Current Shareware 1994 January/SHAR194.ISO/finance/buygold.zip/MONEY.TXT

Text File | 1993-05-07 | 23KB | 415 lines

                         A BRIEF HISTORY OF MONEY
                   -- AND WHY THE HISTORY MATTERS TO YOU

               The evolution of money has been a long and often
          difficult process as societies searched for ways to
          develop reliable and lasting systems of commerce and
          finance.

               Over the course of history, money has changed its
          physical appearance as people refined its shapes and
          sizes into convenient and practical forms.  At the same
          time, money's nature has changed.  From the days of the
          Roman gold aureus to the original U. S. silver dollar,
          money's intrinsic worth -- meaning its precious metal
          content -- was a paramount measure of its value.  Today,
          money's value is measured not by its material worth but
          by what it can buy -- its purchasing power.

               The long and colorful history of money began when
          people in ancient civilizations learned they could trade
          for things they needed, rather than produce them.
          However, trade was often complicated, with people not
          able to compare the value of different goods.  And,
          finding an appropriate trading partner was difficult --
          for example, a fisherman couldn't get wheat from a farmer
          who didn't want fish, and a candle maker couldn't get
          bread from a baker who didn't need candles.

               People learned to use prized ornaments or
          agricultural products as standards by which the values of
          different things could be compared.  From time to time,
          beads, shells, rocks, fish, hooks, grain and cattle were
          used as money.

               Most types of early money were made from metal
          because it was durable and easy to carry.  About 2,500
          B.C. the Egyptians produced one of the first types of
          metal money in the form of rings.  The Chinese used gold
          cubes about 400 years later.

               The first metal coins were struck in Lydia (now
          western Turkey) in about 700 B.C.  Made from an alloy of
          gold and silver called electrum, the coins -- known as
          "staters" -- were actually bean-shaped pellets stamped by
          the government with their weight and purity.  Because
          these coins were made of precious metal, they had
          "intrinsic" value, meaning that they had value in and of
          themselves, apart from their official designation as
          money.

               The ancient Greeks also minted coins, which replaced
          the handfuls of iron spits that they had been using.  In
          fact, the word "drachma" -- which is the base unit of
          currency in Greece today -- is a derivative of the Greek
          word for handful.  A number of numismatic innovations are
          credited to the Greeks, among them the first coin with
          designs on both sides; the first series of coins issued
          in different denominations; the first coin with a human
          representation -- the goddess Athena -- and the first
          commemorative coin, celebrating a military victory.
          Greek coins were also the first "international" currency,
          being widely used in trade throughout the Mediterranean.

               Another major development was in about 300 B.C. when
          the Romans issued their first coin -- the "as," which was
          made of bronze.  Traditionally, 100 of these were equal
          to one cow.  In later years, Julius Caesar authorized the
          minting of the gold "aureus," which became one of the
          most widely used coins in the ancient world for more than
          300 years.  Smaller denominations of Roman coins that did
          not contain gold or silver were struck with "sc," the
          seal of the Roman Senate, to bolster their acceptability.

               While these smaller denomination coins had no value
          in and of themselves, they were widely accepted because
          of the prestige of the gold aureus.  This was one of the
          first successful examples of the circulation of "fiat"
          currency -- currency that is valuable because of its
          purchasing power rather than because of its precious
          metal content.

               This early attempt at using fiat currency failed in
          the fourth century when the Romans began issuing ever-
          increasing amounts of fiat coins to compensate for
          insufficient quantities of gold needed to mint the
          aureus, which was in demand throughout the empire.  Huge
          budget deficits in the Roman government and a loss of
          confidence in coins caused catastrophic inflation that
          eventually destroyed the Roman monetary system.

               Ironically, it was during the post-Roman era that
          the Roman "solidus" became the most enduring coin in
          history, circulating throughout Europe and the Near East
          for more than 700 years.  The solidus owes its incredible
          longevity to its largely unchanged appearance and gold
          content over time, which helped to maintain public
          confidence in the coin.

