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Part 1 can be found here
In this post Insha’Allah, I’ll be having a brief look at the concept of currencies, and the history of money. This is still just a preliminary glimpse into the whole subject field.
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Earlier this week Zimbabwe announced their latest note, which has a face value of 100 Billion dollars. One could be forgiven for thinking that the Zimbabweans must be revelling in ultra luxury which such high value dosh. How many football clubs would you like to buy for a 100 Billion dollars? A couple of Chloe handbags maybe? Possibly be your very own Bruce Wayne? Nah, in Zimbabwean currency, 100 Billion dollars is not even enough to buy three eggs!
Officially inflation in Zimbabwe is supposed to be running at 2.2 million per cent, realistically though this number is grossly underestimated, a more accurate number pitches inflation at 15 million per cent. Money is devaluing so fast, that the printing presses can’t keep up. In January, a 10 million dollar note was issued, then a 50 million dollar note in April. In May, notes for 100 million and 250 million dollars were issued, swiftly followed by those for 5 billion, 25 billion and 50 billion.
The apoplectic nightmare that Zimbabwe is facing is a singularly effective demonstration in today’s age of what a fiat currency represents. In a fiat money system, money is not backed up by any form of commodities, instead it’s relative scarcity is through the faith that people entrust in it. It only exists because the government declares it exists. Fiat money truly is Monopoly money made valuable through the political will of the government. Whereas the US dollar may be backed up the the full faith and credit of the mighty US government, the Zimbabweans fare a little worse off, especially with Mugabe at the helm.
But if you won’t trust a dictator with a free printing pass, is there really any government that you can trust? Ron Paul answers this pretty succinctly:
“History has shown that fiat money, or “faith-based currency”, always fails. Because when governments claim this power, they always behave irresponsibly.
Government now has the ability to create and spend all the money it wants. So priorities shift, and the concept of budgeting – as most people know it – loses all meaning. Hand a teenager a credit card, and tell him there is no limit and no accountability for what he spends, and the effect would be the same.
This problem is not unique to our government. It is a predictable outcome based on human nature, and we’ve seen variations of what we are experiencing now happen time and again throughout history. I didn’t have a crystal ball or a fortune teller when I predicted this three, seven or even thirty years ago. Actions have logical consequences. The government becomes the reckless teenager with the credit card, and in the end, the taxpaying citizens get the bill. What happens after that is never pretty.”
A bit like Peaches Geldof with her rich daddy’s credit card…
So was this always the situation with money? Have governments for millennia always been printing money? Are the cycles of increased inflation, stagflation and hyper-inflation a monetary phenomenon witnessed by all past and present human societies?
Fortunately not. To explain though, let us look at the roots of how money originally came about.
True wealth is determined by the goods that we own i.e. our houses, cars, furniture, clothes etc. In early societies the same held true. A carpenter would produce goods, so would the farmer, builder, fisherman etc. They would trade their goods with each other according to their needs. But often the direct bartering of goods would be cumbersome and inefficient. The farmer pays the carpenter in sacks of potatoes, but he can only do so at the time of harvest. He can’t store potatoes for long, so with what does he pay the carpenter for the rest of the year?
Eventually, a resolution to the problem forms as money - a medium for exchange - is developed. Early records of money show that objects such as cowrie shells, slabs of salt, pebbles and horseshoes were used as simple forms of currency. More recent examples can be found in school playgrounds. Children not having much form of real cash (well not in my area anyway), begin to transpose the primitive forms of functioning societies, when using collecting cards as money. I noted this with my little sister and her friends, who could use Pokeman cards to buy sweets and games. The Pokeman card was only a valid form of currency in the playground, since the schoolyard society acknowledged, accepted, and assigned it as a form of currency. Outside of school, try as she might, I could not be convinced of accepting some Bulbasaur Pokeman cards in lieu payment for a brand new DS Lite.
The development of money, or indirect exchange, was a quantum leap for human societies. It enhanced our ability to generate capital, engage in specialization and trade, form contracts of joint ownership or obligation, particularly with strangers. But early forms of money still had their issues. Particulary, the easy forms of manipulation and debasement. If horseshoes were used as money, then the skilled ironsmith could in essence create money, become rich, but consequently devalue the use of the currency. The same would apply to the use of Pokeman cards as currency, the event of an externality, i.e. a generous older brother providing a huge gift of cards to his little sister, would particularly affect the balance of money supply in the playground - children would quickly realise that the cards have lost the value of scarcity, and then switch to alternative forms of money……like Yu-Gi-Oh cards (I don’t have a clue what kids use these days).
It was through this slow, but organic process, whereby humans began to discover more incorruptible forms of money. Thus gold came into use. Gold is a particularly useless metal, too soft to be used in metalworks. However, its relative scarcity, high density, ability to be cut easily into smaller weights, resistance to corrosion and natural attractiveness subsequently made it the de-facto standard for money around the world. The same, though to a lesser extent, also applies to silver.
The great Ibn Khaldun expounds on this in his Al-Muqaddimah:
And Allah created the precious metals, gold and silver, to serve as the measure of value of all commodities. They are also generally used by men as a store or treasure. For although other goods are sometimes stored it is only with the intention of acquiring gold or silver. For other goods are subject to the fluctuations of the market, from which they [gold and silver] are immune.
As such, the use of gold and silver as money was the case from the era of the Romans and Greeks, the illustrious period of Islamic rule, all the way until the middle part of the 20th Century. Governments were kept in check, strictly limiting their revenues to that which they could raise from the country’s wealth.
The case of Zimbabwe is just a forerunner to all nations that adopt the fiat standard, as opposed to the true benchmarks for money - gold and silver.
