OF COINS AND TREASURE
Money is a very old convenience but the notion that it is a reliable artifact to be accepted without scrutiny or question is, in all respects, a very occasional thing—mostly a circumstance of the last century. For some four thousand earlier years there had been agreement on the use of one or more of three metals for purposes of exchange, these being silver, copper and gold, with silver and gold being also once used in the natural combination called electrum. For most of these many years silver was pre-eminent; for lesser periods, as under the Mycenaeans or in Constantinople after the division of the Roman Empire, gold had prior place.1 It has always been thought derogatory that Judas delivered up Jesus for 30 pieces of silver. That it was silver suggests only that it was a normal commercial transaction; had it been three pieces of gold, a plausible early ratio, the deal would have been somewhat exceptional. On occasion, in the extent of use, gold ranked below copper. For brief periods, it should be noted, iron also intruded. And much later tobacco, as will be told, had a limited but notable run. More awkward or exotic items such as cattle, shells, whiskey and stones, though greatly relished by teachers on money, have never been durably important for people much removed from primitive rural existence. The historical association between money and metal is more than close; for all practical purposes, for most of time, money has been a more or less precious metal.
Metal was an inconvenient thing to accept, weigh, divide, assess as to quality in powder or chunks, although more convenient in this regard than cattle. Accordingly, from the earliest known times and more likely somewhat before, metal was made into coins of predetermined weight. This innovation is attributed by Herodotus to the kings of Lydia, presumably in the latter part of the eighth century B.C.:
All the young women of Lydia prostitute themselves, by which they procure their marriage portion; this, with their persons, they afterwards dispose of as they think proper …
… The manners and customs of the Lydians do not essentially vary from those of Greece, except in this prostitution of the young women. They are the first people on record who coined gold and silver into money, and traded in retail.2
It seems possible, based on references in the Hindu epics, that coins, including a decimal division, were, in fact, in use in India some hundreds of years earlier.3 Coinage after the Lydians developed greatly in the Greek cities and in their colonies in Sicily and Italy to become a major art form. Some surviving specimens cannot be viewed without a quick intake of breath at their beauty. After Alexander the Great the custom was established of depicting the head of the sovereign on the coin, less, it has been suggested, as a guarantee of the weight and fineness of the metal than as a thoughtful personal gesture by the ruler to himself. It was one that could work in reverse. According to Suetonius, after the death of Caligula his money was called in and melted down so that not only the name but the features of the tyrant might be forgotten.
Coinage was a notable convenience. It was also an invitation to major public and minor private fraud. For profligate or hard-pressed rulers, and these, over time, have been a clear majority of their class, it regularly appeared as a flash of revelation that they could reduce the amount of metal in their coins or run in some cheaper brass and hope, in effect, that no one would notice, at least soon. Thus a smaller amount of silver or gold would buy as much as before, or the same pure weight that much more. And it occurred equally to private entrepreneurs, after concluding a bargain, that they could clip or shave a few micro-milligrams from the coins they had agreed to pay. This, over time, would add marginally but agreeably to the profits. Counterfeiting was also an early innovation. As early as 540 B.C., Polycrates of Samos is said to have cheated the Spartans with coins of simulated gold.
With the passage of time and depending on the financial needs of rulers, their capacity for resisting temptation, which was generally modest, and the private development of the peculative arts, coinage had a highly reliable tendency to get worse. The Greeks, notably the Athenians, seem to have resisted debasement out of a rather clear understanding that this was a short-run and self-defeating expedient and that honesty was, at a minimum, good commercial policy. After the division of the Roman Empire and the reassertion of Greek influence at Constantinople the bezant was for several centuries the world symbol of sound money, everywhere as acceptable as the gold it contained.
