Chapter 2. Monetary reality through history.

In the previous chapter we have used an exposition system which suggested, to a certain extent, some sort of historical reconstruction of the development of monetary systems: first there is the non-monetary barter; then the monetary units appear and the market values are established (prices and salaries); finally, in some evolved societies, the monetary instruments appear.

We are aware that this reconstruction is very theoretical and simplifies the complexity of the facts which actually took place. For this reason, in this chapter we want to offer some brushstrokes to give some support to the broad outline made in the previous chapter.

However, it is necessary to point out that the reconstruction of the development of the monetary reality, both among prehistoric peoples and among present primitive peoples, shows serious difficulties: the existing documents are few and partial, and their interpretation is a very delicate task.

With all these limitations then we face our subject.

1. The pre-monetary barter.

From studies carried out on the utilitarian exchange among the primitive peoples existing at present, it can be inferred that among these peoples (and perhaps also, through an ethnographic parallelism, among the prehistoric peoples), barter has not an exclusively utilitarian character, but it mainly fulfils a social function.

Actually, in human populations with a simple social organization (those of hunters-harvesters), the individual and familiar sustenance is always granted and, therefore, exchange is not vitally necessary. On the contrary, it is socially needed, as it is used to establish friendship bonds or alliances with other groups; or to affirm the existing social relations inside the group itself.

Because of the great importance of this social component of primitive barter, often it is endowed with formalities, with complex rituals bound to magic, that is to the sacral conception of man's life. Every exchange act is considered as sacred, the same as all social relations.

2. Monetary reality among the primitive peoples.

Among the primitive peoples existing at present, the knowledge and use of some sort of monetary system stands out in three parts of the world: Western Africa and Congo; Melanesia and Micronesia; Eastern North America.

It must be pointed out that all the peoples in these areas develop an advanced utilitarianism, of a neolithic type, either farming or shepherd's.

But this neolithic utilitarianism is still little specialized: every small social-producer unit can yet provide for itself to a great extent, and for this reason the utilitarian barter still holds a strong social character.

These peoples have no scripture system either.

But they have monetary systems constituted by what we have called monetary units and market values.

Indeed, among the primitive populations of the above-mentioned areas (not only these areas, but mainly these), some objects (which of course vary according to the population) have a great social importance: they are symbols of wealth, and bestow social prestige on those owning them.

Because these objects are often exchanged ceremonially during some given social events, many ethnologists have compared them to a reduced or primitive, specific, form of metal currency, which was in force among all the present-day civilized peoples until some time ago (until it was definitely substituted by the so-called bank notes).

Now, we suggest a different interpretation: these specific objects seem to have two completely separated functions. The first one, fundamentally social, creative and sustaining social relations, is the one which develops through the actual, specific, exchange of these specific objects, in certain, very well specified cases, of great social importance. The second, exclusively utilitarian one, is that of being used as standards of value measurement in the exchange of the ordinary utilitarian goods. In this second case, the objects are never really exchanged, but they are only an abstract reference to calculate equivalences among other goods, valued in them: this is what we have called a monetary unit. The values in monetary units attributed to goods (produced or producing goods) are the market values of such goods.

Most of the times, the ethnologic documentation we have is not enough to confirm or to invalidate this interpretation with an empiric basis. This is due mainly to the prejudices of ethnologists, who direct their observation towards some given realities, neglecting some more significant ones for an overall study of the primitive utilitarianism.

In spite of this difficulty, we have chosen a couple of examples which seem to go in the given direction.

First example: in the Admiralty Islands (Malaysia), the natives can evaluate all their goods in shells and dogs teeth. In ordinary exchanges, however, the shells and dogs teeth are almost never used, while their use is compulsory in ritual exchanges.

Second example: among the Lele of Kasai (Congo), the raffia fabric is the wedding heritage which any man about to marry must have. But, at the same time, the goods which are the object of non-ritual exchange may all be evaluated in raffia fabric units: in these exchanges, then, the raffia fabric does not appear as a real merchandise, but only as a value standard.

In these peoples, then, we are bound to talk about the existence of abstract monetary units, and not of real monetary objects (as some ethnologists do). In order to make this interpretation extensive to all the neolithic peoples who know some sort of monetary reality, it would be necessary to carry out thorough studies which do not exist yet -or, at least, are not within our reach-.

