Harley Hahn Web Site - Understanding Money

Money and
Economics

Understanding Money

Coins

Everywhere money was adopted, it showed itself to be a strong force, making enormous changes in the prevailing culture. For the first time in history, people began to build towns and cities designed around marketplaces rather than palaces or temples. Money was important because it allowed people to organize their activities in ways that would otherwise have been impossible. A money-based culture was able to grow stronger and become more robust more quickly than a society held together by force or by ties of kinship. Even today, money has an enormous effect on our social organization. On the Internet, for example, much of what you are able to do and much of what you see is controlled by the invisible force of money.

In ancient Greece, the influence of money was profound. In the 6th century BC, the culture of the Greeks was as yet unformed, while their neighbors, the Phoenicians and the Persians, had sophisticated social systems. These systems, however, were not monetary. Once the Greeks adopted the Lydian system of commerce, they were able to surpass their neighbors and break through the invisible wall that had limited other cultures. As a result, Greece become a powerful trading nation that grew to dominate the entire Mediterranean area, and the Greeks developed a highly accomplished culture that eventually changed the world.

It takes more than coins to create a successful economy. There must also be leaders who understand how to guide the economy.

Of course, it takes more than coins to create a successful economy. There must also be leaders who understand how to guide the economy. It took, literally, centuries for people to learn enough about money and how it works to act with wisdom and skill. In the meantime, one country after another fell prey to the most common of the money-induced evils: greed and mismanagement. One of the most important examples is the Roman Empire.

During the time of the Roman Republic (509-27 BC), Rome had its ups and downs militarily, but for the most part, it thrived economically. The Romans had adopted the use of money, which they implemented over an immense area, and it was during this time that most of Rome's commercial growth took place.

In 27 BC, the Roman Empire was founded, the first empire to be organized around the use of money. Over the next five centuries (until 476 AD), Rome was ruled by a long succession of emperors.

The early emperors had a clear respect for the value of commerce and markets, and they appreciated how important the monetary system was to their being able to retain power. As a result, they were able to maintain the success of the Republic and even improve upon it somewhat. During the reign of the emperor Marcus Aurelius (161-180 AD), the Roman Empire reached its economic zenith and, for the first time in history, most of the Mediterranean region and many of the surrounding lands were united under a single political and monetary system.

However, the Roman Empire, as powerful as it was, had a fatal flaw. All power was centralized in Rome and, unlike Athens (the center of Greece), Rome produced very little of value. Moreover, unlike Sardis (the capital of Lydia), Rome was not a major center for trade and commerce. The wealth of Rome was imported, mostly from lands that were conquered by the Roman army.

As a general rule, Roman emperors spent what they had: they did not save and they did not use a budget. Moreover, the later emperors mismanaged the empire's finances by spending more and more money on the army and on a bloated bureaucracy. Over time, it became clear that the empire's wealth could not be sustained by conquests and pillaging. It was then that the emperors, in looking around for a cure, hit upon a plan of action, one that would provide a temporary fix, but would ultimately destroy the very integrity of the monetary system: they debased the currency.

What they did was to reduce the silver content of the coins, which allowed them to manufacture more coins with the same amount of silver. Unfortunately, this type of behavior was not unique to the Roman emperors. Over the next two millennia, it was repeated many times, always with disastrous results.

In the case of Rome, their unit of money was the denarius. Early on, the emperor Nero (who ruled from 54-68 AD) reduced the silver content of a denarius from 100 percent to 90 percent. Over the years, the silver content was reduced again and again by one emperor after another, until, by the reign of Gallienus (260-268), the denarius contained virtually no silver at all. The same amount of silver that, at the time of the founding of the empire, was used to create a single denarius, was now used to create 150 denarii.

The end result was as you might expect. As the silver content of the Roman coins went down, so did their value, leading to INFLATION, a condition in which the prices of goods and services increase significantly for an extended period of time. In the 2nd century AD, for example, a certain amount of wheat cost half a denarius. A hundred years later, the same amount of wheat cost 100 denarii.

The emperors needed more money, not less, but the debasement of the Roman currency had effectively reduced their purchasing power. Their solution was to raise taxes, which they did repeatedly. The uncontrollable inflation and unconscionable taxation combined to destroy the Roman economy leading, eventually, to the deterioration and ultimate downfall of the empire.

This scenario, the debasing of the monetary system by a king or a government leading to inflation and misery, is only one way in which a monetary system can be destroyed. As I mentioned earlier, a growing economy needs just the right amount of money, not too much and not too little. If a country were to find itself with too much money, the same type of thing would happen: inflation would set in, the ruling class would get greedy, the bureaucracy would grow, and the system would collapse. This is exactly what happened to Spain in the 16th century.

In 1492, Columbus made his first voyage to the New World. Over the next 300 years, the Spanish, and later the Portuguese, established colonies in Mexico and South America from which they shipped enormous quantities of gold and silver to their mother countries. Much of the gold and silver was stolen from the native peoples; the rest of it was extracted from mines using mostly native labor.

The Spanish established mints in Mexico and Peru to make coins and, over time, the number of gold and silver coins that made their way to Europe was so large that it created tremendous inflation and inspired enormous greed. By the 16th century, the country of Spain had became so impoverished that it went bankrupt twice (in 1557 and again in 1597). The influx of gold and silver coins also affected Spain's trading partners causing significant inflation in other countries. For example, by the end of the 17th century, prices in England were three times what they were before Columbus sailed to the New World.

However, the increase in currency did have some positive effects. Commerce increased as the regional economies of Western Europe began to grow together, bringing merchants and bankers into a single financial system. As the new coins became ubiquitous, the lives of common people were affected profoundly. For the first time, everyone in Western Europe, not just the ruling class, was able to participate in the economy, and many new types of goods and services became available to anyone with money. Before long, the new economy gave rise to a middle class, most of whom were merchants.

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