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The Holy Light of Money:

A Brief Survey of Pre-Modern Economic Systems

By Lafayette C. Curtis
Copyright 2008 by Lafayette C. Curtis, All Rights Reserved


The phrase "economic systems" might sound a bit discouraging because it brings to mind capitalism and socialism and other whatever-isms that many people have been forced to learn about in school. Fortunately, this article will not examine those politically-based divisions of economic systems; instead, it will take a broader economic, historical, and sociological view on the various forms of economic arrangements known from prehistoric times up to the modern day, placing special focus on details that may be relevant to speculative (especially SF and fantasy) and historical fiction writers.

The most basic arrangement, known as the subsistence economy, is where every household produces practically everything it needs to survive. For example, imagine that a broad grassland is sparsely populated by a few families of sheep-herders, all of whom produce the same set of goods (milk, meat, wool, plus byproducts like horn and glue) from their herds in quantities enough to keep themselves from starving. For the rest of their needs -- such as flint for tools, berries and roots for seasoning their food, pigments for art -- they gather freely and directly from the environment without much fear of scarcity because the population is so sparse that there is little or no possibility of overexploiting the available resources. In this situation each of the families can live well enough alone without exchanging resources with any other families, except perhaps for reproductive needs. The advantages of this economic system are fairly obvious: independence and self-sufficiency. Unfortunately, it's also a relatively inefficient one because all economic surplus has to be consumed within the family rather than traded out for profit.

Of course, with the invention of advanced skills, people naturally begin to see an advantage in specialization. An agricultural family will farm better if it doesn't have to bother with making its own pots, and a pottery-making family will make pots better if it doesn't have to worry about growing its own food. So the two families may come to an arrangement whereby the farmers will supply the potters with their produce whenever the potters ask for it and the potters will provide the farmers with pots upon request. This reciprocal sharing does not involve any exchange rates (i.e. price) -- the produce and pots are given for free to the other party as the need arises. The result is a system that economic historians call a redistributive economy. Its characteristics of specialization and exchange of surpluses make it a more efficient and productive system on the whole than a subsistence economy. On the flip side, it creates interdependence between the farmers and the potters -- both will suffer when one family ceases production -- and on the other hand it is not very practical when there are more than just a few different kinds of resources to redistribute.

Naturally, the next step is for the producers of different goods and services to set terms of trade for their products, or in other words to set prices for them; to use the example of the farmers and potters once again, the two families would agree to exchange their products at a prescribed rate, such as one pot for enough grain or beans to fill that pot. This example represents the basic form of a trade economy. This specific method of directly trading one commodity for another is called barter.

A system of trade based on barter has two crucial weaknesses. First, it's not always easy to find people whose trade interests match; when somebody from the potters' family goes to the market, he/she can't always be sure of finding a farmer who would trade grain for pots. More likely he/she would meet people who want pots but are offering commodities that the family doesn't currently need (say, shoes or milk) or those who are willing to part with their grain but not for pots. Even when the interests match, the quantities may not, as the potter would likely be looking for more or less grain than what the pot-desiring farmer wishes to sell. The second weakness is a difficulty in establishing exchange rates; if, say, the farmer wants to trade grain for an important religious object worked in substantial quantities of bronze, he/she might have to carry a huge amount of grain in order to match the price of the object even after a great deal of haggling. This last weakness can be temporarily overcome by using standardized tokens to represent discrete amounts of the goods in question, like the clay tokens used in the ancient Near East, but eventually the commodities will have to be exchanged in physical form with all the difficulties that entails.

