The Direction of History

(Credit – sbc.edu)

This week in “A Brief History of Humankind” from Dr. Yuval Noah Harari we started Part 3 of the course “The Unification of Humankind” . Lecture 8, the first lecture of this part is entitled “The Direction of History”. After the Agricultural Revolution, humans created many different cultures and societies. The relations between these different societies were very complex, and involved wars and conflicts as well as trade, immigration and imitation. But as time went by, the connections between the societies became stronger and stronger, so that humankind was gradually united into a single global society. Three main forces shaped this process of unification. The first was money and trade. Money is the most universal system of mutual trust ever devised by humans. Even people who believe in different gods and obey rival kings, are nevertheless willing to use the same money. This week we discuss some of the reasons.

These are my course notes and reflect the opinions of Dr. Harari.

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Emerging societies

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This course has already looked at the Agricultural Revolution and the kind of societies that emerged as a result. Unlike Chimpanzee or Wolf Societies which are pretty similar to one another Sapien Societies are very, very different from each other. Even when people share the same objective reality of rivers, trees and clouds and live in the same geographical zone under the same climate, different human societies often have different imagined orders and different social hierarchies. This part of the course will try to examine how these different human societies interacted with each other and what exactly happened when people who believed in one kind of imagined order encountered people who believed in very different things.

The interaction between different societies took all kinds of falls. There was of course war, trade, sometimes immigration from one society to the other or religious missionaries coming from one place to another. The number of such different interactions is colossal. In this course we are not going to go over all the various wars, trade expeditions, missionary efforts, and immigration movements in history. We don’t have the time. Instead we will focus on one particularly important point which is whether all the different interactions between, human societies have some kind of overall pattern or direction; whether all the wars, emigrations and trade were leading humankind towards a particular destination: or whether it was just a collection of random forces pushing humankind from one direction to another and history has no destination. Does human history have a clear direction or not? Dr Harari stated right at the beginning that the answer is very simply yes. There is a destination, a direction to history. The thousands of wars, revolutions, trade expeditions and emigration movements in history have a clear general direction which is global unification of the world and of humankind.

Consolidation and diversification

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Over thousands of years small, simple cultures gradually combined to form bigger and more complex civilizations. Over time the world, planet Earth, contains fewer and fewer cultures, but each of these few cultures is, becoming bigger, and more complex. This is a very crude generalization as it is true only at the highest level, at the macro-level of history. Perceiving the direction and the events of history depends on your vantage point and from which perspective you’re looking at history. If you observe history from the height of say, a rain cloud and you see no more than a few centuries, it’s hard to say whether history moves in the direction of unity or whether actually history moves in the opposite direction of diversity. From the vantage of a rain cloud it seems that for every group of cultures that combine to form a bigger culture, there is also some civilization, some big culture, that breaks up into many, many small pieces. For example, the Mongol empire expanded in the 13th century to dominate huge parts of Asia and even Europe, but after some time it shattered into fragments. The Christian religion, converted, and thus united, hundreds of millions of people over time but is gradually splintered into innumerable different sects. Christianity isn’t necessarily leading to unity.

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The same thing happened with human languages. Take for example the Latin language, the language of the Roman Empire. This language spread over much of Western and Central Europe. More and more people began to speak the same the same language, Latin. But then, over time, Latin itself split into different dialects, that eventually became different languages, French, Italian, Spanish, Portuguese, and so forth. From the vantage of a rain cloud it not very clear if history’s moving towards unity or towards diversity.

However, if we observe history from a much higher vantage point from say of a spy satellite which can scan millennia, and not just century. Then it becomes very, very clear that history is moving relentlessly towards unity. Yes there are things like the splintering of Christianity into different sects and the collapse of the Mongol empire, but these are only speed bumps on the highway of history, which is leading human kind inexorably, towards global unity, towards unification of the whole world.

Unification

First contact with the Gweagal Aboriginals and Captain James Cook (Credit – Wikimedia)

The best way to appreciate that this is a general direction of history is to simply count the number of separate human worlds that coexisted at any particular moment on planet Earth. Today we are used to thinking about the whole planet as a single interconnected unit. For most of history this was not the case. For most of history Earth was a kind of galaxy of many separated and isolated human worlds.  2000 years ago there were no connections, no economic, political or military connections between the humans in America, in Europe, and in Australia. As far as aboriginal Australians were concerned, the Roman Empire for example, and Christianity, might have been happening on Mars or Venus. It’s more accurate to view planet Earth 2000 years ago as being composed of a galaxy of separate human worlds, not of a single world. The number of different human worlds that coexisted on Earth at any particular moment changed as history progressed, it got smaller and smaller. Around 10,000 BC, when the agricultural revolution began, our planet contained many thousands of different human worlds, which had almost no connection between them. By about 2,000 BC, the number had dwindled. There are now just hundreds of them or at most a few thousands.