3. The monetary systems of the rising civilizations.

Archaeology has shown us in the last decades how the first civilizations rose in Southwestern Asia, the Indus Valley, Egypt, and later the Aegean Sea, the Valley of the Danube...

These civilizations were based on an advanced neolithic utilitarianism, with extensive corn cultivation and with a well-established work division. With them writing appears; but writing is only a consequence of another social practice we are very interested in, that is the use of monetary instruments.

Probably these societies had, from the beginning of their reaching the neolithic age, well-defined monetary units. For example, in Mesopotamia the monetary unit was rye, and later also silver. This does not mean, as we have just said, that in the specific exchanges goods were bartered against rye (or silver), but only that rye and silver were the value standards with respect to which the value of each one and all the goods could be expressed.

Now at this moment -which coincides with the beginning of the Bronze Age, during the the 4th millennium b.C.- the Near East civilizations have a noteworthy economic development: there is a drastic increase of population in Iran and Iraq, and the craft specialization and the beginning of large-scale trade appear. Trade is carried over very large distances. This sort of economic explosion is coupled to the appearance of very strange artifacts, which have been recently studied and interpreted. We are talking about the bullae, which are a sort of clay bags, more or less spherical, full of different clay shapes, and sealed on the outside. These bullae are the heirs of a complex accounting system⁶ based on tokens -apparently representing different goods and different numerical values- which goes as far back as the beginning of the Neolithic, towards the 9th millennium b.C. These tokens are of the same sort as the ones which are found, at a later time, inside the bullae.

But the introduction of bullae means an important quality change. We may interpret the fact that the tokens were kept together, closed inside a clay envelope, as an indication that these tokens represented a given transaction carried out between two people. The fact that many of the bullae discovered up to now carry two different seals gives support to this interpretation.

If this were so, the bullae would be what we have called a monetary instrument-document⁷: a document acting as a go-between and recording an elementary trade operation which has been carried out. Probably, in addition, these bullae could be intercompensated, because we know that the Mesopotamian temples already then carried out complex banking and administration functions. The bullae, then, were what we would call today an agreed voucher, an accepted invoice and a cheque cashed written out by the customer.

Later, the bullae became the famous cuneiform tablets: the tokens sealed inside the envelope started to be graphically represented on the outside. This is the most probable origin of the cuneiform writing.

4. Emergence of the specific metal currency.

From a given historical moment onwards -which we probably may locate in the 3rd millennium b.C. in Mesopotamia- the monetary instruments change completely their features.

The primitive monetary instruments which we have just described in the previous paragraph, had a radically abstract-auxiliary nature, had no intrinsic value. Their operation did not imply the use of any specific object, but only the reference to an abstract monetary unit. Even if the abstract monetary unit were symbolized by a given specific merchandise (some shells, a sack of rye, an ox...), this merchandise never participated in the operations, since what was meant was to make an abstract reference to its value, and not to exchange other goods for it.

In Mesopotamia, however, probably since the middle of the 3rd millennium b.C., appears and becomes general a new kind of monetary instrument, which we call metal currency: we all know what a metal currency is (gold, silver...), and we can understand that it is no longer an abstract-auxiliary instrument, but a very specific object, having an intrinsic value (valuable in itself). The metal currency (and, generally speaking, any monetary instrument being a specific object) is also called merchandise-currency, because its main feature is that a specific merchandise is chosen, among all the others, to be mediator in any exchange of any other merchandise. That is, a merchandise is delivered against a merchandise-currency.

During the reign of Hammurabi (1760 b.C.) the use of gold, silver or bronze ingots in Babilonia is already fully testified. But not only the Mesopotamian civilization carried out this decisive change. All the historical civilizations, sooner or later, reached the metallist monetary system. In the Indus valley they used oblong copper bars; among the Hittites, iron ingots; in Mycenae, bronze plates imitating animal skins, and in China also bronze plates in the shape of dresses.

The first metallic monetary instruments were, even inside each civilization and each empire-city, very different in their shapes and of very variable metal qualities. For this reason, at every operation the metal used had to be weighed and tested.