By contrast, the history of the highly developed coinage of Rome itself, as legend has sufficiently established, was one of steady debasement, beginning, it is commonly supposed, in consequence of the financial pressures of the Punic Wars. In time, this had the effect of converting the empire from a gold and silver to a copper monetary standard. By the time of Aurelian the basic silver coin was around 95 percent copper. Later its silver content was brought down to 2 percent.4 Modern coin collectors, it has been suggested, now own the good gold and silver coins that were held back in hoards and which, with the slaughter, urgently compelled departure or normal demise of their owners, were then orphaned and forgotten.5 In time it would be asserted that the debauchment of the currency caused the downfall of Rome. This historiography—the tendency to attach vast adverse consequences to monetary behavior of which the observer happens to disapprove—is one which we will find frequently to recur. It should, needless to say, be regarded with the utmost suspicion.
In the ancient and medieval world the coins of different jurisdictions converged at the major trading cities. If there were any disposition to accept coin on faith, it was inevitably the bad coins that were proffered, the good ones that were retained. Out of this precaution came, in 1558, the enduring observation of Sir Thomas Gresham, previously made by Oresme and Copernicus and reflected in the hoarding of the good Roman coin, that bad money always drives out good. It is perhaps the only economic law that has never been challenged, and for the reason that there has never been a serious exception. Human nature may be an infinitely variant thing. But it has constants. One is that, given a choice, people keep what is the best for themselves, i.e., for those whom they love the most.
With numerous coins in circulation variously adulterated, clipped, filed, sweated, trimmed, and with the worst being offered first, coins became a problem. The path was now open for the next great reform, which was to go back to weighing. This decisive step was taken by the City of Amsterdam in 1609—a step that joins the history of money to the history of banking. It was a step especially occasioned by the large trade of Amsterdam. That, in turn, was associated with one of the most pervasively influential events in the history of money—the voyages of Columbus and the effect on Europe of the ensuing conquest and development of Spanish America.
There were many in Europe after 1493 who knew only distantly of the discovery and conquest of lands beyond the ocean seas, or to whom this knowledge was not imparted at all. There were few, it can safely be said, who did not feel one of its principal consequences. Discovery and conquest set in motion a vast flow of precious metal from America to Europe, and the result was a huge rise in prices—an inflation occasioned by an increase in the supply of the hardest of hard money. Almost no one in Europe was so removed from market influences that he did not feel some consequence in his wage, in what he sold, in whatever trifling thing he had to buy, The price increases occurred first in Spain where the metals first arrived; then, as they were carried by trade (or perhaps in lesser measure by smuggling or for conquest) to France, the Low Countries and England, inflation followed there. In Andalusia, between 1500 and 1600, prices rose perhaps fivefold. In England, if prices during the last half of the fifteenth century, i.e., before Columbus, are taken as 100, by the last decade of the sixteenth century they were roughly at 250; eighty years later, by the decade of 1673 through 1682, they were at around 350, up by three-and-a-half times from the level before Columbus, Cortés and the Pizarros. After 1680, they leveled off and subsided, as much earlier they had fallen in Spain.6
As noted, these prices, not the tales of the conquistadores, were the message to most Europeans that America had been discovered. At work in a primitive but unmistakable fashion was the central proposition concerning the relation of money to prices—the quantity theory of money. This holds, in its most elementary form, that, other things equal, prices vary directly with the quantity of money in circulation. In the sixteenth and early seventeenth centuries prices varied upward and greatly with the vast increase in the supply of precious metals available for coinage from across the Atlantic. There will be occasion later in this history to look at the quantity theory in its modern and more sophisticated form. By then, enough knowledge will have been gleaned from the record of monetary experience so it can be rather readily understood and, what is more important, not misunderstood.
The message from the Americas was not one that brought uniform joy. In Spain the new wealth led also to a bidding up of wages; there wages seem to have kept pace, more or less, with prices. Elsewhere in Europe they lagged far behind, differences in population growth being a possible influence. The figures available show only orders of magnitude. Also, in those times, workers, and most notably the many in agriculture, had income that was not part of their money wage. Nevertheless, in England, in the decade from 1673 through 1682, when prices were around three-and-a-half times the pre-Columbian level, it seems probable that wages were only about twice as high. There was a similar discrepancy in France and, it may be assumed, also in the trading cities of the Low Countries and northern Europe.