Christopher Columbus by Sebastiano del Piombo. (Credit – Wikipedia)

By 1492, when Columbus was setting sail from Europe to America, the number of separate human worlds on planet Earth was even smaller. It declined, much more drastically. At that time Earth still contained a significant number of small, isolated human worlds in remote jungles and islands, which had no connection with the outside world. At that point in history, close to 90% of humans already lived in a single mega world, the world of Afro-Asia. Most of Asia, most of Europe and most of Africa, even before Columbus set sail were already connected to each other by significant, political, economic, religious and cultural ties. For example, the year before Columbus set sail, in 1491, if a Muslim pilgrim made the pilgrimage to Mecca, the centre of the Islamic world, he could have met pilgrims from all over Afro-Asia. In Mecca there may be pilgrims from the Siberian Peninsula, North Africa, Central Africa, India, Central Asia, China and even Indonesia. All these different parts of Afro-Asia already had significant religious, economic and political links in 1491. At that time 10% of humanity was still disconnected from this central world but even they were not broken up into thousands of different, tiny separate worlds. They were concentrated instead, in just four worlds each of considerable size and complexity.

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By 1491, there was the Mesoamerican world, which encompassed most of Central America and part of North America. There was the Andean World which contained most of Western South America. Most of Western South America was already connected to each other. People in what is today Ecuador, Chile, Bolivia and Peru had very close economic and cultural ties. A third independent world was the continent of Australia, and the fourth world was the Oceanic World of the Pacific region which included most of the Islands of the South-western Pacific Ocean, from Hawaii to New Zealand. They all had cultural and political and economic connections between them. In 1491 there was one big mega world, Afro-Asia, with 90% of humanity belonging to that world, four medium sized worlds in North and Central America, South America, Australia and the Pacific Ocean, and many other worlds, but very small ones in remote islands and jungles which were not connected or had very little connections to other people. What happened over the subsequent centuries was that people who came from Afro-Asia spread over all the rest of the globe conquering and swallowing up all the different independent worlds that existed previously in America and Australia and the Pacific Ocean and so forth. They created the single global world in which we live today in the 21st century. Today almost all humans in the world live as part of the same system. They all share the same basic global cultural, outlook on the universe and on the world. No matter where people live, in China, Mexico, Israel or Iran they are influenced by each other’s actions.

Cultural changes and homogenisation

The flags of 200 nations Photo credit: Getty Images

Few people now live in a separate world. A political conflict in the Middle East could cause oil prices to rise in China or Australia and it may cause unemployment in Mexico or in Japan. People in all these places increasingly share the same basic understanding of politics, of economics, and of the natural world. Even though people still have different political views and agendas the entire world today shares the same basic, political model, that of the sovereign nation states. Most people in the world live in one another of the 200 nation-states that cover the world. Most people in the world also believe that political power should come from the people and most countries have parliaments, political parties, and elections even if they’re not always completely free elections. You can find the same basic political ideas everywhere in the world. The same is true in the field of economics. Almost everywhere you go today around the world, you will find the same economic structures and ideas that of the Capitalist system. In America, Australia, Russia, Asia, Africa and so on there are stock exchanges, banks, limited liability companies and money.

(Credit – wikimedia)

We can observe the same phenomenon as far the understanding of the natural world and the human body. For most of history, people who lived in different parts of the world had a very different understanding and perspective on the natural world, and on issues such as biology and medicine and so forth. Today hospitals in Tehran, Tel Aviv, Buenos Aires or New York look basically the same. They use the same theories, medicines and treatments. If you have a heart attack the doctors will diagnose you according to exactly the same medical theories no matter where you are. They will examine you using the same techniques and the same tools and they will give you the same treatments and medicines which, very often, are both on the international market from the same drug producing companies.

We still talk an awful lot about authentic cultures. If by authentic we mean something that developed independently and consists only of ancient local traditions free of external global influences then there are no more authentic cultures left on planet Earth. Over the last few centuries, all cultures without exception were changed, almost beyond recognition, by a flood of global influences and inventions. One of the most interesting examples in this respect is Ethnic Cuisine or Ethnic Food. Think for example about Italian cuisine. The Queen of the Italian Cuisine is the tomato, what’s more Italian that to eat spaghetti in tomato sauce? But the tomato is not native to Italy. It originated in Central America, around Mexico arriving in Italy only about 3 or 4 hundred years ago. Columbus came from Genoa and he never ate spaghetti and tomato sauce in his life.

Profile portrait of Dante, by Sandro Botticelli (Credit – Wikimedia)

Dante Alighieri   in the Middle Ages and Julius Caesar in ancient Rome never ate spaghetti and tomato sauce for the simple reason that there were no tomatoes in Italy before Columbus. Switzerland in the middle ages had not even a single chocolate bar because there was no chocolate. Chocolate is made of cocoa which originated in Central America and arrived in Europe after the Spanish expeditions to Central and South America, some time in the 16th Century. Other ethnic cuisines for example in Poland or Ireland are based on potatoes but there were no potatoes in Poland and Ireland in the middle ages. They did not exist at all in Europe before the Europeans arrived in America. The food of people in Asia and in America has also changed in the last 500 years. Almost every conceivable Indian dish is spiced very generously with chilli pepper. It’s hard to conceive of life in India without chilli peppers, like tomatoes and potatoes chillies originated in America. There were no chilli peppers anywhere in Asia, or in India before Columbus. In Argentina in 1491.there was no steak except llama steak because there were no cattle in Argentina before 1492. Cattle arrived in America with the Europeans. We see then, that our conceptions of our authentic ethnic cuisines, actually reflect, the development of the global world, of the last few centuries rather than primordial local traditions.

