhaps part of the attraction of cowrie money was its variety; it occurs in different colors and ranges in size from as small as the end-joint of the little finger to as large as a fist. The cowrie probably first secured its hold on the human imagination as a commodity with religious and ornamental significance.

The use of cowries as money in China dates back to at least the fourth century b.c. when the first Chinese invaders found cowrie shells in use as money among the pre-Chinese population. In the Chinese language words denoting buying, selling, riches, prices, cheapness, and dearness, make use of the ideographic sign for the word “shell.” In 1375 b.c. P’an Keng of the Shang dynasty expressed his displeasure at his greedy ministers hoarding cowries and gems. In 221 b.c. the government of China banned the use of cowries as money. In a.d. 10 Wang Mang, seeking a return to ancient traditions, revived the use of cowries, establishing an elaborate system of five different sizes of cowries to serve as monetary units with specific value. The commercial classes raised a howl over the return to an antiquated monetary system, and Wang Mang desisted.

Visiting Bengal India in the sixth century, Pyrard de Laval reported the use of cowries as ordinary money, although gold and silver were available. Kings and lords stored up shells in treasury houses especially built for the purpose. Without counting, merchants faithfully accepted in payment baskets of 12,000 cowries.

At least as early as the sixth century cowrie money had found its way to Timbuktu, where it was used for smaller transactions. During the nineteenth century the French colonial authorities in the Sudan managed the supply of cowries to smooth out local fluctuations, sending cowries to communities short of cowrie money. In Timbuktu the authorities fixed the exchange rate of cowries at 1,000 cowries per French franc.

By the sixteenth century cowrie money had become an important component of the money supply in Nigeria. Even after World War I cowries were hoarded as a store of wealth, piling up in treasure houses like heaps of newly threshed corn.

Arab traders introduced cowrie money to Uganda at the end of the eighteenth century, where it became the dominant medium of exchange and store of value during the nineteenth century. A woman cost 2 cowries at the beginning of the century, rising to 1,000 cowries by 1860, probably reflecting a massive influx of cowries rather than an increase in the value of women. By 1911 2,500 cowries were sufficient to fetch a cow, 500 cowries a goat, and 25 cowries a fowl. An ivory tusk weighing 62 pounds brought 1,000 cowrie shells.

Cowries were durable, easy to clean, and impossible to counterfeit, making them a useful form of money over a vast geographical area. Unlike another primitive money, cattle, which were highly practical in the struggle for survival, cowries were valued by cultures for aesthetic, and in some cases religious, reasons. Cowrie shell money gives meaning to the phrase “shell out” as a popular expression for making payment.

Counterfeit Money

Counterfeit money is mostly forged or faked paper money, sometimes referred to as funny money. Counterfeit paper money is almost as old as paper money, and the practice of counterfeiting money survives into our own day as governments strive to remain one technological step ahead of the counterfeiters.

Counterfeiting became a flourishing activity early in the nineteenth century because of the proliferation of banks issuing their own bank notes. England was one country that did not spare the rod in handing out justice to counterfeiters. Between 1805 and 1818 the Bank of England successfully brought 501 counterfeiters to the bar of justice, and 207 met their fate at the gallows. Not only was it illegal to counterfeit money but having a forged note in one’s possession was illegal and ignorance was no defense. A public outcry rose up against savage sentences meted out to people who accidentally came into possession of forged notes. In 1819 the Society of the Arts, concerned about the hanging of innocent people, published its Report on the Mode of Preventing the Forgery of Bank Notes. The report found fault with the Bank of England for issuing bank notes too easily counterfeited, and proposed a distinct set of copper plates and employment of highly skilled artists to design notes and engrave plates.

