Quote of the Day
The lack of money is the root of all evil.
Lydia’s round, copper coins became ubiquitous and were in rampant circulation. The new money instilled greater confidence in trade and commerce. At first, the Cave Village had been transacting by barter – this meant trying to find a suitor for the goods you had to offer in every transaction. It was very cumbersome; not every watermelon grower needed eggs at the same time the poultry farmer needed watermelons. Immediately after the massive pebble hyperinflation of 97,985 BC, Cave People resorted to using things with more limited supply such as rare shells, feathers and rare antelope hides (buck-skins). Interestingly, buck-skins or hides were a luxury and regarded as a symbol of wealth on every continent. They represented a “big kill” or supreme power.
Skin in the Game
Indeed, it would later be found that that an Asian warrior leader, named Temujin (which translates as “iron”), was on the verge of slaughter by his main rival. In an act of desperation, he persuaded another, larger, rival clan leader, Togrul, to side with his forces by offering him a rare animal skin; a sacred black sable fur. Temujin made a huge gamble – Togrul could have killed him on the spot, as was commonplace – but such was the value of the fur, and thus the gesture, Togrul agreed to side with him. Togrul had skin in the game. Because of this turning point, Temujin went on to become, what some regard, as the greatest warrior ever to walk the Earth. His conquests created the largest land empire ever known to mankind. His calligraphers and scribes would document his deeds in detail, but local history books would later refer to him as simply the “Great Ruler”, or “Genghis Khan”. He and his sons were as promiscuous as they were ruthless, to this day it is thought that 1 in every 200 people are descended from him… and all this changed the course of history, just for one piece of animal skin. Such was the value of this ancient exchange medium. It’s amazing what an animal skin can buy you.
But animal skins were a common currency throughout history. In Africa, animal skins were a major trading utensil. In America, Native Indians used buck-skins as currency – a term which would later be abbreviated to “buck”, the American slang for a dollar.
Back in Asia, in a post-Ghenghis world, animal hides were becoming old hat, as modern, sophisticated fabrics were conveyed over trade-routes, like the “Silk” Road. The use of round metal-disc currency was taking preference over animal hide. It is tempting to think coins were made circular to save on metal. Actually, because the manufacturing process involves striking (whacking with a great big hammer), the way the metal bulges and spreads makes it easier to manufacture in circles. Also it’s more practical and durable both for the vessel carrying the coins (no sharp or jagged edges) and the coin itself (no corners which chip and break). Thus, in Asia, the coins were called “circular piece”, which loosely translates to “yen” in Japanese or “yuan” in Chinese and “won” in Korean.
Not to be outdone, the Europeans were also minting their own circular pieces from a precious metal called silver. In Eastern Europe the “Thaler” was a standout coin of choice. The Thaler (pronounced “Daler” in Scandinavia) derived its name from a valley or “dale” from where the silver was physically mined. Obviously, this name mutated into “Dollar” in an English-speaking accent.
But the British didn’t use Thalers or Dales. They were busy making their own silver circles. The slang alternative for the British currency was “quid”, as if to highlight the money’s exchange property (quid, a shortened version of the Latin phrase quid-pro-quo, i.e. “exchange barter for goods or services”). But there was an inherent problem with using pure silver. While it had exemplary exchange properties of money, the metal was too soft – it did not have sterling durability. Durability is one of the critical properties of a true money, as we know from our piece on the Birth of Money. Forgers knew that, by fortifying the silver with other metals, they could create a much more durable silver alloy. But the British didn’t trust each other, so a silver alloy standard was created which had 92.5% silver and 7.2% other metal, like copper. This standard was known as Sterling Silver and was used to mint the new, coins of sterling durability. As British trade grew during their own empire expansion, larger transaction sums were needed in the form of weights of Sterling Silver. A heap of the coins (240 of them to be exact) equated to a lb (a pound weight) in Sterling Silver. Thus the oldest currency still in circulation today was formed. The British Pound Sterling.
Trust, Faith, Religion and Banking
But, while, trading buck-skins was a useful alternative, the coins proved much more effective. Lydia’s idea of creating circular copper money may sound simple to us, but you see she was nearly 100,000 years ahead of her time! Importantly, Lydia’s vision was a noble one. As she accumulated wealth of her own and others, she would use her capital and the copper deposits of others entrusted to her, to create a private organisation. By using the most secure cave in the village, and then paying for it to be guarded by the fiercest dogs, she could pile all the copper into a great big vessel, a copper bank*, if you like.
Lydia understood her concept required a level of faith and trust of almost religious** proportions. She, indeed, had a position of great responsibility. Her honourable idea was that she should incentivise, or, rather, compensate each depositor for their money she had “banked” up. Compensate them, that is, for the loss of flexibility or cost of opportunity and also the risk depositors naturally assume by keeping their capital stagnant and in the hands of a single debtor (yes, I use the word “debtor”, quite deliberately), who may or may not die/default. The old Latin word “interesse” translated as compensation for loss, so Lydia would call this payment for capital deposits “interest”. This meant, when someone left copper with her for a fixed term (a guaranteed reserve), she would repay them their copper when the term matured plus a little more copper as well, as honourable compensation for the risk the depositor was taking. Interesting isn’t it? The notion that a portion of the interest one receives from depositing money at a bank is attributed to the default risk of the bank, not just the opportunity cost of time. But, that’s another story for another time, perhaps we’ll come back to it later…
How was Lydia able to pay interest on deposits? Well, she was able to do this with a neat little trick. Even if the Money Supply remained relatively stable, because she knew the terms of all her locked-in, secured deposits, she could now loan out that secure money without fear of it being recalled by the depositor. She could charge the borrowers more interest than she paid out to the depositors and thus make a modest profit in the meantime. Just for moving copper between participants! Because there was a one-for-one relationship between the savings of clients and the loans of borrowers there was almost no risk to this arrangement. Depositors could store their money in the copper bank and they could “bank on Lydia” returning that money to them, with interest when their term expired. Because the copper she held was banked up in a mound she called this institution a “bank”. A sort of savings and loans bank, was born.
*It is possible that the word bank is derived from a word meaning a “heap” or “mound” and is synonymous with the Italian word “monte”. To this day there are Italian banks with “monte” in the title. In fact, according to a friend of mine, Banca Monte Paschi, is regarded as the oldest bank in the World and has been operational since 1493. It was created to guarantee exportations from Italy to the rest of Europe. In fact, they were the first to create the concept of a “credit letter”. Payments were guaranteed by Banca Monte Paschi with special letters… people were not happy to travel with gold. The second step was the exchange of these credit letters. But this is another story … and should be told another time…
**The earliest form of banking in was the storage of wealth in “treasure houses” or special rooms, “treasuries”, located in trusted religious establishments like churches and temples. Note how so much of banking revolves around trust and faith. To this day Temple is located in the heart of London’s financial district, The City. Without getting too Da Vinci Code on you, it’s named after the Knight’s Templar who were perhaps the first “City Bankers”. Noticed how both the Federal Reserve buildings and the Bank of England buildings look like Temples? It’s an architectural shape synonymous with trust and faith.