Ayr Bank

The Ayr Bank was a Scottish bank of the latter eighteenth century that caused one of the most famous banking debacles in European history. In part the bank owes its notoriety to Adam Smith, who, in the Wealth of Nations, devoted a good bit of space to describing its story.

The Ayr Bank, more accurately called the firm of Douglas, Heron, and Company, came into being in November 1769. It was founded along the lines of the land bank schemes suggested by John Law, but unlike Law’s schemes, it was a purely private initiative without official backing. As a copartnership, as opposed to an incorporated business, its owners were fully liable for all the debts of the business. Its founders were landowners of the first order, one of whom, the Duke of Buccleuch, had accompanied Adam Smith on a tour of Europe and had the benefit of the famous economist’s advice. Land owned by the founders was the ultimate security for the bank’s notes.

The Ayr Bank burst upon the scene when the Scottish economy was in a contraction and many observers felt that a shortage of circulating money acted as a drag on the Scottish economy. According to Smith, writing in the Wealth of Nations:

This bank was more liberal than any other had ever been, both in granting cash discounts, and in discounting bills of exchange. With regard to the latter, it seems to have made scarce any distinction between real and circulating bills, but to have discounted all equally. It was the avowed principle of this bank to advance, upon any real security, the whole capital which was to be employed in those improvements of which returns are the most slow and distant, such as the improvements to land.

(Smith, 1952)

The liberal lending policy of the bank led to a rapid expansion of bank notes, greater than what the bank’s resources could support. The Ayr Bank expansion of credit found its way into speculation in real estate and the London stock market. Bank notes were redeemed with bills of exchange drawn on London banks in amounts that exceeded the bank’s London resources. In 1772 a London-Scottish banking house with close connections with the Ayr Bank failed, and the Ayr Bank’s house of cards collapsed. Scotland’s public banks refused to grant credits to the failing bank. The bank was liquidated, and the income from the land was pledged to the redemption of outstanding bank notes. The founders of the bank lost everything, some of whom were apparently unaware that their liability was unlimited.

The failure of the Ayr Bank was probably due more to mismanagement than to faults in the land bank principle. The bank may have actually spurred the economic development of Scotland, but its failure weakened public confidence in land banking schemes, leaving gold and silver as the most acceptable security for bank notes. The bank’s history shows how easily an expansion of bank notes leads to a speculative bubble that ends in collapse. History has continued to repeat itself, with Tokyo being the last scene of a speculative bubble fed by overly generous credit policy.

Austrian Hyperinflation

After the close of World War I, Austria, one of the states that emerged from the division of the Austro-Hungarian Empire, experienced an episode of soaring hyperinflation, registering an annual inflation rate of 10,000 percent between January 1921 and August 1922. A legacy of food shortages and high unemployment after World War I helped send Austria on a monetary path of economic insanity. The creation of new states, coupled with the scarcities of war, disrupted traditional flows of trade, and Austria, a loser in the struggle, owed war reparations.

The government of Austria met the crisis by incurring large expenditures on food relief and unemployment relief. From 1919 until 1922 the Austrian government collected less than 50 percent of public expenditures in taxes, and financed the remainder selling treasury bills to the Austrian section of the Austro-Hungarian Bank, which paid for the treasury bills with fresh bank notes, denominated in Austrian crowns. From March 1919 until August 1922 the Austro-Hungarian Bank multiplied Austrian bank note circulation by a factor of 288, increasing the supply of bank notes in circulation from the equivalent of $4.7 million to over $1.3 billion. Aside from public borrowing, the bank continued to make private sector loans at favorable interest rates.