Not for the last time—and probably not for the first—inflation had a profound effect on the distribution of income, with a particular tendency to punish most those who had least. The loss of those who received the lagging wages was in turn the gain of those who paid them and received the high and increasing prices. The result was high profits,7 and the further result was a general quickening of commercial and, in more elementary manifestation, industrial capitalism. Historians have for long talked, often with more grandeur than personal comprehension, of how the American treasure financed, lubricated, stimulated or otherwise enhanced the early development of European capitalism. In one view it was the gold and silver per se that nurtured that capitalism. In fact, it was not the metal but its consequences, and these were not at all mysterious. The high prices and low wages meant high profits. From the high profits came high savings and a strong incentive to their investment. Additionally the rising prices made it easy to make money; to the natural rewards of shrewd trading or efficient manufacture was added the gain, with the passage of time, from the ability to sell the same thing for more. Inflation does lubricate trade but by rescuing traders from their errors of optimism or stupidity. Finally it may be assumed that the easy profits gave easier opportunity to new entrepreneurs who were, as is often the case, more energetic, aggressive or imaginative or less deterred by the impossible than those already in the field. It was thus that American money and the resulting inflation assisted at the birth of European capitalism. Doubtless it would have been born anyway. But there can be no doubt that the assistance was real.
Where Spain is concerned, legend regularly persists against the strong burden of fact. Possibly this is because Spanish historians, unlike those of other countries, have rarely been aroused by national conceit. They have been content to assume the worst. The Holy Inquisition in Spain remains in the minds of all as the paramount example of public cruelty, at least until Hitler. It is not something one would wish to praise. But the number of Jews, Marranos and other heretics who fell victim to its professedly judicial procedures during the three centuries of its sway—a few thousand at most—were fewer than were, on occasion, slaughtered summarily in the Rhineland cities in a single year. The Spanish Armada remains to this day the classic case of overwhelming and pompous military power brought to defeat by an inferior but far more sanguinary and alert foe. Against this belief the truth has never made headway. It is that the English had a nearly equivalent tonnage of much better designed men-of-war which were much more heavily gunned and much better manned and thus made up an altogether superior force.8
Similarly the accepted view of the American treasure of Spain. The legend holds it to be gold looted from the temples of the Aztecs, extracted as a ransom by Francisco Pizarro for Atahualpa—the wonderful roomful of gold artifacts demanded by Pizarro for the Inca—or surrendered by the Indians after persuasion of a uniquely painful sort. This treasure was then conveyed to Spain by galleons, many of which fell victim to the hordes of pirates that patrolled the Spanish Main and who were justified at least partly in their theft by the yet greater criminality and avarice of the Spaniards.
The treasure looted from the temples or extracted from the Indians was, in fact, a trifling part of the total. The overwhelming part was mined. Nor was the treasure gold. Nearly all, after the first years, was silver. Beginning with the decade of 1531 through 1540, the weight of silver was never less than 85 percent of the total and from 1561 through 1570, never less than 97 percent.9 San Luis Potosi, Guanajuato and the other rich silver mines of Mexico, some of which continue to operate to the present day, and their counterparts in Peru were the source of the American treasure. Finally, by far the greatest part of it was conveyed safely and routinely to Spain. Two or three bad years apart, the losses to piracy, righteous and otherwise, were slight. This continued to be the case until the 1630s, after which, the richest ore having been exploited, exports of silver declined.
The bullion coming officially into Spain was, according to law and mercantilist policy, coined at the Spanish mints. These coins then went on to the trading centers of northern Europe, which sold desired products or, being less affected by the inflow of money, had lower prices. Along with the coins went smuggled metal that had circumvented the Spanish mints or avoided Spain entirely. In the sixteenth century precious metal went in quantity to France and in the following century to the Low Countries to pay for Spanish armies operating there. War, it is well to recall, was an important occupation of the age, with a major claim on public revenue. (Max Weber estimated that in this period about 70 percent of Spanish revenues and around two-thirds of the revenues of other European countries were so employed.10) A not inconsiderable part of this flow converged on Amsterdam, to which we now return.