The sight of two women hanged for passing forged notes led George Cruikshank, cartoonist and political satirist, to produce an antihanging note: His “Bank Restriction Note” bore an image of Britannia with a skull instead of a head against a background of despairing figures and highlighting 11 individuals hanging from scaffolds. The note also bore the signature of Jack Ketch, a notorious public hangman. Cruikshank’s note sparked riots in London, and the government appointed a royal commission to find ways of producing notes that could not be imitated. England turned to the American firm of Murray, Draper, Fairman & Company, which had revolutionized bank-note printing using a siderographic transfer process and highly complicated background patterns. The siderographic process facilitates the exact duplication of engraved steel plates by using alternating hardened and softened steel cylinders to pass on imprints. An employee, Jacob Perkins, inventor of these processes, offered his services to the Bank of England, won a contract, and the firm of Perkins Bacon became the premier producer of postage stamps and paper money worldwide during the nineteenth century.

Counterfeiting is sometimes a state-sponsored activity, with the object of producing confusion and social unrest in enemy countries. The Bank of England counterfeited vast numbers of assignats, the famous French paper money of the French Revolution that touched off a wave of hyperinflation. One of the largest counterfeiting schemes in history was Operation Bernhard, the code name for Nazi Germany’s vast program for counterfeiting Bank of England notes. Apparently the Soviet Union also resorted to counterfeiting as a weapon in the arsenal of revolution.

Thanks to an international conference held in Geneva in 1929 counterfeiting laws are relatively uniform among various countries. Counterfeiting either domestic currency or foreign currency is illegal, and counterfeiters are subject to extradition. Printing counterfeit money is invariably a felony offense drawing a prison sentence, but incidental offenses, such as owning counterfeiting equipment or possessing counterfeit money, usually draw lesser sentences.

The development of high-quality color copying machines and sophisticated offset printing operations has complicated the problem of combating counterfeiters. The United States now impresses a thin polyester thread into its federal reserve notes. The thread runs vertically to the left of the Federal Reserve seal, and can be seen when the note is held up to a light. The notes also have the words “United States of America” microprinted in letters that can only be read with magnification. Despite these innovations, counterfeiting remains a major problem in the United States.

Corso Forzoso (Italy)

The famous Corso Forzoso, meaning “forced circulation,” refers to the suspension of convertibility of Italy’s paper lira from 1866 to 1881, which put Italy on a paper standard inconvertible into a precious metal. Before the Corso Forzoso Italy was on a gold and silver bimetallic standard, and holders of Italian bank notes could redeem notes in gold and silver specie.

The origin of the Corso Forzoso can be traced to costly wars waged to unify Italy, disorderly public finances arising from consolidation of budgets and taxation systems of separate Italian governments, and heavy public works expenditures in the name of industrialization. Between 1 January 1862 and 1 January 1867 the public debt grew from 3,131 million lire to 6,929 million lire. The debt was financed by short-term treasury bonds, a third of which were held by foreign investors sensitive to crises of confidence, and expecting bond redemption in gold and silver. The end of the American Civil War, bringing cancellation of war contracts, demobilization, and renewed competition from cheap American cotton, sent the economic tremors that pushed Italy over the monetary precipice. The price of Italian bonds on the Paris Bourse tumbled from 80 percent to 36.44 percent of par value and Italian bondholders and Italian correspondents of foreign bondholders asked for redemption in gold, causing a shortage of gold, and a crisis of confidence in the banking system. A run on the banks forced the government’s hand and on 1 May 1866 the government, with prior approval from the legislature, decreed the inconvertibility of bank notes—the Corso Forzoso.

Notwithstanding the Corso Forzoso, the National Bank of Italy avoided the runaway issuance of bank notes that brought to ruin many past experiments with paper money. The index of wholesale prices rose modestly from 0.897 in 1866 to 1.051 in 1873. The gold price index rose from 1.046 to 1.137 over the same time period.

Defenders of the policy of Corzo Forzoso argue that the consequent depreciation of the lira in foreign exchange markets made Italian exports cheaper in foreign markets, and foreign goods expensive in Italian markets, together acting as a powerful boost to Italian industry. Also the Corzo Forzoso accustomed the Italian people to the acceptance of bank notes. In 1865 only one-tenth of the circulating money had consisted of bank notes. Critics of the policy point to the fear that Corzo Forzoso struck in the minds of potential foreign investors at a time when Italy badly needed foreign capital.

