Money

• 1. Introduction

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  Money's a matter of functions four, a Medium, a Measure, a Standard, a Store. That couplet, which summarized William Stanley Jevons's analysis of money, became widely popular in macroeconomics textbooks by 1919. Behind those tidy lines sits one of the strangest facts about the thing in your pocket. Nearly all money today is fiat money, unbacked by any commodity, with no use value of its own. A banknote is worth something only because a government has declared it legal tender and because everyone agrees to accept it. So where did this shared agreement come from, and how did barley, cowry shells, and slips of tree bark end up doing the same job as a coin stamped with gold? Why does most money in a developed country exist only as numbers on the books of banks, never as a note or a coin at all? And how did the very word money trace back to a temple on a hill in Rome?

• 2. Juno's Mint

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  The temple of Juno Moneta stood on the Capitoline, one of Rome's seven hills, and it was there that the mint of Ancient Rome was located. From that temple the word money flows: through the Latin moneta, meaning coin, and the French monnaie, into English. In the ancient world, Juno was often associated with money. Her name may have come from the Etruscan goddess Uni. The epithet Moneta itself has two candidate roots. One is the Latin monere, meaning to remind, warn, or instruct. The other is the Greek moneres, meaning alone or unique. In the Western world, a separate term grew up for coin-money: specie, from the Latin in specie, meaning in kind. The vocabulary of money carries this layered ancestry, and the objects it named were older still than the temple that gave them their name.

• 3. Shells, Shekels, And Coins

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  The Mesopotamian shekel began as a unit of weight, resting on the mass of something like 160 grains of barley, with the first usage of the term coming from Mesopotamia around 3000 BC. Barter, by contrast, has never anchored a whole economy. The use of barter-like methods may date back at least 100,000 years, yet there is no evidence of a society that relied primarily on it. Non-monetary societies ran instead on gift economies and debt, and barter, when it happened, was usually between complete strangers or potential enemies. Commodity money spread across the world long before the first stamped coins. Societies in the Americas, Asia, Africa, and Australia used shell money, often the shells of the cowry, named Cypraea moneta or C. annulus. Other peoples reached for naturally scarce precious metals, conch shells, beads, and more. According to Herodotus, the Lydians were the first to introduce gold and silver coins. Modern scholars think these first stamped coins were minted around 650 to 600 BC. Those same Lydian coins would later draw the attention of forgers, because plated copies known as Fourrees have been found among them.

• 4. Bark Into Money

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  How the Great Kaan Causeth the Bark of Trees, Made Into Something Like Paper, to Pass for Money All Over his Country. That is the title Marco Polo gave to a chapter of The Travels of Marco Polo, describing paper money under the Yuan dynasty. Paper money itself was born far earlier, in premodern China, as a slow process running from the late Tang dynasty into the Song dynasty. It began as a way for merchants to swap heavy coinage for receipts of deposit, issued as promissory notes from wholesalers and valid only in small regional territories. In the 10th century, the Song government began circulating these notes among traders in its monopolized salt industry. It granted a few shops the sole right to issue banknotes, then in the early 12th century took the shops over to produce state currency. Not until the mid-13th century did a standard, uniform government issue become an acceptable nationwide currency. The technology mattered as much as the policy. Woodblock printing, and then Pi Sheng's movable type by the 11th century, drove the massive production of paper money. Word of this reached Europe through travellers in the 13th century, among them Marco Polo and William of Rubruck, long before Europe printed any notes of its own.

• 5. Copper Kingdom

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  Sweden was rich in copper, and because copper's value was low, the coins grew extraordinary, often weighing several kilograms. That burden helped push Europe toward paper. In 1661, paper money was first introduced in Sweden, issued by Stockholms Banco, and like the Chinese notes it circulated alongside coins rather than replacing them. The advantages stacked up quickly. Paper reduced the transport of gold and silver and so lowered the risks. It made lending at interest easier, since the specie never left the lender until someone redeemed the note. It enabled the sale of stock in joint stock companies and the redemption of those shares in paper. Those advantages held their own disadvantages inside them. A note has no intrinsic value, so nothing stopped issuing authorities from printing more than they had specie to back. More notes meant more money, and more money meant inflationary pressure, a fact David Hume observed in the 18th century. The result could be an inflationary bubble that collapsed the moment people demanded hard money. Paper printing was tied to wars and their financing, and so to the upkeep of standing armies, which is why paper currency was held in suspicion and hostility across Europe and America. It was also addictive, because the speculative profits of trade and capital creation were large.

• 6. The Gold Standard's End

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  By 1900, most industrializing nations stood on some form of a gold standard, their circulating medium a mix of paper notes and silver coins. The road there ran through a long quarrel between metals. Both silver and gold were legal tender and accepted for taxes, but the ratio between them grew unstable across the 19th century as supply, especially of silver, increased. The attempt to keep both metals backing currency was bimetallism, and it occupied the efforts of inflationists. Governments learned to wield currency as policy, printing notes such as the United States greenback to pay for military expenditures. Private banks and governments followed Gresham's law, keeping gold and silver and paying out in notes. The break from gold did not come everywhere at once. It happened sporadically, often in times of war or financial crisis, beginning early in the 20th century and continuing until the late 20th century. After World War II and the Bretton Woods Conference, most countries adopted fiat currencies fixed to the U.S. dollar, which was in turn fixed to gold. In 1971 the U.S. government suspended the dollar's convertibility to gold, one of the last countries to break away. No country anywhere in the world today has an enforceable gold or silver standard.

• 7. Money The Banks Make

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  By 1990, in the United States, all money transferred between the central bank and commercial banks was already in electronic form. By the 2000s most money existed as digital currency in bank databases. This points to a fact that upends a common picture of banking. Bank money, whose value lives only on the books of financial institutions, forms by far the largest part of broad money in developed countries. It is created when private banks record loans as deposits of borrowing clients, under fractional-reserve banking, in which a bank's reserves are only a fraction of its deposits. Contrary to popular misconception, banks do not simply lend out savers' deposits, and they do not depend on central bank money to create new loans. Economists sort all this money by liquidity into monetary aggregates. M0 is base money, the cash issued by the central bank, and the only money that satisfies commercial banks' reserve requirements. M1 adds demand deposits such as checking accounts. M2 adds savings accounts and time deposits under $100,000, and M3 adds larger institutional deposits. In 2008, Bitcoin introduced a decentralised, borderless currency requiring no trusted third party, relying instead on a distributed network of nodes running open-source software to reach consensus.

• 8. Forgery And Laundering

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  Counterfeiting is almost as old as money itself, which is why objects hard to fake, such as shells, rare stones, and precious metals, were so often chosen as money in the first place. Before paper, the most common counterfeit method was mixing base metals into pure gold or silver. During World War II, the Nazis forged British pounds and American dollars. Some of the finest counterfeit banknotes today are called Superdollars, for their high quality and likeness to the real U.S. dollar. The Euro has been counterfeited significantly since its 2002 launch, though far less than the dollar. A different crime works in the other direction. Money laundering turns the proceeds of crime into ostensibly legitimate money or assets. In many legal systems the term has broadened to cover other misuse of the financial system, reaching into securities, digital currencies, credit cards, terrorism financing, tax evasion, and the evasion of international sanctions. The same trust that lets a stranger accept your note is the trust these crimes try to borrow, which is why a community can also abandon a currency entirely, as prisoners of war once did when they began trading in cigarettes.