An early solution to these problems comes in the form of pegging the price of most commodities on the market against one particular commodity. For example, if the local baker is known for being able to produce loaves of an amazingly consistent size and quality, then most people in the market might start quoting their prices in so many loaves of bread, with the desirable side effect that sellers of non-bread commodities would now be able to compare the values of their goods according to the third-party yardstick of bread--where a wine jar is worth sixteen loaves of bread while a sack of grain is worth two, it's obvious that the farmer can trade eight sacks of grain with anyone who needs them in order to get sixteen loaves of bread and then give all that bread to the potter in exchange for the wine jar. In this way the bread effectively becomes money and the market becomes a money economy based on bread. Note that this money economy is still a subset of trade economies, although of course it is a much more fertile medium for trade than a barter economy. It also has a stronger tendency to spur producers within the economy towards greater quantity or quality (or both) since any surplus in either of these aspects can be sold to prospective customers in the form of goods or services (or a combination thereof) and therefore a greater surplus becomes a desirable thing to the producer.

The bread used in the example above is known as commodity money, where the buying power of the money is identical with its intrinsic value (i.e. the value of the commodity contained within it). Of course bread is not a very good commodity to be used as money because it can be rather bulky and not very long-lasting. Sooner or later people would gravitate towards forms of commodity money that are both long-lasting and sufficiently valuable that they won't have to carry large quantities of the commodity in order to handle large transactions. Gemstones and precious metal are among the most common forms in this respect because they fulfill both requirements for convenience. But the use of highly valuable commodities as money creates new problems even as it solves the old ones. For one thing, the money commodity would still be quite valuable even in small amounts, so traders might be tempted to clip or shave off the edges of metal coins and then sell the collected shavings as plain expensive metal while trying to pass off the clipped/shaved coins as ones that had not been clipped or shaved. Historically, this problem was exacerbated by the way metal coins were minted, which was to place the metal between two dies and hit it with a hammer, thus producing coins with irregular or somewhat asymmetric edges that helped unscrupulous traders to hide the damage caused by shaving/clipping them. A decent solution only appeared in the 16th century with the introduction of milled coins, which were much more uniform in shape and had transverse striations along the edges; the absence of these striations along part of the edge instantly identified a coin as one that had been clipped. The second problem is that precious stones and metals can be too valuable to adequately handle small-scale transactions. In order to overcome this inconvenience, most money-based monetary systems actually use more than one kind of commodity on a graduated scale to handle various transactions at different levels of value. The commodity at the lowest end of the scale forms the small change that most people use in their daily lives, like copper and barley in ancient Mesopotamia or bronze coins in the Hellenistic period.

Another important feature of money economies is a need for confidence--a reliable guarantee of the value of the money being exchanged. At first the money had to be weighed every time it was used, and respectable authorities gave their guarantees by stamping their seals on the weights used for this measurement (which, unfortunately, still leaves room for fraud through faking the seal or tampering with the scale's mechanism). A watershed came around the 7th or 6th century B.C. when rulers in both Lydia (now part of Turkey) and China began stamping their seals and/or inscriptions of authenticity upon the money itself. The Chinese money was spade-like in shape while the Lydian was made in the form of flat circular disks, which in combination with the seal gave them the form of coins we would recognize today.

Shaving or clipping is not the only form of debasement that could happen to precious-metal coins. The coin may be made from metal of less than the desired standard of purity, with the precious metal being alloyed with less valuable metal in the casting of the coin. Done by the public, this falls under the criminal heading of counterfeiting. However, when done by the authorities, this may be a legitimate way to expand the money supply with the aid of legal tender laws forcing the public to accept the debased coins as if they were the same value as purer metal. Thus, the concept introduces a third kind of value into the equation, since legal-tender money not only has buying power and intrinsic value; it also has a nominal value, which is the value it is declared to be by the government. This nominal value quickly becomes independent of the other two values once it has been established and the disparity between the three was not entirely understood until the 20th century or so (although it was certainly noticed by and became a source of confusion for earlier economists). In this way the money begins to take on the character of fiat money, which essentially means "money is money because the government says it is so."

Legal-tender laws also give rise to the complication known as Gresham's Law, where "bad money drives out good money" -- the debased money becomes dominant in trade because people are less reluctant to part with it, while the purer coins are either hoarded or melted down to be sold as bullion. Interestingly, the absence of legal-tender laws tends to produce the opposite condition -- sometimes called the "Reverse Gresham's Law" -- whereby non-debased coins tend to dominate the circulation (because consumers and traders place more explicit trust in them) while clipped, shaved, or debased ones fall by the wayside (because they're simply not worth their ostensible value).