Not only did the American treasure enhance profits and stimulate commerce and industry, it also enlarged the opportunity of all who saw money as a way of making money. The silver coinage of the time contained some copper. It was not difficult for counterfeiters to produce an excellent imitation that contained a little, or even a great deal, more. They were assisted by the fact that the minting of money, even if as in Spain closely regulated, was still extensively a form of private enterprise. The merchants of Amsterdam at the end of the sixteenth century—a hundred years after the great flow of silver had started—were the recipients of a notably diverse collection of coins, extensively debased as to gold or silver content in various innovative ways. A manual for money changers issued by the Dutch parliament in 1606 listed 341 silver and 505 gold coins.11 Within the Dutch Republic no fewer than fourteen mints were then busy turning out money; there was, as ever, a marked advantage in substituting plausibility for quality. For each merchant to weigh the coins he received was a bother; the scales were also deeply and justifiably suspect. Adam Smith told, 170 years later, of the solution: “In order to remedy [the aforementioned] inconveniences, a bank was established in 1609 under the guarantee of the City. This bank received both foreign coin, and the light worn [and other debased] coin of the country at its real intrinsic value in the good standard money of the country, deducting only so much as was necessary for defraying the expense of coinage, and the other necessary expense of management. For the value which remained, after this small deduction was made, it gave a credit on its books.”12 Thus appeared, to regulate and limit abuse of the currency, the first notable public bank.13 Similar institutions were soon established in Rotterdam, Delft and the then important trading town of Middlebourg, In time, guardian banks appeared in other countries.
With the rise of these banks the profits from sweating, adulterating and otherwise diminishing the coinage fell. At the public bank it was only the valid metal that counted. And, equally or more important, with the rise of national states coins became fewer and better minted. So coinage ceased to attract the attention of men of peculative instinct. The returns from such ingenuity were now low or derisory. The problems associated with money ceased to be those of coinage; they became, instead, those of banks and exchequers, not excluding those of the institutions that had been established to safeguard the coinage. A constant in the history of money is that every remedy is reliably a source of new abuse.
Such was true of the Bank of Amsterdam, on which a word should be added by way of completing the story. For a century after its founding it functioned usefully and with notably strict rectitude. Deposits were deposits, and initially the metal remained in storage for the man who owned it until he transferred it to another. None was loaned out. In 1672, when the armies of Louis XIV approached Amsterdam, there was grave alarm. Merchants besieged the Bank, some in the suspicion that their wealth might not be there. All who sought their money were paid, and when they found this to be so, they did not want payment. As was often to be observed in the future, however desperately people want their money from a bank, when they are assured they can get it, they no longer want it.
In time, however, there came a turn for the worse. A companionable relationship had always existed between the mayor and members of the Senate of the City of Amsterdam which, more than incidentally, owned the Bank, and the directors of the Dutch East India Company. Often they were the same men. In the seventeenth century the Company had been an exceedingly solid enterprise, although it often needed short-run accommodation for outfitting ships or until the ships came in. Such loans the Bank came to provide out of the funds on deposit to the account of others. This was a small step toward what, for the modern, everyday commercial bank, is the most orthodox of operations. Then, toward the end of the seventeenth century, the East India Company began to do less well. Its deficits and debts increased, and in the eighteenth century things got even worse. In 1780, the war with England brought heavy losses of ships and cargos, and the Bank became yet slower to pay. The City government also began hitting the Bank for loans. Now, were all depositors to come at once for their money, all could not be satisfied. Some of the money would be away in uncollected or uncollectible loans to the Company or City. Previously merchants, accepting payment for goods and debts, had taken bank deposits at a premium over the more dubious coin that was the alternative. Now, suspecting trouble at the Bank, they took payment by transfer of a bank deposit only at a discount. And presently the Bank began to limit the amount of coin that could be withdrawn or transferred to another bank. Refusal or inability to make good in coin on deposits was, in days to come, to be the certain signal that a bank was in trouble—that, however the action might be explained, the end was in sight. For the Bank of Amsterdam the end came in 1819. After two centuries and a few odd years of service its affairs were wound up.