After achieving a balance budget early in the 1870s the Italian government began taking steps to restore convertibility of the lira. As the government paid off its debts to the National Bank of Italy in gold, the bank was able to restore convertibility, and on 7 April 1881 the Corzo Forzoso came to an end.

The Corso Forzoso ranks among the more successful early efforts to circulate fiat money, or money not supported by precious metals or other commodities. During the Napoleonic Wars England maintained control over its monetary affairs despite the adoption of an inconvertible paper standard. Before the Corso Forzoso, however, the more normal consequence of inconvertible paper money had been a whirlwind of inflation. France lamented two disastrous experiences with inconvertible paper, John Law’s paper money, and the French Revolution’s assignats, both of which caused runaway or hyperinflation.

Corn Banks of Egypt

Ptolemaic Egypt (323–30 b.c.) developed a highly sophisticated system of warehouse banking based on corn, a traditional form of money in Egypt. The Egyptians applied the knowledge of Greek banking to scattered government granaries that dotted the landscape in every locality of any consequence, and turned them into a national network of corn banks with headquarters in Alexandria. Even after Greek coinage spread to Egypt with the conquest of Alexander the Great, corn remained an important standard of value in the feudal economy of Egypt. The government and rich merchants jealously hoarded coins and precious metals to finance foreign transactions. Lower- and middle-class Egyptians transacted business in the domestic economy with deposits in corn banks, habituating the entire population to using banks.

Originally, farmers stored their annual crop of corn in government granaries for safety and convenience. The government collected taxes in corn, which was also deposited in granaries. The Egyptians lumped corn of the same quality together in the granaries and learned to exchange the ownership of corn without the corn leaving the granary—the first step in the development of corn banking. The owners of the corn could pass written orders of withdrawal of corn to pay debts and taxes, or to purchase goods and services. By the time of the Ptolemies, Egyptians had become accustomed to paying debts through the bank, a practice that had the additional advantage of creating an official record of transactions that could be helpful in the event of litigation.

The Ptolemaic Egyptians developed the banking expertise to centralize the accounting and management of a nationwide network of corn bank granaries from one headquarters in Alexandria. The centralized accounting and management afforded depositors the ability to transfer funds to other regions, creating one of the first money transfer systems. A thousand years before the development of double-entry bookkeeping, the Egyptians developed a system of debit and credit entries and deposit transfers that made use of the grammar of their language. Credit entries fell under the genitive or possessive case, and the dative case stood for debit entries. Records show that often deposits were transferred from one account to another without corn leaving the granary. Referring to the bookkeeping principles, M. Rostovtzeff, in his Social and Economic History of the Hellenistic World, says “I have mentioned this detail in bank procedure, familiar in modern times, because many eminent scholars have thought it improbable that such transfers were made in ancient times.”

The grain bank network of Ptolemaic Egypt is the only banking institution of the ancient world that bears comparison with the greatest banks of the nineteenth and twentieth centuries. Sufficient records concerning the volume of accounts, number of branches, and employees are extant to form a picture of the vast influence it wielded over the Egyptian economy. In addition, the Ptolemies of Egypt probably deserve the distinction of being first to advance banking as a government enterprise.

The royal grain bank of Egypt demonstrates that precious metals are not a necessary component of a sophisticated monetary system. Any commodity that has a dependable market value can fill the role of a monetary standard. The annual flood of the Nile river helped stabilize corn production in Egypt and shield it from the whims of the weather, making the supply of corn sufficiently stable to form a monetary base.

