From Cattle to Bank Notes

by Röpke, Wilhelm

If we contemplate a collection of old coins, we can readily perceive some of those important features of a sound money about which we have been speaking. What first strikes us is the great variety of coins and of coin systems which appear to have existed in former times side by side within the frontiers of a single country. What a muddle of doubloons, continentals, florins, threepenny pieces, marks, ducats, and gold louis! We may rightly conclude that our ancestors’ patience must often have been tried with the continual counting and recounting made necessary by such a multiplicity of systems. Plainly, the elimination of such confusion by the establishment of a homogeneous monetary system must be numbered among the primary aims of monetary policy so soon as business activity has expanded beyond the rudimentary stage. Homogeneity of the monetary system is thus one of the principal requirements of a sound money: all monetary units within the same economic system should be exchangeable against one another at as stable and firm a ratio as possible. In spite of the antiquity which attaches to the discovery of the coin system, thousands of years of experimentation were required to develop the homogeneous monetary systems which, to our generation at any rate, seem so self-evident, and to put an end to the confusion in computation and, what was even more disagreeable, in prices. Actually, the homogeneity of national monetary systems is an accomplishment only of recent times. The close of the 19th and the beginning of the 20th centuries witnessed, moreover, the successful creation of international monetary homogeneity paralleling that existing on the national level, thanks to the gold standard which united all countries within the framework of one monetary system. The abandonment of the gold standard in our times means then, with regard to the postulate of monetary homogeneity, an unfortunate step backwards, for so far there has been discovered no other international monetary system. A special and thoroughly unhappy phase of the age-long struggle for national monetary homogeneity is represented in the attempts to combine the use of both gold and silver, in a fixed ratio, in one monetary system (bimetallism).4
The collection of coins we are contemplating tells us something else which is perhaps of even greater importance. Many of the silver coins will be seen to give off a suspicious reddish glint, indicating the presence of a strong alloy of copper. No great powers of imagination are needed to conjure up the coin debasements of past centuries (and the monetary depreciations which accompanied them); they are, in fact, the historical prototypes of the inflations of our own times. These experiences of the past make clear the importance of that other requirement of a sound money, stability of value, and the strenuous and repeated efforts required in the course of history to establish it. In this instance, too, the introduction of the gold standard in the nineteenth century was the factor most responsible for the establishment of money upon a solid base. Again, too, it is our own destructive age of wars and revolutions which is responsible for the sabotaging of this accomplishment. Once more, the maintenance of monetary stability has become an economic problem of the first magnitude.
There is one fact, however, which an examination of our coin collection does not reveal to us, but with which we have become intimately familiar as the result of our own painful experience. Though the people in whose pockets our collection of coins once jingled were plagued by a confusion of monetary systems and of coin debasements with a resulting lack of monetary homogeneity and stability, one thing was self-evident: their freedom to exchange their money against goods or against other kinds of money. Of course, there were instances in these earlier periods of where an unscrupulous ruler of the modern stamp such as King Philip the Fair of France would proclaim, as he did at the end of the thirteenth century during his struggle with the Papacy, an embargo on the export of money and letters of credit, thereby introducing what we term at the present time exchange control. But we have no record of Erasmus, Luther, or Goethe encountering any difficulties in exchanging their money on their respective journeys to Italy. Restrictions on freedom to exchange domestic money against foreign money are in fact an invention of our own time, and we have little reason to be proud of having made exchange control a normal procedure and therewith deprived money of that freedom which in the eyes of our forbears pertained to its very essence. Moreover, we find that in some countries even the freedom to exchange money against goods has been so restricted by rationing regulations that for the purchase of certain categories of goods money is worthless unless accompanied by a special permission to purchase. Out of such restrictions collectivist Russia has made a permanent system, a proof that in the collectivist economy money completely changes its role and in any case can no longer be equivalent to “coined freedom.”