1 On the use of different metals there is less than agreement. The above follows the standard view as given by Keynes. Cf. John Maynard Keynes, Essays in Persuasion (New York: Harcourt, Brace & Co., 1932), pp. 181–182. An interesting general sketch of the early development of metals and money is in Fernand Braudel, Capitalism and Material Life 1400–1800 (New York: Harper & Row, 1967), pp. 325–372.
2 Herodotus, Book I, Clio. Rev. William Beloe, trans. (Philadelphia: M’Carty and Davis, 1844), p. 31.
3 Alexander Del Mar, History of Monetary Systems (London: Effingham Wilson, 1895; New York: Augustus M. Kelley, 1969), pp. 1–2.
4 Norman Angell, The Story of Money (New York: Frederick A. Stokes Co., 1929), pp. 116–117.
5 Angell, pp. 117–118.
6 Much of the modern knowledge of this period derives from the diligent, indeed phenomenal, researches of Earl J. Hamilton, early on of Duke University and later of the University of Chicago, to whom Keynes, along with many others, paid warm tribute—work “of high historical importance.” Professor Hamilton spent thousands of youthful hours on the account books and records of Spanish hospitals, convents and other institutions, building up price indexes, and similarly in the Spanish archives (including that marvelous monument to the bureaucrat’s affection for paper, the Archivo General de Indias) establishing the source, kind and quantities of American treasures reaching Spain. Cf. in particular his American Treasure and the Price Revolution in Spam, 1501–1650, Harvard Economic Studies. Vol. XUII (Cambridge: Harvard University Press, 1934). and “American Treasure and the Rise of Capitalism (1500–1700),” Economica. Vol. IX, No. 27 (November 1929), from which 1 have taken the price indexes herewith. The English index numbers cited here, with some rounding off. are the work of the German historian Georg Wiebe. His calculations, first published in 1895, are corrected in details but not in orders of magnitude in Abbott Payson Usher’s “Prices of Wheat and Commodity Price Indexes for England. 1259–1930,” The Review of Economic Statistics, Vol. XIII, No. 1 (February 1931), p. 103 et seq.).
7 A distinction made by Keynes who spoke of profit inflation as opposed to income inflation. John Maynard Keynes, A Treatise on Money (New York: Harcourt, Brace & Co., 1930), Vol. II, p. 148 et seq.
8 “[B]y 1588 Elizabeth I was the mistress of the most powerful navy Europe had ever seen … a fleet capable of outsailing and outmaneuvering any enemy in any weather, and at its chosen range … of outgunning him decisively.” Garrett Mattingley, The Armada (Boston: Houghton Mifflin Co., 1959), pp. 195–196.
9 Hamilton, American Treasure and the Price Revolution in Spain, 1501–1650, p, 40. Thorold Rogers, in his classic study of English prices made in the last century, speaks of the large effect of new silver and the slight effect of new gold. A History of Agriculture and Prices in England, Vol. V, 1583–1702 (Oxford: Clarendon Press, 1887), p. 779.
10 As cited in Hamilton, “American Treasure and the Rise of Capitalism (1500–1700),” p. 340.
11 Richard Van Der Borght, “A History of Banking in the Netherlands,” History of Banking (New York, The Journal of Commerce and Commercial Bulletin, 1896), Vol. IV, p. 192.
12 Adam Smith, Wealth of Nations (London: T. Nelson and Sons, 1884), Book IV, Ch. III, p. 196.
13 There was at least one short-lived Venetian precursor. The proper reference is to a public bank rather than to a central bank. The Bank of Amsterdam had little of the character and few of the functions later associated with central banking.