Thursday, October 10, 2013

Gold, Silver, Money

Gold and silver have their uses in modern technology, but for the ancients, they were largely useless. They are much too soft to make good tools. Whence came they to have their value premium? Precisely because of their use in money, says Prof Harari.

Our first clear evidence for money is the barley money of Sumer. Standardized bowls were made to measure it. Barley has the advantages and disadvantages of being intrinsically useful. It also has some unique disadvantages: it's hard to store, bulky, and rats and mice like to eat it. Durable, useless, money came later in the form of the cowrie shells of Asia and the silver shekel of Mesopotamia (to give a couple of examples). Cowrie shells and silver have the crucial advantage of being relatively rare as well as durable. If your money is in barley, a good harvest will make you poorer and a plague of rodents might eat up your profits. Silver has two crucial problems. It has to be weighed, instead of just counted, and it's subject to adulteration or alloying.

The invention of the coin, of a weight and purity attested by a King or government, seeks to address both these problems. It's subject to counterfeit, but counterfeit is treated as an offense against the king, like treason, and harshly punished everywhere. Even though the gold and silver in coins had little metallurgical value, they acquired prestige from their presence in the coins, and also happen to be relatively easy to incorporate into ornementation. This presented two problem temptations: one the one hand, to melt down the coin for the ornamental value of its contents and on the other, the temptation for the issuer to respond by decreasing the gold and silver content.

Thus, the coin backed by the power of the government and intrinsic rarity was vulnerable to having itself undermined by competition between the two bases for value. The Chinese may have been the first to take the next logical step by making bronze coins. Bronze is not rare enough for it to be useful to melt down for its metal content, so now the authority of the government becomes the sole basis for value. The also invented paper money.