Corinthian Silver Standard

Corinth was the first Greek city-state to successfully launch a rival coinage that competed with the Aeginetan standard. The beginning of coinage in Corinth gives some credence to the theory that geography is a determinant of history. The harbor of Corinth stood astride the isthmus connecting Peloponnesus with Attica, looking east toward Aegina, the birthplace of Greek coinage, and west, toward Italy and supplies of silver that it could control. Aegina controlled eastward trade into the Aegean Sea, but to the west the Corinthian gulf opened into the Ionian and Adriatic Seas, giving Corinth a free field to establish colonies on the route to the Adriatic and across the sea to Sicily. Corinth learned about coinage from its eastward trade, and from control of the western sea routes won access to the silver mines of the Illyrian Mountains, breaking the Aeginetan monopoly on Greek supplies of silver.

Corinthian coinage may have been born of a political revolution that displaced an aristocracy and empowered the merchant classes. The first coinage in Corinth roughly coincided with the ascendancy to power in 655 b.c. of Cypselus, who established himself as a despot favoring the merchant classes. Corinthian coinage probably began as a measure to promote the commercial interests of Corinth.

Because it had to transport silver from long distances, Corinth could not coin silver on terms comparable to Aegina. Whereas the Aeginetan silver drachma weighed 96 grains, the Corinthian silver drachma weighed 43 grains, giving the coins of Aegina a sizable edge in Greece and the Aegean trading area. In Sicily and southern Italy, however, the advantage lay with the Corinthian coins that could be shipped directly from the Corinthian Gulf, whereas shipments from Aegina had to round the Peloponnesus, a longer, more dangerous, and therefore more expensive route.

In style and craftsmanship, Corinthian coins utterly outshone the Aeginetan coins. First, they bore the image of Pegasus, the winged horse of Greek mythology, a more charismatic and spirited concept than the clumsy tortoise image on Aeginetan coins. Also, the Corinthians stamped both sides of their coins and designed different coins for various denominations—another departure from the practice of Aegina, which stamped coins of all denominations only on one side and with the same image. In Aeginetan coinage, different coin sizes represented different denominations, a source of confusion to people in distant lands unfamiliar with Aeginetan weights and standards. One side of Corinthian coins always bore the image of Pegasus, but the reverse side bore different images for different denominations. The head of Athena was stamped on the reverse side of the stater, and the head of Aphrodite on the reverse side of the drachma.

The colonies of Corinth adopted the Corinthian coinage system, and sometimes restamped the Corinthian coins with images of their own choosing. Coins have been found upon which the second stamping left vestiges of the original Corinthian stamping. The Corinthian coinage was edging out the Aeginetan coinage when Athens began its own coinage during the sixth century b.c. Athenian coinage would supersede the Aeginetan coinage and substantially overshadow the Corinthian coinage.

Copper

After gold and silver, copper has the longest and most varied history as a monetary metal. Resistant to corrosion and malleable, copper was used by ancient peoples to make utensils, hammers, knives, and vessels of great beauty. As early as 5000 b.c. ancient Egyptians buried copper weapons and tools in graves for use in the afterlife. The Chinese epic Shu Ching makes references to the use of copper around 2500 b.c.

In the Mediterranean world, Cyprus was a major producer and the sole supplier of copper to the Romans, whose first metallic monetary system was based on a copper or bronze standard. The Romans called it aes cyprium, later shortened to cyprium. The English word “copper” stemmed from the word cuprum, a corrupted form of cyprium. The chemical symbol for copper, Cu, comes from the first two letters of the Latin name.

The Ancient Egyptians operated on a copper monetary standard. The standard unit of weight was a uten or deben of copper, and it was subsided into the kit or kedet. Some writers contend that the copper units were mainly used to value goods for barter, but others claim that copper rings, equal to multiples or fractions of the copper unit of weight circulated as a medium of exchange.

Copper or bronze remained the monetary standard of Rome until the end of the Roman Republic in 30 b.c. The Latin word for copper also denotes bronze, leaving some confusion about Rome’s monetary system. Bronze is copper alloyed with tin, and is a tougher metal than either copper or tin separately.