As inflation mounted, Austrians began a “flight from the crown.” They spent the bank notes sooner after receiving them and Austrian crowns held as a form of wealth were spent. Austrians put wealth in foreign exchange or real assets, minimizing holdings of Austrian currency. Contemporary economists might describe the flight from the crown as an increase in the velocity of money, meaning money is spent more frequently on goods and services. The government instituted exchange controls in a rather ineffective effort to stop Austrians from converting Austrian crowns to foreign exchange. The value of Austrian crowns in the New York foreign exchange market dropped sharply. In January 1919 one U.S. dollar bought 17.09 Austrian crowns, and in August 1922 one U.S. dollar bought 77,300 Austrian crowns.

The flight from the crown caused prices to rise faster than the money supply growth rate. Between January 1921 and August 1922 retail prices rose by a factor of 110, while bank note circulation rose by a factor of only 39.

The depreciation of the crown in foreign exchange markets stopped abruptly in August 1922, and the upward spiral in retail prices ended the following month. The League of Nations arranged for the Austrian government to receive a loan of 650 million crowns. In return the Austrian government had to end deficit spending and establish a central bank independent of the government. The mere spread of knowledge of the agreement was sufficient to stabilize retail prices and the crown in foreign exchange markets.

The central bank of Austria continued to rapidly infuse bank notes into the Austrian economy but inflation subsided, appearing to defy the laws of economics. These bank notes, however, were backed with gold, foreign assets, or commercial paper, rather than government securities. The change in the composition of the assets of the central bank accounted for the end of the monetary disorder.

At the end of 1924, long after the inflation subsided, Austria issued a new unit of currency, the shilling, worth 10,000 crowns.

Augustan Monetary System

Augustus, Roman emperor from 30 b.c. to a.d. 14—the first emperor after the fall of the Roman Republic, established a monetary system that provided a degree of monetary order to the Romans for two centuries. The system gradually gave ground to currency debasement and inflation, which grew to unbearable proportions during the third century a.d., when the emperors Aurelian, Diocletian, and Constantine instituted major reforms of the Roman currency.

The early Roman Republic adopted a bronze monetary standard, but wars brought in larger supplies of silver, making it the dominant monetary metal in last 150 years of the Republic. Bronze became only token money and under Julius Caesar Rome regularly minted gold coins.

Under the Augustus system, the gold aureus was equal to one-forty-second of a pound of gold, down a bit from the standard of the Republic that put an aureus at one-fortieth of a pound of gold. The system continued the later Republican standard for the silver denarius, fixing its weight at one-eighty-fourth of a pound of silver. By government decree, 1 aureus equaled 25 denarii, making the Augustan system a bimetallic monetary standard. The ratio by weight between gold and silver was 1:12.5. Like all bimetallic standards the system had difficulty maintaining a fixed ratio between two metals, the values of which were free to fluctuate in open markets.

Augustus also minted a gold quinarius worth one-half of an aureus, and a silver quinarius, equaling one-half of a denarius. He minted two bronze coins, the sestertius and the dupondius, the latter worth half as much as the former. A sestertius was equal to about one-half of a silver quinarius. Further down the scale of coins was the copper aes, equaling one-quarter of a sestertius, and a copper quadrans, equal to one-half of an aes. The bronze and copper coinage belong in the category of token coinage, and was mostly sold to the moneychangers who found buyers in need of small change. The gold and silver coins were almost pure in precious metal content and were used to pay for government expenditures, including the wages of the soldiers.

Augustus followed the example of Julius Caesar in having an effigy of himself struck on one side of the coins. After his death coins appeared with an image of Augustus and referred to him as a deity. The idea that coins were struck and issued by deities may have encouraged later Romans to think that coins had value independent of their precious metal content. Toward the end of the first century the emperor Domitan put the words “Dominus et Deus” on coins bearing his image.