When did this globalisation start?

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What is true of ethnic cuisine is true of many other facets of so-called traditional culture. If you look carefully at most of the facets of ethnic cultures around the world, you will find that many of them are in fact the modern developments and the result of global connections. We often associate this process of unification with events of just the last few centuries from Columbus onwards. In particular, we often associate the unification of the world with European Imperialism and with the rise of the Capitalist Economy. It is certainly true that the final stage of unification of humankind happened only in the modern era and was due to the twin forces of Imperialism and Capitalism. However, it is important to emphasize that the globalization of the modern era was only the final step, the climax of much older processes that began working thousands of years previously. Already in 1492 when Columbus set sail the European conquerors of the world didn’t need to unify the world out of thousands of different separated islands and different cultures. Already when Columbus was born, most of humankind had been unified into the single giant world of Afro-Asia. This is a process that began not in the 15th century but thousands of years previously. The vision of a united world may have been fulfilled only in the last century or two, but it’s not a modern vision. It goes back at least to the first millennium BC.

All for one?

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More than 2,000 years ago the revolutionary idea of creating a universal order of all humans together first took root in the minds of sapiens in different parts of the world. This vision is actually very strange, especially when you think about it from a biological and evolutionary perspective. Homo sapiens evolved to think of people as being divided in to ‘us versus them’. ‘Us’ is the group of people that surround the individual and ‘them’ is everybody else in the world. In theory, this is not unique to Homo Sapiens. No social animal, as far as we know, thinks about the interests or the identity of the entire species to which it belongs. No chimpanzee, for example, cares about the interests of the entire chimpanzee species. No ant will do anything for the sake of her global ant community. Ants are willing to give their lives for their ant nest but not for their global ant community. Despite what you see in Hollywood films, no lion was ever the king of all the lions. Male lions often fantasize about becoming the alpha male of their particular pride of lions but they don’t have a conception of uniting all the lions in the world under their rule. In no bee hive, will you find the slogan, “worker bees of the world unite”. Bees care a lot about their hive, but not about the other bees in the world.

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Beginning with the cognitive revolution homo sapiens started to become more and more exceptional in this respect. People began to cooperate on a more regular basis with complete strangers who they imagined as being their brothers and friends. This growing brotherhood between people was not universal. For tens of thousands of years, after the Cultural Revolution, people still continued to divide humanity into ‘us versus them’. There was us, and then somewhere in the next valley or beyond the mountain ranges, there were other people, strangers who could still be called them, they did not belong to our community. For example, when the first Pharaoh of Egypt, Menos, united the entire Low Nile Valley around 3000 BC into a single kingdom, Egypt, it was clear to the Egyptians that Egypt did not contain all the humans in the world. Egypt had borders and beyond the borders there were other humans who were considered Barbarians.

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The different imagined orders that people created in the centuries after the unification of Egypt still tended to ignore a large part of humankind. It was always ‘just’ tribal religions and tribal identities, even if they were very large tribes. There was always somebody outside the group, always barbarians, or people who do not belong with ‘us’. This changed in the first millennium BC when the vision of the unification of the whole of humankind began to grow. Three potentially universal orders appeared and people who believed in these orders for the first time started to imagine the whole world and the whole human race as a single unit that, potentially, may be governed by a single set of laws. According to this new universal vision everybody in the world was ‘us’ at least potentially, and there were no longer any ‘them’, people who don’t belong, in our group.

The first of these universal orders was economic order. It was the monetary order which was based on the belief in money. The second universal order to appear was political, the imperial order, the vision of a single empire governing the whole world. The third universal order that people began to believe in, was a Religious

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order, the order of universal religions, such as Buddhism, Christianity, and Islam that potentially aimed to include all of humankind as their members, as their believers. Merchants, conquerors and prophets were the first people in history who managed to transcend the binary evolutionary division between ‘us’ and ‘them’ and to foresee the potential unity of the whole of humankind.

We are going to look at how money, empires, and universal religions spread around the world, and how they lay the foundations of the united global world of today. We begin this story of human unification, by focusing on the history of money, and on the creation and spread of the monetary order. The amazing thing about money is that it succeeded in doing something that no king, no conqueror, no God, managed to do. Even people who don’t believe in the same God or king are often willing to use the same money. People who hate each other and don’t agree about anything are still able to use the same money. This is maybe the most fundamental basis for the unification of human kind.

The History of Money

Mutual favours and barter

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Initially humans had no money. Each band hunted, gathered and manufactured almost everything it needed such as meat, medicine, sandals, and jewellery. Everything was obtained locally by the people themselves. Different band members may have specialized in different tasks. For instance, somebody may have been very good at producing boots, but they shared their specialities, their goods and services by an economy of favours and obligations. If someone’s boots needed mending he would take them to the best member of the band for making and mending boots and ask him for a favour. He would do this without asking for anything in return, just on the basis of personal relationships, assuming that when one day he needed something the others would be willing to repay the favour and help him in in doing whatever he needed.