Copper had many practical uses for shaping weapons and tools, but ancient cultures never seemed to have invested copper with the religious significance that enveloped silver and particularly gold in a cloak of reverence. The Old Testament makes only one reference to copper (Ezra 8:27), but makes countless references to gold and silver, beginning in Genesis. Nevertheless, a certain Father Allouez, traveling through the area of Superior Bay (also called Allouez Bay) on Lake Superior in the 1660s observed:

There are often found beneath the waters of Lake Superior pieces of copper, well formed and of the weight of 20 pounds. I have seen them in the hands of Indians; and, as the latter are superstitious, they keep them as so many divinities, or as presents from the gods beneath.

(Del Mar, 1968)

Before the Spanish Conquest, copper was more valuable than gold in North America, Mexico, and Peru. In modern European history copper has clearly been a second-class monetary metal. In the sixteenth century Spain debased its silver currency with copper alloy. The currency was called vellon and by 1599 it was virtually pure copper. Copper money was sometimes called black money because when mixed with a bit of silver it blackened quickly. In the seventeenth century Sweden, which had vast copper deposits, adopted a copper monetary standard that lasted over a hundred years. During the Napoleonic era the French government tried to make copper legal tender in the settlement of debts in amounts up to one-fourth of the amount owed, but the effort fizzled. In August 1800 the government instructed the Bank of France to pay no more than one-twelfth of the government’s debt service in copper.

In the nineteenth century the demand for small change created a new demand for copper as a monetary metal. In 1797 England began issuing penny and twopenny coins made of copper. The first coinage legislation of the newly constituted United States authorized the coinage of cents and half cents made of copper. Copper coinage in the United States continued into the 1970s, when the high price of copper made pennies more valuable melted down and sold by weight.

The three metals that have served as money in the Western world are gold, silver, and copper. Although copper was not as valuable as gold or silver as a unit of weight, it filled a niche in the monetary system. A person planning to purchase a house would find it very difficult to transport the amount of copper needed to make the payment. For large commercial transactions, gold was ideal, because of its high value per unit of weight. For the purchase of a soft drink, however, the amount of gold needed would be a very small quantity, too small to be easily measured and handled. Silver was preferable for intermediate transactions, but for small retail transactions, copper was most suitable.

Constantine I

Cosmas Indicopleustes, a sixth-century a.d. merchant, observed that the eastern Roman Empire owed its prosperity to two causes, Christianity and coinage. The history of these two valued attributes of the eastern empire leads back to one person, Constantine I, who made Christianity the official religion of the Roman Empire and introduced the golden solidus coin, which the Byzantine Empire continued to mint without debasement until the eleventh century.

Constantine rose to power in a portion of the western empire in a.d. 306, and after nearly two decades of piecemeal war with rivals, made himself sole emperor of the Roman Empire in a.d. 323. The Roman Empire had been in the clutches of rampant inflation for half a century. The emperor Diocletian had issued full-weighted gold and silver coins, but the inflation showed no signs of easing up. In a.d.

301 Diocletian issued his famous Edict of Prices, which made raising prices above legal limits a capital offense. The Roman government had continued to debase its silver and copper coinage, but it had never significantly reduced the weight or purity of its gold coins. With inflation still out of control, Constantine put the reform of the currency close to the top of his priorities.

Constantine minted the solidus at a weight equal to one seventy-second of a pound of gold. Each pound equaled 12 ounces, and each ounce equaled 24 scruples. A solidus weighed 4 scruples. The greatest challenge Constantine faced was finding adequate supplies of gold and silver bullion. He required that a certain share of taxes be paid in silver and gold and he enacted new taxes payable in silver and gold. Also rents on imperial lands were collected in gold. He inherited a practice from previous emperors of placing a levy on cities in gold bullion. His most famous action to secure large supplies of gold and silver, enabling him to launch new gold and silver coinage on a large scale, was the seizure of the gold and silver stored in pagan temples. In the words of an anonymous observer writing a generation later:

In the time of Constantine there was lavish expenditure: he assigned gold to mean transactions, instead of bronze, which formerly used to be held of high value. The origin of this avarice is believed to have come from the following cause. When gold and silver and a great quantity of precious stones, which had been stored in ancient times in the temples came into public use, it inflamed the desire of all for giving and possessing. And whereas the expenditure even of bronze … already seemed heavy and excessive, nevertheless owing to a kind of blindness there was a more lavish zeal for expenditure in gold, which is considered more valuable.