The emperor Nero reduced the weight of the aureus to one-forty-fifth of a pound of gold, and the denarius to one-ninety-eighth pound of silver. The relative values of the two coins stayed fixed at 1 aureus to 25 denarii. Also the silver was alloyed 10 percent with another metal. As government expenditures outpaced tax revenues, Roman emperors turned to the practice of secretly debasing silver coins. Under the philosophic emperor Marcus Aurelius, the silver content of silver coins fell to 75 percent, and by the second decade of the third century the silver content had fallen to 50 percent. Then the debasement and inflation became a much more frenzied affair until the silver content of coins fell to 4 percent by a.d. 270. With the monetary reforms of Aurelian, Diocletian, and Constantine the Romans would learn to live with inflation and perhaps slow it down slightly before it took off again in the fourth century a.d. The problem of currency debasement and inflation became one of the subplots of the decline and fall of the Roman Empire.

Augustalis

The augustalis was the first gold coin of commercial importance struck in western Christendom after the disappearance in the eighth century of the old Roman Imperial coinage.

The Emperor Frederick II (1194–1250), the most gifted, innovative, and scholarly ruler of the age, first struck the augustalis in 1231, preceding by about 20 years the European return to large-scale gold coinage. Frederick II’s gold coinage is often judged an extension of Islamic and Byzantine gold coinage, rather than Western European coinage, depriving Frederick II of credit for minting the first European gold coinage after the disappearance of European gold coinage in the Middle Ages. Nevertheless the augustalis was an important step in the reintroduction of gold coinage to Western Europe.

Frederick II was emperor of what was later called the Holy Roman Empire, which Voltaire described as “neither holy, nor Roman, nor an empire.” The Empire encompassed what is now Austria, the Czech Republic, eastern France, Germany, large parts of Italy, the Netherlands, Belgium, Luxembourg, Sicily, and Switzerland.

After the Carolingian reform in the eighth century, the silver denier was the highest denomination of coin minted in Europe. The shilling and pound were imaginary denominations that passed as multiples of the denier. As trade grew, and the purchasing power of silver fell, Europe needed coinage of greater value.

Probably an annual tribute extracted from Tunisia by treaty supplied the sizable quantities of gold coinage and gold dust that enabled the imperial mints of southern Italy to coin the augustalis. The new gold coin bore an image of the emperor on one side and an eagle on the other side. The coin contained 4 1/2 grams of gold alloyed with an admixture of silver at a rate of 2 1/2 carats of silver per 20 1/2 carats of gold and a bit of copper. The total weight of the coin was 5.28 grams. The alloyed composition of the augustalis was not uncommon at the time, and the scrupulously maintained weight of the augustalis made it more attractive than the pure gold Islamic dinar. In France, England, and the Holy Land, the augustalis displaced the tar, a coin that Lombard princes in southern Italy and Sicily struck as a quarter of a dinar.
The augustalis maintained its popularity for 50 years, but was supplanted by the pure gold coinage that Genoa and Florence first minted in 1252. From Genoa and Florence gold coinage quickly spread to the rest of Italy and Europe. France and England had issued gold coins before the end of the century, and Germany began gold coinage in 1328.

Attic Silver Standard

Athens capitalized upon the invention of coinage more than any other Greek city. The city owed no small part of its success to the Laurium mines, which Aeschylus called a “fountain of running silver.” Athens’ coins became the most popular in the Greek world, and the city forced the client states in the Athenian empire to replace their own currency with Athenian currency, creating the Attic silver standard.

Before the sixth century b.c. Greece and Macedonia could lay claim to only two small mines that held deposits of pure silver. Silver was relatively rare, and valued among the ancient Egyptians more highly than gold. Athens had at its doorstep mines at Laurium that held vast deposits of argentiferous lead ores, awaiting only the technology to separate the silver from the lead. The mines got their name from the laurai, or horizontal alleys, that entered into the hillsides before deeper mining methods were employed. The Greeks learned to free the silver from the lead by heating molten metal on cupels of porous material and exposing it to the air, thereby separating a metal that was 98 percent silver. In 546 b.c. the tyrant Peisistratus, the first Athenian ruler to see the value of the silver mines, coined the first owls, the Athenian coins that would become the most famous coins of the Greek world, remaining in circulation for nearly 600 years. Around 490 b.c. a prospector discovered the first really profitably veins of silver, touching off a silver rush and supplying the financial resources that would propel Athens to commercial supremacy. The Laurium mines remained an important source of silver to the ancient world before playing out around 25 b.c.

