About 600 BC, Spartans (Lycurgus, the lawgiver of Sparta) banned the use of gold and silver, and adopted iron discs as currency. But they were heavy (difficult to handle), and rusted (not a good store of value.). Plutarch: "Who would rob such a person with heavy iron money? Who would take money as a bribe?"
Gold and silver are easy to process
(melting point: G =1064o C, silver = 962o C, platinum = 1768o C).
Gold has one electron on the 6th circuit.
Silver has one electron on the 5th circuit of electrons.
Platinum has one electron on the 6th circuit (but the 4th circuit is more dense)
(original artwork by Greg Robson).
The single electron on the outermost orbit may ensure stability (nonoxidization) Gold does burn at 1943 degree F.
Travels of Confucius (551 - 479 BC)
The world in the Sixth Century BC
The ruins of the Temple of Artemis in Sardis ©
According to Graham Levy, the earliest known coins were changing hands in the 6th century BC in Anatolia, in the kingdom of Lydia. Around 550 BC, King Croesus minted gold coins , made from electrum, a natural alloy of gold and silver found in the River Pactolus that flowed past Sardis, Lydia's capital. This electrum was 98% gold. A punch and anvil die was used to stamp the coins with the Lydian emblem of a lion, or a lion's paws, cutting the metal to reveal its consistency. (If iron was inside, it would be difficult to stamp the coins.)
Gautama Siddharta(b. in 563 BC)
Siddharta, Confucius, Lao Zi, and King Croesus were contemporaries.
Confucius' travel (12 years, 501 - 489 BC).
Gold was a primary medium of exchange in the Roman Empire.
Roman invasion of Britain (55 & 54 BC): Caesar was initially looking for gold. Cicero reported he found none. This is the beginning of British history. (No alphabet, no kings yet.) Britain had people who could become slaves, wool (needed to make Roman togas), tin and lead, but Caesar failed to conquer Britain.
In 43 AD, Claudius appointed Aulus Plautius as the first governor of Roman Britain and built Londinium.
British Museum
Historic Gold Coins
The original gold coins of Croesus and other historic gold coins. This is a gold medallion of Constantine, who founded the Byzantine Empire (May 11, 330 AD).
Soldier: one who gets solidus.
Salary of Roman legionary, 225 denarii (75 denarii in Jan, May and September) for serving 25 years. They received land in a Roman colony plus a pension of 3000 denarii.
lira : pound in Italian
peso: weight in Spanish
mark: 1/2 pound
Why weigh coins? Gresham's law: Bad money drives out good money (Sir Thomas Gresham, 1519-1579).
Economic reason for the Dark Age (5th - 13th century)
Due to trade deficits with Asia, Romans gradually began to neglect to support the Roman troops. From the 3rd century AD, Roman soldiers were replaced by hired foreign mercenaries, and financial support was insufficient.
Solidus of Constantine minted in 325 AD (Wikimedia). Solidus replaced aureus of Augustus, and is the origin of "solid" and "soldier" (one who is paid in solidus).
Production of gold was suspended throughout Europe after the fall of the Roman Empire. This suspension of gold production was a primary cause of the great recession in the Western Europe for about a thousand years . After the fall of Constantinople in 1204 AD, the Byzantine empire was almost broken. It was reestablished in 1261, and lasted for two more centuries until 1453 AD.
Frescoes of Capella Brancacci, Florence show the Renaissance architecture and the bankers wearing silk clothes and turbans, indicating trade with the Middle East.
Due to massive expansion of trade, Venice suddenly became a major power, competing with Genoa, especially after Arsenale Nuovo (shipyard) was built in 1320. Arsenale served not only as a shipyard, but also was responsible for maintenance of 3000 galleys.