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A few rare items that could not be found locally, for instance, some special obsidian rocks, or seashells which couldn’t be obtained anywhere in the band’s territory had to be obtained from strangers. This could usually done by simple barter. Exchanges of seashells for high quality flint, obsidian or seashells are examples of transactions in a barter economy. This is how people lived for tens of thousands of years. In the beginning, the agricultural revolution changed very little in these arrangements. For thousands of years afterwards, most people continued to live in small, intimate communities much like a hunter-gatherer band. Ancient villages were self-sufficient economic units maintained by mutual favours and obligations between the villagers, plus a little barter with outsiders. Almost everything they needed they either did themselves or received free from family members and neighbours in the village.

Specialisation

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The rise of cities and kingdoms, which began about 5,000 years ago. There were also improvements in the transport infrastructure with the appearance of carts, wagons and bigger boats and so forth. These brought about new opportunities for people to specialize in doing just one thing. In a densely populated city there was, for the first time in history, enough employment for professional shoemakers, carpenters, doctors, priests, soldiers and so forth to appear. In a small village there was not enough employment for somebody to be just a shoemaker. Even the best person in the village for making shoes could not do just that because the entire village contain just two to three hundred people and it wasn’t enough to sustain a professional shoemaker. In a city of 10,000 people there are enough people who need new shoes every day to be able to support one or even more than one professional shoemaker. In the cities all kinds of professions started to develop. In villages also peasants began to specialize more and more. Some villages began specializing in producing only one kind of product, say olive oil. They stopped producing everything else and only produced olive oil. This had advantages because every village could concentrate on the ideal products for its location, climate and topography. For instance a hilly country was not suited for wheat, but was good for olive trees, so the habitants could focus on growing olive trees and producing olive oil. The second big advantage of specializing is that it develops knowledge and development of new techniques. Previously a family had to grow wheat, apples, chickens and other things as well as a few olive trees. They couldn’t discover all the secrets of producing the best olive trees and and the best olive oil.

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Specialization also created new problems. The main problem was how exactly to manage the exchange of goods and services between all the different specialists. For instance, the expert olive grower in the village and the expert doctor in the city didn’t know each other very well so it was difficult to manage the exchange of goods and services. An economy of favours and obligations doesn’t work well when you try to apply it to large numbers of specialists who are strangers to each other. It’s one thing to provide free assistance to family and neighbours, but it’s very different to take care of foreigners or strangers. People engaged in transactions may not know each other and may live in different towns or villages so barter was difficult.  If for example somebody wanted olive oil and the other medical treatment, they could barter olive oil for medicine or vice versa. However, barter is effective only when you exchange a limited range of products. Contrary to common belief barter can never form the basis for a really complex economy. In order to understand the limitations of barter, imagine that an expert specializing in growing apples living in good apple growing country goes to the market in the nearest big town with a bag full best apples hoping to barter apples for new shoes. There are two very severe problems. First of all the shoemaker needs to know

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how many apples equal a pair of shoes. That’s a difficult question in a barter economy because every day in the big market in the city the shoemaker encounters dozens of customers who come to him wanting new shoes. Some  may bring apples but others have a variety  of other goods, like wheat, goats, cloth or medicine. Others may offer services like curing illnesses or representing you in court. In a barter economy the shoemaker would have to relearn  the relative prices of dozens of commodities every day. It has been calculated that if 100 different commodities were traded in a particular market then buyers and sellers would have to know 4,950 different exchange rates every day to know how to make these barter deals. If there were 1,000 commodities they would have to know 499,500 different exchange rates. This is impossible, nobody can know so many different exchange rates especially as they change all the time.

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The second and even bigger problem of barter is that even if you manage to calculate and to agree how many apples are worth a pair of shoes, barter is not always possible because each side has to want what the other has to offer. What happens if the doesn’t like or doesn’t need apples. The shoemaker may needs medical care instead. The apple grower could try to look for a doctor who likes and needs apples, give apples to the doctor, the doctor would cure the shoemaker and the shoemaker would give him shoes. This is very, very complicated and it’s hard to find all the people necessary for such an exchange. If the doctor doesn’t need apples either but needs a haircut there is then a four-way transaction with the barber. These kinds of problems prevent barter from being an effective basis for complex economies with many different specialists. If it’s just a few it’s okay but a functioning big market can’t work on the basis of bartering alone. The solution that many societies found for enabling  complex trade networks and economies was the invention and development of money. Money was created many times in many places in history. The development of money required no technological breakthrough. It was a purely mental or psychological revolution. The invention was simply the creation of a new imagined reality, of a new inter-subjective reality that exists only in the shared imagination of many people. Money isn’t coins or bank notes. Money is anything people are willing to use in order to represent the value of other things for the purpose of exchanging goods and services, and buying and selling.  The value of money depends only on our imagination not on the worth of the material from which it is made.