If we keep in mind that the three most important postulates of a sound money are homogeneity, stability of value, and circulatory freedom, then we may regard the history of money as a history of the tribulations which it has endured: a history of debasements, of risky experiments, of repeated violations of these postulates. At the very least, valuable insights can be gained by reviewing the history of money from this angle. Another vantage point for the study of monetary evolution is found in the interesting fact that from earliest times to the present day, money has become progressively more abstract, more “aenemic.”
The cattle in which Homer counted out the value of Achilles’ shield was evidently a very concrete kind of money. Even in the age when men began to use specific weights of the precious metals as money, the purely material aspect of money was still of prime consideration. This primitive method of payment which consisted of weighing out amounts of the precious metals (“weight payment” according to G. F. Knapp) is memorialized in the fact that many contemporary words for money were originally nothing more than designations of weight, as in the obvious cases of the English “pound” and the Italian “lira,” but also in the cases of the German “mark” and the Yugosalv “dinar” (from the Latin “denarius”), among others. Nor did the evolution towards an even more complete dissociation of money from its purely material content end here. Those of us who have ever had to buy a railroad ticket at the last minute will appreciate the difficulties attendant upon the method of “payment by weight,” difficulties which disappeared after the tremendous forward step taken in antiquity—probably for the first time in Crete in the second millenary B.C., then later in Asia Minor—when unitary weights of the precious metals were introduced, embossed with an official stamp guaranteeing their weight and purity.
With the stamp of guarantee, there came into being a money which made it possible to make payments not by weighing, but simply by counting. The exchange value of this fully-valued money (currency) was still identical with its material value. But the next stage of development saw the issue of token money or subsidiary coin, that is, of under-valued monies whose material value represented only a fraction of their exchange value. This marks the further progress in the direction of monetary aenemia; and in fact in most civilized countries today, people know no other coins than these. These aenemic coins, however, are used only in transactions involving small sums; by far the greater part of payment transactions in all civilized countries is effected by means of money still more ephemeral in nature, viz., stamped pieces of paper.
In the beginning, paper money still had a certain material aspect, in the sense that it was a receipt for a deposited amount of precious metal. This early paper money, moreover, had a 100 per cent coverage and could always be converted into precious metal. It was, therefore, originally a circulating claim against the “bank” which had assumed the safekeeping of a quantity of the precious metals and issued in exchange therefor a receipt (bank note). The banks soon noticed the influence of the “law of great numbers” on their increasing volume of business: their deposits and withdrawals largely offset each other. And they noted the even more important fact that the bank notes began to circulate as money, supported by the confidence that people had in the possibility of redeeming them. Consequently, it did not appear necessary to cover the notes to the extent of 100 per cent. Even where full convertibility of the paper notes was maintained, a given ratio of reserves to liabilities was sufficient to enable the bank to meet the demands for redemption which could be expected in the ordinary course of business, a ratio which was later legally fixed in most countries, in one form or another. This meant, of course, that the bank of issue could put into circulation many more notes than the equivalent of its reserve in precious metal and could thus issue more promises of payment than it would have been able to meet if they had all been presented at once. Such additional bank notes got into circulation when the bank of issue used them to accord commercial credits, primarily in the form of purchases of promissory notes from which the interest was deducted in advance (discounting). By using these additional bank notes to furnish credit, the bank had succeeded in a bit of legerdemain which to this day many people fail to understand: it had furnished credits which did not arise from previous savings but from the issuance of additional bank notes (creation of credit).5
The bank notes thus put into circulation were born of a credit operation and hence represented a combination of the monetary system and the credit system. So long as the notes remained redeemable (full gold standard, gold circulation standard),6 they preserved a certain indirect connection with the concrete matter of money. But this connection became increasingly attenuated when redeemability was restricted to certain categories of payments (such as payments to foreign countries) and when the domestic circulation of gold coins was prohibited (gold bullion standard).7 The divorcement of bank notes from a precious metal was made complete with the abolition of redeemability in any form (paper standard). Before World War I, the full gold standard prevailed in the economically developed countries; subsequently, it was the gold bullion or gold exchange standard which became the dominant type. And today we find the paper standard, under various forms, almost everywhere in operation.

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