Florence minted the florin in 1252, which was the most trusted currency in Europe. 25% of Florentines were engaged in the wool industry. Cosimo Il Vecchio (the elder/reign: 1434-1464) supported Baldassare Cossa, who became the (anti)pope, and the Medici bank began to handle the Vatican's finance throughout Europe. Moreover, two of Lorenzo Magnifico's grandsons became a pope. It took a century for Florence to develop the silk industry. Florence became a major exporter of wool and silk to Europe. As the bank handling the Vatican's finance in Europe, Florence emerged as the banking center. Venetian Ducat (coins issued by a Doge/Duke) was minted in 1284, but gold was not produced again in significant quantities until the 20th century. (1 florin = 1 ducat = 3.5 g of gold = $150, $1350 per troy oz)
2% before 1492, and 6% (1492-1800) of the total amount of gold minted (6 billion oz in 2017, worth $7 trillion). One ton (32000 oz) of gold is worth about $40 million.
From the end of the 15th century, navigation skills were gradually developed, and the Portuguese and Spaniards began to explore other continents.
Massolino and Masaccio (1401-1428, Early Renaissance)
Available evidences suggest that by 1400, Europe surpassed China and Japan in terms of per capita GDP.
The wage rose after the Black Death in 1348. This may have been a major cause of the industrial revolution that was taking place in England. Firms began to explore various means of replacing workers with machines.
City states such as Florence, Pisa, Genoa and Venice were engaged in trade, which may have been the source of abundance of gold. Florin was struck in 1252. (1 florin = 120 soldi = 6 lira.) Venetian ducats soon followed suit (1284). Lorenzo's (Il Magnifico) grandson Giovanni became Pope Leo X. His sale of indulgences triggered the Reformation.
The middle class (artisans and common laborers) became wealthier. In 1388, the vanity of the common people in dress was so great that it was impossible to distinguish the rich from the poor, the high from the low, or the clergy from the laity by their appearance.(Wealth and Progress, George Gunton, 1890)
After the fall of the Roman Empire in 467 AD, Constantinople was the only city that minted gold coins for 900 years.
daily wage of skilled labor = 10 soldi, in 1400.
food cost per day = 2 soldi. 720 soldi or more = 6 - 12 florins.
annual income of masters in a guild = 30 gold florins = roughly $4500
rent: a small cottage on the city's outskirts = 1 or 2 florins.
a house = 20 - 50 florins per year.
Brunelleschi's salary = 400 lire = almost 70 florins = about $10,000.
Gold market in Venice
Venice accumulated a large trade surplus, which was held in gold.
Rialto Bridge today (May 2003). The price of gold was fixed on this bridge during the Renaissance period.
In the 1820s, the industrial revolution spread throughout Europe.
gold bullion, Shutterstock
In the United States, the Civil War (1861-1865) ended.
In Japan, the military rule of Tokugawa shogunate (1603-1867) was just over, some ports were opened to trade with European countries, and Emperor Meiji was instituting a major change in Japan (Meiji Restoration).
Admiral Perry of the United States came to Uraga, Japan and forced Japan to open up to trade, causing the fall of shogunate and triggering the Meiji Restoration (1868-1912) (15th shogun, Yoshinobu returned the power to the Emperor).
Europe's trade deficit with China ⇒ Opium Wars. The second Opium War (1856-1860) was just over and imports of opium was legalized in China.
A typical religious painting in the 15th century
Increases in the supply of gold ⇒ The Renaissance
Constantinople, Venice's arch rival, was conquered in 1204 after the 4th crusade war. After the fall of Constantinople in 1453 AD, the majority of intellectuals moved to the city states of Venice, Milan and Florence. By the early 1500s, Venice built a large shipyard, constructing many ships and thereby accumulating a huge trade surplus (in gold).
Also, Genoa became its rival, amassing enough wealth to compete with Venice (Christoforo Colombo was a Genoese). Florence became the center of the textile industry and banking. In the process the Catholic church amassed enormous wealth from religious donations and indulgences. For example, bishops and cardinals during this Renaissance period commissioned many paintings to show their power.
As illustrated in this painting, many donors and influential people are represented in the corners.