Types of money

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Over the centuries there have been a lot of different types of money. Today the most familiar type is coins and bank notes. The coin is a standardized piece of imprinted metal with writing on it, but money is not coinage. Money existed long before the invention of the first coins. Cultures managed to prosper and to have very complex economic systems with other kinds of currency. There were societies whose money was sea shells. Others used cattle, skin, salt, grain, beans, clothes or coral. One particular type of seashell was particularly important in the history of money. Cowrie shells were used as money for about 4000 years all over Africa, South Asia, East Asia and Oceania. Cowrie shells were one of the most important types of money in history. Even in the early 20th century, you could still pay taxes in Uganda, which was then part of the British Empire, in cowrie shells. In Chinese script the initial sign for money was the sign of the cowrie shell (貝) and even today many words in Chinese which are related to money and buying and selling still have the sign of the cowrie shell in them.

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In modern prisons, and previously in concentration camps cigarettes are used as a kind of money. Prisoners, even those who don’t smoke, are willing to accept cigarettes in payment. All the products in prisons are calculated in numbers of cigarettes.

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Most of the economic activity in the world today is not done with coins and bank notes, they have become a rare form of money. In the year 2006, the sum total of money in the world was estimated at about $473 trillion. Today it’s somewhere in excess of $500 trillion. The sum total of all the coins and bank notes in the world, in every currency, are worth only about $50 trillion. More than 90% of all the money in the world that appears in our bank accounts exists only on computer screens and servers. Most money is bits inside computers that we move from here to there. Most business transactions in the world today are done by moving electronic data, from one computer to another or from one

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computer file to another without moving any physical cash. Only criminals buy a house or pay for another large transaction by handing over a suitcase full of bank notes. If you go to the grocer to buy bread you use money in the shape of coins and banknotes. But for everything else people transfer money from this account to this account. The only thing that is being transferred is electronic data which is the dominant form of money today in the world.  BitCoins is an example of modern currency. We still hear a lot in the news about governments printing money such as the U.S government printing trillions of dollars over the last few years to deal with the economic crisis, but they don’t really print the dollars. They don’t actually have a printing press to make more and more dollar bills. When we speak today about printing money, printing dollars what actually happens is the chief of the Federal Bank of the United States logs onto the relevant computer program and changes a file. Previously there was $50 trillion in a particular field, he deletes the zero and writes two instead, it

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now says $ 52 trillion. That’s it Hocus pocus two new trillion dollars appeared, out of nowhere. This is how you print money today and this is most of the money today in the world. If everybody who has a bank account went to the banks and demanded the money that appears in their account in the shape of notes and coins, all the banks would collapse. There is less than 10% of the money in the world available in that form the rest is just electronic data. As long as people are willing to trade goods and services in exchange for moving electronic data from this file to that file, it’s perfectly good money.

Why do we need money?

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For complex commercial systems to function some kind of money is indispensable. It could be electronic data, coins, seashells or something else, but you must have money in order to have complex markets. Money enables people to easily determine the relative value of all the goods and services in the market. A shoemaker in a money economy doesn’t need to know the relative price of shoes compared to apples, olive oil, chicken or butter or whatever. The only thing he needs to know is how much shoes are worth in the relevant currency. Money also solves the problem of finding a trader who wants what you have. Like a shoemaker who wants apples. Once you have money this problem is solved because everybody always wants money. This is perhaps the most basic quality of money.  If there is something that people call money, but people don’t want it, then you can know for sure that it’s not really money. Everybody always wants money for the simple reason that everybody else also always wants money, which means that if you have money you can exchange it for anything you like. The shoe maker might not want apples will always be very happy to sell his shoes in exchange for your money. No matter what he really wants he can always get it in exchange for money.

The sale of indulgences. (Credit – Wikimedia)

Money is a universal medium of exchange that enables people to convert almost anything into almost anything else. This is the magical quality of money. It transforms things, the one into the other. It transforms not only apples into shoes, but also things that are much more distant. For instance if you have money, you can exchange violence for education. A soldier can sell his services in exchange for money and use it to pay for his college tuition. With money as an in-between you converted violence into education and knowledge. Similarly with money you can convert health into justice. A physician cures somebody and gets money in return and then she can use this money to hire a lawyer. You can’t turn health into justice directly, but it can be done indirectly with the help of money. At some points in history you could even transform sex into salvation. 500 years ago in Europe, a prostitute could sell sex for money and then go to the Catholic Church and use the money that she got from prostitution in order to buy indulgences from the Catholic Church and thereby avoid hell and reach heaven.

Somaliland currency. (Credit – cqj.dk)

Ideal types of money enable people not merely to convert one thing into another thing, but also to store and to transport a large amount of wealth. When wealth comes in the form of say apples, it’s hard to store them because they’ll rot after some time and it’s very hard to transport them to another place. When wealth comes in the shape of cowrie shells or of gold coins, it’s very easy to store them indefinitely and to transport them from one place to another in a small purse or box. Because money can convert, store and transport wealth easily and cheaply, it has made a vital contribution to the appearance of complex commercial networks and of dynamic markets that united more and more people into the same economic sphere. Without money, commercial networks and markets would have been doomed to remain relatively small, limited in size, limited in complexity, and not very dynamic. On the right you can see an example of some money that is not ideal. “The Somaliland currency, the Shilling, is worth next to nothing, so more than a few hundred dollars has to be transported in a wheel barrow; Hargeysa. © Claus Qvist Jessen”

How does money work?