The basic monetary unit throughout the Greek world was the drachma, from a word meaning “handful of grain.” The precise weight seemed to range between less than 3 grams in Corinth, and more than 6 grams in Aegina. The famous Athenian owls were usually struck in one-, two-, and four-drachma pieces, and on rare occasions in eight-, 10-, and 12-drachma pieces. Perhaps the most famous coin in antiquity was the four-drachma, or tetradrachm, bearing the image of an owl on one side and the head of the goddess Athena on the other. The owl was the sacred bird of Athena. Before the Athenian owl there were a few scattered instances of coins bearing human heads, but the owl started the fashion of putting the head of a deity or famous person on one side of a coin, a practice that has survived into modern times.
The smallest Athenian coins were made of copper and were called chalkous. Eight chalkoi made an obol, a reference to its resemblance to nails or spits, obeliskoi. Six obols made a drachma, and two drachmae made a silver stater. One hundred drachmas, or 50 staters, equaled a mina. And 60 minae, or 6,000 drachmae, equaled a talent. Two obols were a day’s pay for a laborer.
In 456 b.c. Athens forced Aegina to give up minting its own turtle coinage in favor of the Athenian owls. In 449 b.c. Athens issued an edict requiring that all foreign coins be brought to the Athenian mint, and that all allies adopt the Attic standard of weights, measures, and money. These were probably measures to promote commerce, and certainly acted to further Athenian commercial ambitions.
The Athenian government’s stubborn avoidance of debasement through all its vicissitudes deserves some credit for the esteem that the owls commanded among Mediterranean trading centers. The one exception was an episode during the Peloponnesian War, when Sparta stopped the flow of silver from the Laurium mines in 407 b.c., causing Athens a severe coin shortage. The Athenian government first melted down golden statues and other treasures that adorned the Acropolis, and minted 84,000 golden drachmae. When the coin shortage worsened between 406 and 405 b.c. Athens issued bronze coins with silver coating, giving history one of the first examples of Gresham’s law in operation. During the wartime bronze debasement, the famous Greek comedy playwright Aristophanes, wrote: “In our Republic bad citizens are preferred to good, just as bad money circulates while good money disappears.” (Angell, 1929). Athenian citizens hoarded gold and silver coins and spent the bronze coins. Athens demonetized the bronze coins in 393 b.c. and Athenian coinage again established itself as the preferred currency in the commercial world.
The Attic silver standard gave the Western world a shining example of a monetary policy committed to sound money for an extended period of time. In contrast, the lack of rectitude in Roman monetary policy left the world a legacy of monetary disorder and rapid inflation.

Argentine Hyperinflation

Between 1988 and 1991 Argentina saw the climax of more than a half century of inflation, sending runaway annual inflation rates into four-digit territory.

Unlike Chile, Argentina was no stranger to paper money in the early nineteenth century. In 1822 the Bank of Buenos Aires issued bank notes that traded at a premium, but war with Brazil in 1826 led to the suspension of convertibility of these notes into gold. The notes depreciated significantly before resumption of convertibility in 1867. Convertibility was suspended again in 1876, and Argentina’s peso depreciated by more than 50 percent.