               While coins remained the primary medium of exchange
          for centuries, during the Crusades people sought
          alternatives as travel become more common.  The precursor
          to European paper money was born in the form of "letters
          of credit" -- promissory notes between two parties that
          generally could not be cashed by anyone else.  The use of
          these letters was aimed at thwarting highway bandits who
          wanted coins, not paper, which was impossible for them to
          cash.

               The Europeans were not the first people to discover
          the advantages of using paper money.  Its ancient
          ancestor can be traced back to about 2,500 B.C. to the
          clay tablets on which the Babylonians wrote bills and
          receipts.  The Tang Dynasty in China issued the first
          known paper money in 650, and the earliest piece of
          currency that exists today -- a Chinese 10-kuan note --
          dates back to this time.

               Centuries later, in 1273, Marco Polo reported that
          the Mongol Emperor Kublai Khan issued mulberry bark paper
          notes in China bearing his seal and the signature of his
          treasurers.  Marco Polo described the monetary system:
          "All these pieces of paper are issued with as much
          solemnity and authority as if they were pure gold and
          silver...and the Khan causes every year to be made such
          a vast quantity of this money, which costs him nothing,
          that it must be equal in amount to all the treasure in
          the world."  With an overabundance of fiat currency in
          circulation, it is not surprising to learn that the
          Mongol-imposed monetary system suffered terrible
          inflation; eventually the Mongols left China.

               A major step in the development of paper money took
          place in 1661 when the Stockholm Banco of Sweden issued
          the first bank notes, which were private obligations of
          the bank and could be redeemed there in gold or silver by
          the bearer.  Because redemption in precious metals was
          guaranteed, many people had enough confidence in the
          value of the notes to exchange them for goods and
          services.  However, Swedish merchants feared that the
          notes would be bought up by foreigners who would redeem
          them and eventually deplete Sweden's gold and silver
          reserves.  The issue lasted only one year.

               In the 17th century, colonists settling in North
          America brought coins with them, but most of these were
          quickly returned to Europe to pay for goods that were not
          produced in the colonies.  This led to a shortage of
          coins, so Indian wampum -- beads of polished shells
          strung in strands -- was widely used as money throughout
          the colonies.  However, when settlers learned to
          counterfeit wampum, it lost its value.

               In addition to wampum, the colonists also used as
          money those items that were staples of the local
          economies because they were always in demand.  For
          example, in Virginia it was tobacco, and in Massachusetts
          it was grain and fish.  Nails and bullets frequently were
          used for small change.

               After trade between the colonies and the West Indies
          developed, Spanish eight-reales coins circulated widely.
          These coins, known as "pieces of eight." were used until
          1857.  They were frequently cut to make change: Half a
          coin was "four bits" and a quarter section was "two bits"
          -- a slang expression for the modern American quarter.

               The first coin struck in the colonies was the pine
          tree shilling -- which bore a picture of a pine tree --
          in a Boston mint in 1652.  All issues of the coin, even
          those struck in later years, claim that no additional
          coins had been minted since 1652, in case the British
          Crown decided to enforce its ban on the colonists
          producing their own coins.  Despite the efforts of the
          colonists, the British shut down the mint in 1686.

               During the 18th century, again contrary to British
          wishes, hundreds of different types of paper notes were
          printed throughout the colonies.  Those notes, issued
          before the American Revolution, usually were denominated
          in pounds and shillings and made reference to the Crown
          of England for credibility.  Some colonies issued too
          many bills, however, and their value quickly sank to
          small fractions of their face amount, making trade
          between colonies difficult.  Despite the depreciation,
          these bills helped offset economic slumps caused by a
          scarcity of metallic money in an expanding economy.

               Before the start of the American Revolution, the
          Continental Congress, facing huge expenses without
          adequate taxing power, authorized a limited issue of
          currency in 1775 -- the first paper currency issued by
          what was to become the United States.  These notes,
          called continentals, were printed from plates engraved by
          Paul Revere to read "The United Colonies" and sometimes
          even depicted colonial minutemen.  They had no backing in
          gold or silver and could be redeemed only if and when the
          colonies became independent.