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Money is essential for creating complex economies, but how does it actually work? Why are people willing to exchange a fertile rice field, for a handful of cowrie shells? Why are people willing to work, for entire month, doing, maybe, things they don’t really like, just in order to get a few colourful pieces of paper? People are willing to do such things when they trust the figments of the collective imagination. Trust is the real raw material from which all types of money in history have been minted. When a wealthy farmer, say in ancient China, sold all his possessions in exchange for a sack of cowrie shells and then travelled with them to another province, he trusted that when he reached his destination other people, complete strangers would be willing to sell him rice, a house, fields in exchange for his cowrie shells. Money is accordingly a system of mutual trust and not just any system of mutual trust. Money is the most universal and most efficient system of mutual trust ever devised by human beings.

What created this trust?

How to create trust in money is very complicated. It takes a complex and long term network of political, social and economic relations to build trust in money. We believe in the cowrie shell or the gold coin or the dollar bill because our neighbours believe in them. We all believe in them because our king believes in them, and because our priest and even our Gods believe in them.

Here is an American dollar bill.

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You cannot eat it, or drink it, or wear it. So why do we trust it? Why are we willing to make such efforts to obtain some? We all trust it because we trust in God and in the United States of America.

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On one side of the dollar bill it says “In God We Trust“. On the other side is the signature of the Secretary of the Treasury. We trust this dollar because we trust God and the Secretary of the Treasury of the United States. When both God and the United States government give you their word for something you believe them of course. The crucial role of trust explains why our financial systems are so tightly bound up with our political and social ideological systems; and why financial crisis are often triggered by political developments; and why the stock market can rise and fall depending on the psychological mood of the traders and not on the objective condition of the economy. One way to build trust in money is to define as money something whose value is not completely dependent upon our imagination. The first known money in history was Sumerian barley money, and it is a good example of this. Barley money was the first type of money we know for sure about. It appeared in ancient Sumer about 3000 BC, 5000 years ago, at roughly the same time and place and under the same conditions where writing first appeared. Barley money was simply barley, fixed amounts of barley grains, used as a universal measurement for evaluating and exchanging all other goods and services.

(Credit – factsanddetails.com)

The most common measurement of barley in ancient Sumer was the selo[1]. One selo was equivalent to roughly one litre of today. Standardized bowls, each of them capable of containing exactly one selo were mass produced in ancient Sumer. Whenever people needed to buy or sell something, it was easy to measure the necessary amounts of barley. Salaries, for example, were paid in silos of barley. There is a text saying that the usual salary of a male labourer in ancient Sumar was 60 barley selos a month. A female labourer received half that much, only 30 selos a month. A manager could earn between 1200 and 5000 silos each month. Obviously people did not eat all this barley. They took their barley to the market and exchanged it for whatever they wanted. They could buy anything with these barley selos. It was somewhat easier to build trust in the barley money, than in dollars or cowrie shells, because barley money has some inherent value. People can eat barley. However, even if this sounds trivial to you, the fact that the Sumerians used barley grains as money is far from being trivial. It was very difficult to turn even barley into money. Today you couldn’t buy things for barley even though people can still eat it. It is not accepted money. People don’t trust barley grains. The fact that Sumerians managed to do it is not trivial. It was quite an achievement for the Sumerians to build universal trust in barley grains and to convince people to use barley as money for all the different transactions. On the other hand, there was still a problem with barley money, it was not easy to store and transport. It was not an ideal kind of money. A major breakthrough in economic history occurred when people gained trust in money that lacked any inherent value, but was easier to store and transport than barley. Such money appeared for the first time in ancient Mesopotamia around the middle of the third millennium BC, around 2500 BC.

(Credit – Wikimedia)

The first money which had no inherent value was the silver shekel. The silver shekel was not a coin. It was simply a measurement of the silver metal; about eight grams of silver. When Hammurabi’s Code, for example, declared that a superior man who killed a slave woman must pay her owner 20 silver shekels, it meant that he had to pay 160 grams of silver not 20 coins. Most monetary terms in the Old Testament of the Bible are given in terms of silver metal not coins. When the Joseph’s brothers sold him to the Ishmaelites for 20 silver shekels they didn’t receive 20 coins but 160 grams of silver metal. Unlike barley selos the silver shekel had no inherent value. You cannot eat or drink or clothe yourself in sliver. Silver is a very soft metal, too soft for making useful tools. When people use silver or gold to produce tools or jewellery they’re usually used in order to create status symbols, like rings, crowns and statues, luxury goods that have no actual usage. In a particular society they are used in order to identify people with high social status. The value of silver and gold is always purely cultural. Set weights of precious metals like silver and afterwards gold eventually gave birth to coins.