The gold standard has no precise date of origin. It gradually emerged around 1870-1880 when most of the industrial nations of Europe adopted the gold standard. (Great Britain adopted the gold standard in 1821, Australia in 1852, Canada in 1853, France in 1878, Germany in 1871, the US in 1879)
This period is also marked by the end of private bank notes in the US. (Private banks used to issue private bank notes to reduce coin debasem*nt, e.g., shaving off, clipping and sweating (shaking coins in a bag)).
The gold standard lasted until 1914, before the outbreak of World War I. During this period, most of the industrial nations linked their currencies to gold and inflation rates were about 0.1 percent.
When these nations were on the gold standard, there were no formal agreements with other nations. No treaty was signed . Each nation defended its currency in terms of gold. Its treasury or central bank was required by law to buy and sell gold without limit at the stated price. The public had complete confidence in the convertibility of its currency into gold.
Some policymakers feel nostalgic and want to restore the gold standard. For example, BRICS is planning a reserve currency based on gold and rare earth elements.
Jagiellonian University, Krakow, was the second oldest university in Europe (after University of Bologna). In the Austro-Hungarian empire, Poland was allowed to teach courses in Polish..
US
By the Gold Standard Act, 1900(copy) The Coinage Act of 1872 demonetized silver.
One dollar was defined to be equal to the value of 23.22 grains of pure gold (1 troy ounce = 480 grains of gold).
The gold content of pound sterling was fixed by Coinage Act of 1816 (copy) at 113 grains of pure gold.
Britain adopted the gold standard in 1821. By 1833, Bank of England was obligated to redeem its notes in gold and silver coins. (Bank of England Act, 1833 (copy)
Thus, the par exchange rate between the dollar and the pound was
p£ = 113/23.22 = $4.866
The cost of shipping gold from London to New York was $0.026 per pound. So the exchange rate was allowed to fluctuate within the limits of $4.866 ± 0.026. Thus,
$4.892 = gold import point for UK
$4.840 = gold export point for UK
If the spot price of pound fell below the gold export point, it is cheaper for Britons to convert £ into gold, export gold, convert gold into $ and make $ payments.
During the period of gold standard, (i) prices were stable, and (ii) so little gold actually moved between countries. This was because central banks were not passive, but they adjusted the interest rates to prevent the gold outflow.
For example, when the exchange rate approached the gold export point, the Bank of England raised the bank rate (the interest rate the central banks charge commercial banks, equivalent to the discount rate in the US). This caused investors in New York to shift funds to London, because they could earn higher interest.
Under this system, each country holds gold or dollar or pound as a reserve asset.
(This system was invented due to the limited supply of gold. The scheme was designed to reduce the amount of gold needed for the reserve country.)
(i) The United States and Great Britain were to hold only gold as a reserve asset.
(ii) key reserve currencies: dollar and pound . (Due to an absolute shortage of gold, countries were discouraged to use gold in international payments.) Nonreserve countries were asked to hold dollar or pound (rather than gold) as reserve asset (Hence, gold exchange standard. Dollars and pounds were gold substitutes.) Other currencies are convertible into reserve currencies at fixed parities.
(iii) The Dollar and the British pound were freely convertible into gold between central banks, but not for the general public.
(iv) Most countries that had been on the silver standard also pegged silver to the dollar by 1890s, except China and Hong Kong.
At restored parities, the British pound was somewhat overvalued at $4.866 = £1, whereas FF was undervalued at $0.0392 = Fr 1.
Under the gold exchange standard, a country has to resort to the classical medicine of deflating the domestic economy to cure chronic BP deficit.
Deflationary policies (monetary or fiscal) stifle growth.
Before World War II, European nations often resorted to this policy, in particular the Great Britain. Even though few currencies were convertible into gold, policy makers thought that currencies should be backed by gold and willingly adopted deflationary policy after WWI.