Further on, in order to solve this problem, the use of standard metal pieces became general, as they were guaranteed for a given weight and quality. The guarantee was given by the seal of the person striking the pieces -this seal was engraved on the pieces-: these metal pieces are the actual coins, and the first ones with documented information go back to the 7th century b.C. in Asia Minor.

If at the beginning, anybody with sufficient authority and wealth could strike his own currency, as time went by this function became a monopoly of the official powers.

The specific metal currency has lost the basic feature of the primitive monetary instruments: these were, in the first place, a document of the effected operation; on the contrary, the metal currency is essentially anti-documentary. Even if we shall deal with this matter in more detail in the next chapter, we shall say now that the metal currency has three features which make it completely useless in any attempt of effective documentation; it is anonymous (it does not identify the operation agents), it is uniform (it does not analyse the features of the operation), and it is dynamic, it circulates indefinitely (it does not allow any sort of statistics).

In every trade operation -and in every social-monetary act- the only function carried out by metal currency, is that of being some sort of payment means, that is an instrument which allows to solve, bring about, finish the operation or act under consideration: by delivering some coins any monetary situation can be considered as paid, settled, solved. And from this point of view the use of metal currency is even easier, quicker and more convenient, than preparing a documentary monetary instrument, which must be written, signed and later compensated.

Now, the metallist systems have a very definite limit for their development, which is the quantity of metal for minting purposes existing in a given geopolitical community at a given time.

For this reason it has been necessary to give up, little by little, these systems, as we shall see further on.

5. From metal currency to paper currency.

The present-day monetary instruments are still essentially anti-documentary. Now, from the appearance of the metal money up to now, the monetary instruments have gone back slowly to one of their original features: abstraction, which was reached definitely starting from 1914.

The reason is the shortage of precious metals.

In fact, as we have already said, the monetary systems are abstract constructions which have the function -through the quantification they allow- to make the exchange of specific goods easier, and later, with the monetary instruments, to document it. These abstract constructions, then, are parallel to the specific, existing goods, produced or producing ones; they evolve with them and are adapted to them. When we substitute the abstract construction through a specific object and, on top of that, scanty -precious metals-, this flexibility of the monetary system, this ability to adapt to the market reality, is definitely lost. Serious distorsions are derived, both of our vision of reality and of its healthy working.

Let us now go quickly through the history of this return to the necessary abstraction of the monetary system.

Already in the Middle Ages, the shortage of precious metals caused kings and other currency minting authorities to make unconfessed or public currency manipulations. Since the emission and the legal tender of currency are in the hands of the local authorities, they can cause the nominal and legal value of the currency pieces not to be equal to the actual metal value, -either by striking new currency with the same nominal value, but with less quantity of metal, or officially and artificially increasing the nominal value of the circulating pieces-. Through these means, the minting authority could make its payments using a small amount of metal. These methods were used currently all along the Low Middle Ages: the royal treasuries were almost permanently indebted, and found in this monetary trick the solution to their problems. But this solution was only temporary, as the unavoidable consequence of the currency manipulations was the price and salary increase, an increase which again made the monetary State situation worse, so new manipulations had to be carried out, thereby starting an infernal cycle. But the most prejudiced were the lower classes, which had not enough purchasing power to face the price increases, and neither had the ability to manipulate the currency which was imposed on them.

For our analysis, what we want now to point out is that the monetary manipulations of the Middle Ages open the gap which starts to separate the real value of specific metallic currency from the monetary value which is conferred to it, artificially, according to the needs of utilitarian life.

When America is discovered, with its important precious metals mines and treasures to be looted, it seems that the metal shortage is going to finish. But this end is only relative, because the end of the Middle Ages has witnessed an enormous development of trade relations and, therefore, of the needs for currency. So the bankers of the time invented a new system to make up for the metal shortage: we are talking about the bill of exchange.

At the beginning the bill of exchange is just a means to settle debts from a distance, to avoid the dangers of transporting metal: the Barcelona trader can pay his supplier in Genoa by means of a bill -a letter- which the supplier will be able to transform into cash by presenting it to his banker, because the Genoa banker and that of the Barcelona trader are in contact.

But later, to the bill of exchange the concept of credit is added, that is, of delayed payment. The customer who, at the time of the operation, has not the necessary resources, may deliver a bill to his supplier, which ensures the payment of the debt within a fixed time limit. The supplier can keep the bill until the end of the foreseen delay, when he will receive in cash the indicated amount.