(Credit – farm8.staticflickr.com)

The first coins in history, as far as we know, were struck around 640 BC by King Alyattes of the kingdom of Lydia in what is today western Turkey. These Lydian coins were simply standardized weights of gold and silver which the king imprinted with some kind of identification mark. The mark on the coin, testified to two important things. First of all, it indicated how much precious metal each coin contained. Secondly it identified the authority which struck the coin and guaranteed its contents. Almost all coins which we use today in the world are the descendants of these original Lydian coins from Western Turkey.

Plated counterfeit of the Roman emperor Domitian. (Credit -wikimedia.org)

Coins such as these have two important advantages over the unmarked metal ingots which were used previously like the silver shekel. Firstly when you try to buy or sell something for a lump of silver, you have to weight it each time to be sure how much silver there is in the ingot. Secondly even if you take the ingot or lump of silver and weigh it you can’t be certain that it is pure silver. Somebody may try to cheat by using another metal, lead for example, and covering it with silver. Coins helped to solve these problems. The mark imprinted on the coins testified to the exact value so it didn’t have to be weighed. The mark is also the signature of some political or religious authority that gives you his or her guarantee on the value of the coin so you can trust it. The shape and the size of the mark on the coin varied tremendously throughout history, but the message was always the same. It is the same message as we have today “I, the great king so and so give you my personal word that this metal disk or this piece of paper is worth what I say it is are worth. If anyone dares to counterfeit the coin or the bank note this means that they have to fabricate my own signature. They impersonate me, and they harm my reputation, and I don’t like it so I will punish them with utmost severity”. That’s why counterfeiting money has always been considered a much more serious crime than almost any other act of deception or cheating. When you counterfeit money, you’re not just cheating somebody else you are impersonating the king or the government. You are acting as if you were the king and this is an act of subversion against the power and the privileges and the very person of the ruler, of the king. Therefore throughout history it has been customary to punish the counterfeiting of coins and banknotes and money in general by severe torture and death. The political authority helps people gain trust in money. As long as people trust the power and integrity of the king, or of the political authority they also tend to trust their money. Total strangers, who never met, can nevertheless agree on the worth of a particular coin. A Denarius of the Roman Empire, for example would be trusted as long as people trusted the power and integrity of the Roman emperor whose name and sometimes picture appeared on the coin. Similarly today, people throughout the world trust the American dollar more than they trust, say, the Mexican Peso, because they trust the US government and they trust the US Federal Bank much more than they trust the government or the bank of Mexico.

Japanese commodity money (Credit -Wikimedia)

Osama Bin Laden had enough trust in the American government as a Federal bank to accept and use the dollars. In turn, the power of rulers also rests on the trust in money. It would have been very difficult  to maintain a large empire such as the Roman empire without money, without coin. If the Roman Empire had to pay salaries and raise taxes in barley and wheat  it would have been impossible to collect taxes from Syria, transport the funds all the way to the central treasury in Rome and from there, transport the barley again to pay for legionnaires posted in Britain or Germany. It would have been equally difficult to maintain the Roman Empire if, in different parts of the empire, people believed in different kinds of money. If the inhabitants of the city of Rome believed in gold coins and did business in gold coins, but the Gauls, Greeks,Jews and Syrians rejected them and trusted other things like cowrie shells this would also have been impossible.

Money and unification

(Credit – history.ucsb.edu)

Not only do governments give trust in money, but you need money in order to have a stable government, which can control a large area. Money therefore served a particularly important part in the unification of humankind. Not just because it supported these local governments here and there, but even more importantly because the trust in money could cross geographical, topographical, and even political borders, thereby enabling people from very different cultures and religions and even kingdoms to trade with one another and to cooperate at least in the economic sphere. This happens today in the world with the dollar, but it happened 2000 years ago with other kinds of money such as the gold and silver coins of the Roman Empire. In the first century AD, Roman coins were an accepted medium of exchange not only in the Roman Empire, but also very far from its borders, in the mountains of India for example. The Indians had such strong confidence in the Roman Denarius that when local Indian rulers began to strike coins of their own they tended to imitate the shape and form of the Denarius down to the portrait of the Roman emperor. People had trust in these kinds of coins with this particular picture on so Indian Kings used it also. The very name Denarius became a generic name for all kinds of coins. After the Roman Empire collapsed and the Muslim empire rose, Muslim caliphs “arabisized” the name Denarius and started to issue dinars.

Early Dinars (Credit – Wikimedia)

The word dinar is simply an Arab translation, an Arab form of saying Denarius. The dinar is still the official name of the currency today. In many countries around Mediterranean such as Jordan, Iraq, Serbia, Tunisia and several others, the dinar is still used as currency. As Lydian style coinage spread from the Mediterranean to the Indian Ocean. China also developed a system of money. The monetary system was a bit different from the Lydian system of the Mediterranean. It was based initially on bronze coins, not silver and gold. But as time went by, Muslim and European merchants and conquerors, spread the usage of gold and silver coins not only in, Europe and Asia, but to more and more parts of Africa. Later on America and Australia in the Pacific Ocean, so that gold and silver became the standard money all over the world. By the late modern era, the entire world was thus united into a single monetary zone relying first on the belief, on the trust in gold and silver. Later on a few trusted currencies, first the British Pound Sterling, and then the American dollar which is still dominant today.