During this period (1925-31), these countries had 3 options to prevent gold outflow:
(a) countries tried to manage or stabilize the flexible exchange rates - by raising interest rate, but it did not prevent capital outflow.
(b) Some countries devalued their currencies, but many countries already did this without success. Nevertheless, this would be the best option.
(c) others imposed exchange control when faced with capital flight.
On September 21, 1931, Britain suspended gold payments. This put an end to the vain attempt to restore the gold standard. Many countries followed Britain's lead and abandoned the link to gold. For example, Japan also abandoned gold convertibility in December 1931, after its invasion of Manchuria.
Devaluation of the dollar
In April 1933, President Franklin Roosevelt suspended the gold standard.
Gold Reserve Act of 1934 (copy)
(i) GRA prohibited gold exports . In 1933 gold trade of US citizens were outlawed. Now, private possession of gold and gold export are outlawed. Citizens were required to sell gold to the Treasury.
(ii) It allowed the President to change the gold content of dollar. In January 1934, President Franklin Roosevelt raised the price of gold from $20.67 to $35.00 per ounce. ⇒ This resulted in a gold inflow into the US.
(40% devaluation of dollar, or 69% increase in the price of gold)
France devalued Franc in 1936. Europe was in a turmoil by the outbreak of WWII in 1939.
The article you've provided covers a vast range of topics, including historical events, economic concepts, monetary systems, and significant developments in the use of currency, particularly gold, across different civilizations and time periods. Here's a breakdown of concepts discussed and the related information:
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Introduction to Currency Development:
- Spartans' use of iron discs as currency (600 BC) due to limitations of gold and silver.
- Transition to gold and silver due to their ease of processing and stability.
- King Croesus minted the earliest known coins made from electrum (550 BC).
-
Ancient Civilizations and Currency:
- Confucius' travels (6th century BC) and contemporaneous existence with Siddharta, Lao Zi, and King Croesus.
- Roman Empire's interest in Britain for resources like gold, slaves, wool, tin, and lead.
-
Historic Currency Systems:
- Introduction of historic gold coins like those of Croesus, Constantine, and Roman soldier payment details.
- British pound's historical association with silver coined money and references to currencies like lira, peso, and mark.
-
Economic Shifts and the Dark Ages:
- Economic reasons leading to the Dark Ages (5th - 13th century) due to Roman trade deficits and insufficient support for troops.
- Impact of the suspension of gold production after the fall of the Roman Empire.
-
Renaissance and Economic Growth:
- Renaissance-era developments in Florence, Venice, and Genoa, involving banking, silk, wool industries, and the Medici family's financial role.
- Exploration by Portuguese and Spaniards leading to the expansion of trade.
-
Transition to the Gold Standard (1870s):
- Industrial Revolution's spread in Europe (1820s-1830s) and Japan's Meiji Restoration (1868-1912).
- Opium Wars and the accumulation of gold leading to the Renaissance in Europe.
-
The Gold Standard Era (1870-1914):
- The gradual emergence of the gold standard in major industrial nations and its end around World War I.
- Confidence in currency convertibility to gold without formal international agreements.
-
Adjustment Mechanisms under the Gold Standard:
- Exchange rate mechanisms between the US and the UK under the gold standard.
- Central bank interventions through interest rate adjustments to prevent gold outflows.
-
Restored Gold Standard (1925-1931):
- The Gold Exchange Standard, its design, and the problems it faced due to chronic balance of payments deficits.
- Policy options for countries during this period to prevent gold outflow.
-
End of the Gold Exchange Standard:
- Britain's suspension of gold payments in 1931, leading to the abandonment of the gold standard by several nations.
- Devaluation of the dollar by President Roosevelt in 1933, impacting gold reserves.
This comprehensive historical and economic account covers the evolution of currency, the gold standard, monetary policies, and global economic shifts over centuries. It highlights how various civilizations and events influenced the development and adoption of different monetary systems, including the gold standard, and the subsequent challenges they faced.