(Jones, 1964)

During the time of Constantine, the solidus was mainly used to pay large government expenditures, but it steadily grew in popularity as a means of settling private transactions. During the fifth century a.d., both the eastern and western governments discontinued all but the smallest copper coins, and silver coinage also dropped to a trickle. Gold coinage became the principle medium of exchange for public and private transactions. The gold solidus became the international coin par excellence, accepted from one end of the world to the other, and constituting further proof of Rome’s sovereignty and divine favor.

The gold solidus was the most prestigious coin of the Middle Ages, and became one of the most famous coins in history. In the hands of the Byzantine government it maintained its weight and purity for 700 years, a record for any coinage.

Confederate Hyperinflation

From October 1861 to March 1864 price increases averaged 10 percent per month in the states of the Confederacy, putting the Confederate price index when Lee surrendered at 92 times its prewar base. In the history of the United States only the hyperinflation of the American Revolution compares in intensity with the hyperinflation of the Confederacy.

Like the revolutionaries that spearheaded the American Revolution, the leaders of the Confederacy faced a populace that was in no mood to pay additional taxes. Southerners felt that the present generation bore the burden of a war that would primarily benefit future generations, and as much of the expense as possible should be passed to future generations. Union blockades of Confederate ports precluded any effort to implement a revenue tariff on imports, the main source of federal government tax revenue. The Confederate government enacted a property tax but lacked the machinery to collect it in the face of uncooperative state governments. By October 1864 tax revenue accounted for less than 5 percent of all revenue that found its way to the Confederate treasury.

The Confederacy met with slightly more success in trying to finance public expenditures with bonds. In May 1861 the Confederate Congress approved a $50 million bond issue. The bond issue faltered on a depressed cotton market that resulted from the use of cotton as a bargaining chip with European governments whose recognition the Confederacy needed, leaving angry planters unable or unwilling to subscribe to bonds on the scale needed. By October 1864 bond sales had raised less than 30 percent of all revenue that had entered the Confederate treasury.

The remaining source of revenue was Confederate money. On 9 March 1861 the Confederate Congress authorized printing notes in an amount not exceeding $1 million, but the Treasury Department over four years printed $15 million of notes. Treasury employees at the note-signing bureau rose from 72 in July 1862 to 262 in July 1863. As printers, paper, and engravings became scarce, the Confederate government granted credit for counterfeit bills, which were stamped valid and reissued. From 1 July 1861 to 1 October 1863 the paper money column of the Confederate Treasury ledger accounted for 68.6 percent of all government revenue.

Surprisingly, private banks in the Confederacy were restrained in the issuance of bank notes. The uncertainties of war encouraged private banks to hold large quantities of vault cash, which actually tempered the inflationary thrust of the excess paper money.

Much of the Confederate currency bore the option to buy interest-bearing Confederate bonds up to a certain date, after which that option expired. As inflation gathered force early in 1864 the Confederate Congress enacted a currency reform that brought a lull in the inflation rate. The reform provided that all currency in bills greater than $5 could be converted into 4 percent bonds, dollar for dollar. Currency not converted into bonds by 1 April 1864 had to be exchanged for new currency at a rate of three for two. Inflation subsided until December 1864 when the Confederate government again had to turn to the printing presses.