(Credit – willard.colonial)

This slow process of creating a single transnational and transcultural monetary zone laid the foundation for the unification first of Afro-Asia and later of the entire world into a single economic and political sphere. People continued to speak many different languages, to obey different rulers and to worship distinct and very different gods. But more and more people all over the world believe in the same money, in gold and silver and later, sterling and dollars, and to use the same money. Without this shared belief, global traded networks would have been virtually impossible to create. How could Europeans, for example, have traded easily with China if the Chinese did not believe in gold and silver and refused to accept payment in gold and silver. We might ask how this was accomplished if there was not a single religion or empire that ruled the entire world. How come the Chinese, Indians, Muslims, and Spaniards, who belonged to different cultures, and failed to agree about anything, really, they nevertheless managed to agree on this shared belief in gold and silver?

Mediaeval Coins. (Credit -coinquest.com)

Why didn’t it happen that the Spaniards believed in gold, but the Muslims remained devoted to barley? And the Indians continued to use cowrie shells, and the Chinese would have say, rolls of silk as their money. Economists have a very convincing answer to this question.  According to economic theories which are accept by almost all economists, once trade begins to connect to separate areas the forces of supply and demand tend to equalize the prices of all the goods which you can transport from one area to the other. This applies to money as well. In order to understand why let’s consider a hypothetical scenario. Let’s assume that when regular trade opened between India and the Mediterranean, Indians were still not very interested in gold. Therefore gold was not worth much in India. At the same time in the Mediterranean, gold was already a very coveted status symbol, and the basis for the currency hence the value of gold in the Mediterranean was very high. What would happen is that merchants travelling back and forth between ports of India and the Mediterranean would obviously notice the huge difference in the value of gold in these two places. In order to make a profit, wise merchants would start to buy gold cheaply in India and sell it for a huge profit in the Mediterranean.

(Credit – coinnetwork.com)

Consequently, over time the demand for gold in India would increase because of all these merchants coming from the Mediterranean and wanting to buy gold. Indians would start wanting gold just in order to sell it to these Mediterranean merchants. At the same time in the Mediterranean, there would be more and more gold coming from India and therefore the value of gold in the Mediterranean would start to decrease. This increasing and decreasing of value would continue until they reach roughly the same value and there it would stop. In India and in the Mediterranean gold would be worth quite a lot and have a relatively similar value. This is what happens with all kinds of money. The mere fact that another person believes say in cowrie shells or dollars, or in electronic data, is enough to strengthen belief in them. This is how Christians and Muslims for example, who could not agree about religious belief, could nevertheless agree on monetary beliefs. Whereas religion asks us to believe in something like a god or some scripture, money asks us to believe that other people believe in something. This idea is of tremendous importance, and it’s not easy to understand it. It is worth repeating.

Religion wants us to believe in something like in God, money doesn’t ask us to believe in anything in particular. Money simply asks us to believe that other people believe in something.

(Credit – earthfirstjournal)

You may not value the dollar at all, you may not believe in it but if you believe that other people believe in the dollar you will accumulate dollars, not because you want them, because, but because you know that other people want them. If you ask other people why they believe in the dollar, they reply the same thing I know that others want it. This is why you accumulate them in order to exchange them with the others for whatever you want. This is how money works. For thousands of years philosophers, thinkers, prophets and poets have besmirched money and called it the root of all evil and the reason for all the troubles in the world. In truth, money is the climax, the apogee of human tolerance. There is nothing more tolerant it the world than money. Money is far more open-minded than any religion, than any state, than any cultural code, than any social habits. Money is the only trust system that humans created in history that can bridge almost all cultural gaps and it does not discriminate on the basis of religion, gender, race, age or anything else. A dollar in the hands of a black person or a white person is the same dollar and one accepts it anyway the same with a dollar bill in the hands of a woman or a man it doesn’t matter. Money does not discriminate between the different genders or the different races.

Conclusion

Adam’s Bridge (Credit – Wikimedia)

To conclude, money is based on two universal principles. First, universal convertibility, with money as a go-between, you can turn almost anything into almost anything else, land into loyalty, justice into health, violence into knowledge. The second fundamental principle of money is universal trust. With money as a go-between, any two people can co-operate on any project. Even if they don’t know each other, even if they hate each other, if there’s money involved they can co-operate. Thus money served for hundreds and thousands of years as a bridge between different kingdoms, different religions and cultures and helped to unify humankind and create the global world that we live in today. It would however be a mistake to think that money alone unified human kind. Money is just an imagined reality and it is based on trust. In order to have an effective monetary system you need the support of an effective political system and of at least some shared ethical principles. It would be difficult to manage the United States without dollars. It would be equally difficult to build trust in the dollar without the United States. You cannot understand really how money works without taking into account politics and religion. In order to understand how thousands of isolated cultures combined over time to form the global village today we must be aware of the important role of gold and silver, but we cannot disregard the equally crucial role that conquerors and empires played in the unification of humankind alongside merchants and money.

As a side note it was opportune timing that we had the lecture about money the week that the US government shut down due to opinions about the budget.

 

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