A third kind of money is known as representative money, which appeared when people began to make transactions with really huge sums and discovered that such sums required impractical quantities of coins or whatever money was in circulation. This eventually led to the use of certificates to show this or that person's ownership of so much gold or silver in this or that other person's custody. When the owner of the gold or silver wished to make a large payment, he/she would now be able to simply hand over a certificate of the suitable amount to the seller. The seller could then go to the custodian and show the certificate to claim all or part of the payment as needed -- or, more usually, the seller would also have a custodian of his/her own and the transfer would then be handled by the two custodians with much more experience in handling these large amounts in an efficient and practical manner. Things could be easier still if the buyer and seller used the services of the same custodian so that the money in the two people's accounts could be "transferred" without having to move it physically. If this custodian was also the government (or a government-authorized bank), and the certificates were issued in a number of standardized denominations, the certificates would effectively become paper money backed by a precious-metal deposit. It would only take the additional step of divorcing the paper money from the backing deposit (thus making it the most extreme form of fiat money) to make money as we know it in most parts of the modern world.

(Note: in a sense, ancient Mesopotamian clay tokens can be said to be a very early form of representative money, since they worked in exactly the same way as precious-metal certificates -- that is, by proclaiming a person's ownership of a commodity in the stated value. They seemed to have vanished entirely with the appearance of precious-metal commodity money, however, so I'm not treating them as a direct ancestor of the representative money as it is known today.)

Of course, the process that converted precious metal deposits into ownership certificates can also be taken one step further so that the certificates now signify the ownership of money -- any kind of money, whether commodity or fiat -- while retaining their usability in trade. This creates a fourth kind of money called credit money and best known to the modern world in the form of cheques, bonds, and credit/debit cards. Credit money provides even greater convenience in handling large quantities of money, which has only become more pronounced with the development of modern technology because credit lends itself very well to computerization. In fact, a sizable proportion of money in today's world never exists in any physical form, being traded entirely as bytes in computer memories and shown to users only as numbers in computer screens.

 

A common detail of pre-modern monetary systems that tends to escape most fiction writers' notice is the difference between money of account, which is a theoretical standard of monetary values, and money of exchange, which comprises the actual coins being used in commerce. In modern times the two are virtually identical, with money of exchange being explicitly printed or stamped with its value in units of account; however, the coins circulating in ancient and medieval societies and in many places up to the 19th century often were not stamped with a fixed value, and in fact their values fluctuated relative to the unit of account. For example, an English pound used to be a unit of account worth the same as a hunk of silver weighing exactly one pound, and it could be divided into twenty shillings or 240 pence. The actual English coins in circulation at the time were not usually named according to their value, being called instead by the designs stamped on their faces or some other related feature -- like the "guinea," named for the source of the gold used to make the coin. The guinea itself was originally worth one pound of account when it was introduced in 1663, but people liked its purity and demanded more and more of it, causing a rapid rise in its value. In this way the guinea's worth in units of account occasionally went as high as 30 shillings until it was stabilized at 21 shillings in the early 18th century.

What effect does this have on fictional economies, then? Well, for one thing, it means that the Dungeons & Dragons model of coins having fixed, precisely graduated values (1 gold coin is worth 10 silver coins, which in turn is worth 10 copper coins) would only work for money of account, not for the fluctuating worth of coins exchanged in the daily life of ancient, medieval, and early modern societies. Of course, it's an unavoidable simplification when it comes to a role-playing game, but fiction writers may be able to make good use of the additional complications caused by the distinction between money of exchange and theoretical units of account. It is also worth noting that the multiplicity of coins circulating at various (and ever-changing) values can help to build suspension of disbelief, especially when the principal coins are mentioned often enough that the readers can start to speculate how much this coin or that is worth against the established units of account.