               In January, 1776, the Continental Congress made it
          treason for people not to accept continentals or to
          discourage their circulation in any way.  In 1777, after
          the Declaration of Independence, the first notes bearing
          "The United State" were issued.  However, because people
          were reluctant to accept paper money, well-known
          revolutionary figures were asked to sign the notes to
          give them credibility.

               For about a year and a half, continentals changed
          hands at close to face value, but this stability was
          short-lived.  People hoarded goods and coins during the
          war, which caused inflation.  As a result, continentals
          became basically worthless.  As George Washington
          commented: "A wagon-load of money will scarcely purchase
          a wagon-load of provisions."  The currency's vanishing
          value led to the expression for worthlessness that
          remains today -- "not worth a continental."  The failure
          of continentals produced a deep mistrust of paper money
          throughout the colonies.

               However, the brief period when continentals
          circulated successfully was significant because it marked
          the first time that the worth of U.S. currency lay in its
          purchasing power, as it does today, and not in its
          intrinsic value.

               After the failure of continentals, more than 70
          years passed before the federal government would issue
          paper money again.  However, until then, state-chartered
          banks made up for the lack of a national currency by
          issuing their own paper notes, which were obligations of
          individual banks.  These state-bank notes became the
          dominant form of currency used between the time of the
          American Revolution and the Civil War.

               Each bank designed its own notes, so they differed
          in size, color, and appearance.  By 1860, an estimated
          8,000 different state-banks were circulating what were
          sometimes called "wildcat" or "broken" bank notes in
          denominations from $1 to $13.

               The nickname wildcat came about because some of the
          less reputable banks were located in low-population areas
          and were said to attract more wildcats than customers.
          People also called the notes broken bank notes because of
          the frequency with which some of the banks failed, or
          went broke.

               Because these notes had varying degrees of
          acceptability and were not always redeemable in gold or
          silver on demand, they often circulated at substantial
          discounts from face value.  These conditions made
          counterfeiting relatively easy and bogus notes abounded.

               In 1861, in an effort to finance the Civil War, the
          federal government issued the first paper money since
          continentals.  The demand notes of 1861 were popularly
          called "greenbacks" because of the color on their reverse
          side.

               In 1862, Congress issued $150 million of legal
          tender notes, more commonly known as United States notes,
          and retired the greenbacks.  These new notes were the
          first that were made legal tender for all debts, except
          import duties and interest on the public debt.
          Confidence in U. S. notes began to decline when the
          Treasury stopped redeeming them in coins during the Civil
          War to save gold and silver.  However, redemption resumed
          in 1879.

               Even though U. S. notes were generally accepted,
          most paper currency circulating between the Civil War and
          the First World War consisted of national bank notes.
          This currency, uniform in size and general appearance,
          was issued by thousands of banks across the country.  The
          federal government granted charters to these banks under
          the National Bank Acts of 1863 and 1864, allowing the
          banks to issue notes using U. S. government securities as
          backing.  From 1863 to 1877, the notes were printed
          privately, but in 1877, the Bureau of Engraving and
          Printing -- a division of the U. S. Department of the
          Treasury -- assumed responsibility for printing all
          notes.

               During the late 19th century, the U. S. government
          increased its reserve of precious metals by offering
          certificates in exchange for deposits of gold and silver.

               In the late 1950s, rising world demand for silver as
          an industrial metal began pushing up its price.  To avoid
          the possibility that the value of silver in coins might
          exceed the face value, the Treasury began selling silver
          from its stockpile in the open market to keep the price
          of silver low.  However, demand continued to be high and
          soon threatened the Treasury's silver inventory, so
          Congress took steps to reduce the amount of silver in
          American coins.

               In 1964, the silver content of half dollars was
          reduced from 90 percent to 40 percent and, in 1970, was
          eliminated entirely.  Silver also was eliminated from
          quarters and dimes in 1965.