Now, instead of waiting for the payment term to finish, the payee may, in the meantime, use this bill to make his own payments, either handing it over to a creditor of his (this practice is called endorsement); or selling it to the bank, which will immediately deliver the indicated amount in cash after deducting a given percentage as a remuneration of the service given (and for this reason this practice is called discount), taking charge of cashing the bill of exchange at the end of the payment term.

In both cases the final result, which we would like to point out, is the same: the creation of new monetary instruments, the starting of a new monetary circulation, which is added to the circulation of metal currency. In fact, whether the bill of exchange circulates, or is discounted, there is a creation of new monetary instruments, different from metal currency, but which fulfil the same function.

When the bill circulates, it is just a piece of paper circulating and representing a promise of cash payment at a given date, but this cash does not exist yet; therefore the bill of exchange does not substitute metal currency, but is added to it, it is a new monetary instrument which, besides, has no value in itself, besides that of the trust it may arouse that the payment will be actually made after the term comes to an end.

When the banker discounts the bill, we must be aware of the fact that he does not pay with his own money, but he does it with his customers' deposits, which may be demanded by them at any time; it is then also a new monetary circulation, because there exist simultaneously the metal currency of the bank customers' deposits and that of the person who has discounted the bill. There is no mystery here because the banker knows that the deposits will not be all drawn at the same time, and therefore he only needs to hold a reasonable relationship between the total deposits and the total operations, in order to be able at any time to face his commitments. When the bill will finally be paid at the end of the term, the balance of the situation will be restored.

In these two cases of invention of additional monetary instruments -which are not metal currency, but which represent, within a given delay, the payment of metal currency- the limitation, with respect to the metal currency, is that these new instruments are temporary: they do not last indefinitely, but finish, disappear, at the end of the term, when the bill has been cashed by the payee.

With the invention of the bank note, this limitation disappears. The bank note was invented in 1656 by Palmstruch, an Amsterdam banker. This consists only of the fact that the bank, instead of paying its customers with metal currency coins, pays with notes, pieces of paper which are a promise from the bank to convert them into metal at any time the owner demands it. Since these notes indicate no term, they may circulate indefinitely until somebody decides to exchange them for metal.

We have now already two permanent monetary circulations, well differentiated from each other: the circulation of specific metal currency; and the circulation of bank notes, which have no intrinsic value, but which represent a permanent promise of conversion into gold, and therefore are based on the trust in the emitting bank, in its ability to face the conversion demands. This monetary circulation, then, is no longer specific, but holds a relationship with actual circulation (that of metal currency): the permanent possibility to become it.

Thanks to the bank note, banks have the possibility of solving the problem of the precious metals shortage -which, in spite of the successive discoveries of mines during the 19th century, are still inadequate: we are in full industrialization-.

In fact, private banks emit notes in quantities well above the cash contents of their deposits. As we have already said, they may do so without any problem, as long as they hold a reasonable proportion between cash and notes. But through this mechanism they create the monetary instruments which the market or society need, since the metal currency is inadequate.

The monetary system we have just described -based on the metal currency and the convertible bank note-, called gold standard, typifies the whole of the 19th century.

But finally also this system has become unsuitable for the needs of a developed utilitarianism. With the new evolution, the monetary instruments will definitely change their nature, and will go back to their primitive abstraction. Let us see how this took place.

During the 19th century, the Central Banks of the different States monopolize the emission of bank notes, which then become legal tender. But every time that a State has political or utilitarian problems (production crises; wars; revolutions...), because it must face greater expenses, it issues more notes, until the time comes when there is a trust crisis, everybody wants to convert his notes in metal and then the compulsory tender is established, that is the inconvertibility of bank notes. When things become normal again convertibility may be reestablished.

During the First World War, the enormous expenses caused by the war caused the almost total emptying of the vaults of the States at war -whose gold migrated, for a great part, to the U.S.A.-. Notes are issued in great amounts, but evidently their convertibility must be suppressed.

Since then the monetary systems of the civilized world have been typified by the inconvertibility of the bank notes, either officially or actually. After the war, some countries tried to reestablish some sort of partial convertibility, but the crisis of 1929 definitely settled the matter.