From the first quarter of 1861 until 1 January 1864 prices in the Confederacy rose 28-fold while the money supply rose only 11-fold. Prices rose even faster than the money supply because of wartime disruptions in the supply of goods, and the phenomenon of velocity. Velocity is the average number of times per year that a dollar is spent, and in a hyperinflationary environment, recipients of money rush to spend it before it loses its value. An increase in the velocity of money has the same effect on the economy as an increase in the money supply.

The experience of the Confederacy shows what happens when the supply of money exceeds what is demanded by the normal transactions of business and the desire for liquidity. When the supply of money exceeds the demand, the value of money falls, meaning it buys less because of price increases.

Commodity Money (American Colonies)

Stable commodities produced in the American colonies often filled the gap in the colonial money supply left by the outflow of most hard specie for European goods. Colonial assemblies sanctioned commodity money as legal tender and set the price of commodities for the retirement of public debts.
Typical of colonial assembly legislation sanctioning the use of commodity money was an act of the South Carolina assembly adopted in 1687. This act read:
that all debts, accounts, contracts, bargains and judgments, and executions thereupon which are not made expressly for silver or money or some other particular commodity att a certain price shall and may bee paid and discharged by Corne att two shillings the bushel, Indian Peas at two shillings six pence the bushel, English Peas at three shillings sixpence the bushel, Pork at twenty Shillings per cwt., Beefe at twopence the pound, Tobacco at two pence the pound, Tar at eight shillings per barrell.
(Brock, 1975)
Around the same time New York allowed pork, beef, and winter wheat to serve as money, and east New Jersey included wheat, Indian corn, butter, pork, beef, and tobacco as commodity money. New Hampshire’s list of commodities serving as money for the years 1701 through 1709 had eight kinds of boards or staves and four kinds of fish, as well as pork, beef, peas, wheat, and Indian corn. The Caribbean colonies often made use of sugar as a medium of exchange, and tobacco dominated the commodity money supply in Maryland and Virginia. Curtis P. Nettels quotes a statement from the Virginia House of Burgesses regarding the salaries of the clergy, which states that “[f]or every marriage by license the laws give them twenty shillings or two hundred pounds of tobacco and if at a private house they marry any person they have for it one hundred pounds of tobacco at least” (Nettels, 1934). The difference between a marriage by license and a marriage at a private house is unclear, but tobacco was an important means of paying clergy.
Colonial assemblies set legal prices for all public payments, such as taxes, but prevailing market prices often set the rate for all private payments. Colonial assemblies invariably set the legal prices for public payments above the market prices, often chafing public officials who received income in commodity money at legal prices. The higher the legal price of a commodity relative to its market price, the smaller would be the quantity of the commodity received by the public official.
One of the problems with the use of commodity money is that commodities often vary substantially in quality. Creditors and government officials in jurisdictions that allowed commodity money often found themselves pressured to accept low-quality commodities in payment. To address this problem, the colony of New Haven (later absorbed into Connecticut Colony) in 1654 required that on:
every plantation there shall be a viewer of corn, that in case of difference may judge, whether it be well dressed and merchantable or no, which man is to be chosen by each plantation, and shall be under oath to judge faithfully when called to it, and is to be paid for his time spent and pains therein by him whose corn is faulty, or who unnecessarily occasions the trouble.
(Nettels, 1934)
Connecticut adopted a similar measure for both grains and pork. In Virginia and Maryland a debtor presenting tobacco to a creditor who refused to accept it could ask for two impartial judges. If these judges declared the tobacco good and merchantable, and the creditor still refused to accept it, the debt was counted as paid.
Another problem associated with commodity money is the expense and difficulty of transporting it. In the Massachusetts Bay Colony the General Court said that in the case of cattle driven to Boston for payment of taxes:
if they be weary, or hungry, or fall sick or lame, it shall be lawful to rest and refresh them for a competent time in any open place, that is not corn,
meadow or inclosed for some particular use.
(Nettels, 1934)
The widespread use of commodity money reveals the severity of the shortage of coins and other forms of money in the American colonies. It shows that forms of money will develop from the ground up when governments fail to infuse economies with sufficient money to finance trade.