               The elimination of silver from all U. S. coins
          completed the transition of American currency from money
          of intrinsic value to fiat money, the value of which lies
          in its wide acceptability and purchasing power.

               In 1971 the United States made a decision that
          marked the beginning of the end of the international
          system of fixed exchange rates.  America closed its "gold
          window".  Foreign central banks were thus prevented from
          converting their holdings of dollars into gold at the
          official price. For the first time in history, the
          world's principal currencies were shorn of all links to
          the value of any real commodity.  Henceforth the value of
          money - that is, the stability of prices - was entirely
          at the discretion of governments.  Before long, inflation
          was raging almost everywhere.

               Governments throughout history have tampered with
          the link between currencies and underlying measures of
          value.  Whenever wars or other emergencies required it,
          they have become monetary cheats -- fiddling with the
          convertibility of their currencies and at times
          suspending it altogether, raising revenue either by
          depreciating their coins (explicitly reducing their
          weight) or debasing them (secretly reducing the
          proportion of precious metal).

               Since ancient times, whenever private mints found
          that the fees (or seignorage) for weighing, certifying
          and coining their customers' precious metal was earning
          them a nice profit, governments began to monopolize the
          business for themselves.  That way, they found, the
          currency could be more conveniently debased whenever
          their battles for territory demanded extra money.  This
          technology of expropriation (monetary policy, as it is
          now known) took its greatest leap forward with the advent
          of fiat currency. Governments printed intrinsically
          worthless bits of paper, called them legal tender, and
          required their subjects on pain of imprisonment to give
          them goods and labor in exchange.

               For governments, the idea was understandably
          attractive.  They surrounded the process with the
          mystique of sovereignty to make the confidence trick more
          plausible. In many countries counterfeiting was not
          merely fraud but treason.  Similarly, in the present
          debate over European monetary union, it is said that the
          creation of a European central bank would be an attack on
          the sovereignty of the member states.  Viewed in a
          historical perspective, that warrants a hollow laugh: the
          sovereignty in question is the right of a government to
          steal from its citizens.

               The only check on these otherwise excellent
          opportunities for theft was the promise to redeem paper
          money for an asset of intrinsic value, such as gold.  For
          a long time that was a serious inconvenience, because
          until around the middle of this century people thought
          the promise ought to be kept.  By 1971 it had already
          been badly undermined; the closing of the gold window
          finished the job.  The power of the state took another
          large and possibly irreversible step forward.

               The world will not return to the gold standard. As
          history has shown, modern governments are now big enough
          to rig the gold market, or the market for any other
          single commodity, without much trouble.  The dropping of
          the gold standard by governments means that they have now
          lost interest in manipulating the price of gold, since it
          no longer has a relation to their currencies.  This is
          important to investors in gold, which now takes on a
          private significance as a hedge of value.

               The history of money has been given here at length
          for a very important reason.  It is important to not only
          have a feeling that something is wrong, and that United
          States currency and investments are at risk, but to
          understand fully the reasons why this is so.  It is very
          important to realize that these patterns of history
          constantly repeat, and have done so for centuries.  The
          current political rhetoric of a new administration in
          Washington cannot change the inevitable course of
          history, nor can it reverse the downhill slide that is
          well under way.

               All governments and a fiat monies have their
          problems, but some are better than others, and looking at
          the comparative strengths and values is important to
          preserving your wealth.

               The Swiss franc is more than a paper currency -- it
          is backed by gold -- the only currency left in the world
          that still is backed by gold.  Swiss law requires a
          minimum 40% gold reserve for the Swiss franc, and the
          actual reserves are about 56%.  But this is very
          misleading, because the gold is carried on the Swiss
          central bank's books at the old "official" purchase price
          of US$42 per ounce.  So with the current prices of gold,
          the gold backing per Swiss franc is actually many, many
          times its face value.  No other currency is in this
          position.

               To protect wealth properly, an investor must act on
          his own, know why he is doing so, and not drift along
          waiting for a political solution that history has shown
          is impossible.