So the monetary system sprung out of the First World War is based on the giving up of metal currency -inside each state, since in the international relations things are, for some time, different (that is up to 1971 when Nixon separates dollar from gold)- and on the prevalence of the inconvertible bank note, which we call pseudo-bank note o paper currency. This paper currency has no relationship with gold: it does not represent it in any amount, and cannot be converted into it. Which is then its nature? which is its foundation?

Paper money -that which still circulates in our time- is based simply and exclusively in the need we have of it, in the social conventionalism which has made it a necessary instrument for the market and social acts, and in the trust which is granted to it as an instrument which fulfils its tasks suitably. Therefore, its nature is already radically auxiliary-abstract: its value is that of an instrument which helps us in the accounting and exchange of specific goods existing on the market; it is then an auxiliary and abstract value, not an intrinsic or specific value, which only specific, produced or producing, goods have.

6. The present monetary system.

In this long -but with a wealth of teachings- evolution towards the metal currency, a deeper and deeper breach has been opened between the specific-intrinsic value of precious metals, and the abstract-auxiliary value of the moentary instruments. With the introduction of paper currency, these two realities have become definitely dissociated: at present, they bear no relation with each other.

On reaching this point the monetary system, free from the heavy ballast of metals, can evolve towards more and more intangible forms, more dematerialized, more abstract, in accordance with its primitive nature.

This is in fact what has happened, and what still happens under our own eyes. Today, paper currency is not the only sort of monetary instrument used. To it has been added the so-called scriptural currency, which is purchasing power entered on an account. The paper currency which we take to the bank becomes there monetary units entered on a personal account; these units will then be able to circulate through a simple game of entries between different accounts, without any need to circulate paper currency: this is called clearing. Two people having current accounts in the same or in different banks, may effect their mutual payments by simply entering the corresponding figures in their respective accounts.

This new form of monetary circulation is the last invention of the banks to face, in this case, the paper currency shortage, controlled by the State. By means of the entries in the current accounts the circulation of a lot of paper-money is avoided; but, on top of that, new monetary circulation can be produced. This is, indeed, the bankers' job: to create the purchasing power which is lacking on the market, to make possible an additional monetary circulation, when the existing one is not enough. And this is being done, as it was before, through credit. But now the credit is no longer granted by emitting bank notes more or less backed by cash deposits, because this emission is controlled by the State; it is made by opening credit current accounts, that is to people who have not made any prior deposit of paper currency. And the guarantee of this credit is constituted by all the deposits actually made in the bank. As before, the only thing needed to ensure the solidity of this system is to hold a suitable relation between these two monetary circulations: the circulation starting from the deposits carried out, -which is limited to substituting the paper currency circulation- and the circulation caused by credit -which is added to the previous one-.

Scriptural money has become the currency par excellence of the developed countries, where trade and industry contribute to multiply exchanges. In some industrialized countries, it represents as much as 80% of the total monetary mass. At present, it is rapidly becoming electronic money: some simple electric impulses and some magnetic memories are enough to carry out the transfer of entries. This growing dematerialization of the monetary reality is the most obvious proof of its basically instrumental-abstract nature.

Yes, the monetary system has gone back to its primitive features of abstraction and instrumentality: the monetary instruments in force have no intrinsic value, but simply act as intermediaries in the exchange of actual goods, and to express their value in terms of abstract units.

It is also evident that these present-day monetary instruments -the pseudo bank-notes and the scriptural money of the bank current accounts- do not resemble at all that which in the previous chapter we have called monetary instrument.

In fact, the monetary system, in spite of its evident evolution, still retains all the inherent faults of the specific metal currency: anonymity, uniformity and dynamism of the monetary instruments.

We will then now analyse which features should have a monetary system without any of these faults, and find a way to update these features in a monetary instrument really suited to the present trade complexity and technological progress.

7. Bibliography for this chapter.

Notes:

⁶For all the information concerning the development of this accounting system we are indebted to Denise Schmandt-Besserat's research. To explain it, we shall use her article «The Earliest Precursor of Writing.» (, published in Scientific American, issue June 1977, Vol. 238, No. 6, p. 50-58.
⁷In this case of course we are talking about pre-scriptural documents.