In 1899 Argentina adopted the gold standard and began an era of price stability that, aside from the interruption of World War I, lasted until Argentina and the world abandoned the gold standard early in the depression of the 1930s. Argentina’s wholesale price index (based upon 1943 prices equaling 100) stood at 31.6 in 1907, rose to 38.3 in 1914, and climbed steadily—reaching 68.0 in 1920. Then Argentina saw prices decline steadily until reaching a trough of 42.1 in 1933.
From 1934 until 1990 prices rose and inflation fluctuated with a long-term upward trend. Inflation averaged over 50 percent between in 1940 and 1950, and then subsided to an average slightly over 23 percent between 1961 and 1965. Inflation began to creep upwards and really took off in the early 1970s, averaging nearly 109 percent between 1973 and 1976. Inflation finished the decade of the 1970s in the 170 percent range, and approached 400 percent in the mid 1980s. By 1989 the annual inflation rate exceeded 3,000 percent. Inflation exceeded 2,000 percent in 1990 and declined to 84 percent 1991. By the mid-1990s Argentina had tamed inflation to well within the single-digit range and had become a model of monetary stability.
The root cause of the inflation originated in isolationist foreign trade policies, political instability alternating between military dictatorships and civilian governments, interventionist domestic economic policies emphasizing subsidies, and the failure of the tax system to fund public expenditures. The unfortunate episode of the Falklands war in 1982 may have helped put Argentina on the road to bankruptcy and collapse. Between 1980 and 1990 real wages fell 20 to 30 percent. Between 1973 and 1990, per capita income fell 26 percent. Tax revenue as a percentage of the gross national product (GNP, a measure of total national output and income, comparable to the gross domestic product in use today) fell in the 1980s and the public debt surpassed 100 percent of GNP. Printing money became a substitute for taxation.
Dissatisfaction with economic chaos helped bring a democratic revival in Argentina, and early in the 1990s a democratic government brought inflation under control, a feat that had eluded military governments. Worldwide inflation in the 1970s had led some observers to doubt the ability of democratic governments to face up to the disease of inflation.
In March 1991 the Argentine legislature enacted the Law of Convertibility, creating a new Argentine peso convertible into one U.S. dollar. The new monetary base was backed by 100 percent of reserves in gold, dollars, or other foreign currencies. United States dollars were also accepted as a currency for domestic transactions. The value of the peso was pegged at 1 dollar, and the central bank maintained convertibility between pesos and dollars. This currency reform not only broke the back of inflation, but made Argentina’s monetary system a model for other developing countries. Monetary reform coincided with a capitalist revolution in Argentina, emphasizing privatization, less government intervention, and openness to foreign trade.

Arab Dinar

The gold dinar of the Arabs rivaled the Byzantine solidus as the preferred international currency from the eighth century until the thirteenth century.

By the middle of the seventh century the Arabs had wrested Syria and Egypt from the Byzantine Empire, and had conquered Iran and Iraq. Within another 50 years the Muslim empire stretched from Spain and Northern Africa to India. The victorious Arabs fell heir to the Byzantine gold coinage in the west, the principle coin of which was the solidus, and to the Iranian silver coinage, the principle coin of which was the drachm, named after the Greek drachma.

The first generation of Arabs contented themselves with the existing monetary standards and coinage, but in a.d. 696 the caliph Abd al-Malik established a uniquely Islamic coinage. Its principle coin was called the gold dinar because the Arabs had called the Byzantine solidus a dinar. The term dinar seems to have stemmed from the word denarius, referring to a silver coin in ancient Rome. The gold dinar was equal to 4.25 grams of gold, compared to 4.55 grams of gold content in the Byzantine solidus.

Typical of the age, a religious dispute seems to have sparked the decision to establish an Islamic monetary system. Apparently, the caliph Abd al-Malik received word that the Byzantines were importing papyrus decorated in Egypt with a Greek inscription reading “Father, Son, and Holy Ghost.” Abd al-Malik then sent written instructions that the words “Allah is witness that there is no God but Allah” replace the words “Father, Son, and Holy Ghost.” When the Byzantine emperor learned of these developments he sent word to Abd al-Malik, pointedly observing that the Byzantines dominated world coinage. He threatened that soon Byzantine coins would bear messages insulting to the prophet Mohammed unless the Christian inscription was restored to the Egyptian papyrus. This threat provoked the Arabs to erect their own mint, and begin striking their own coinage.

The new Arab dinar bore an inscription on one side affirming the unity and uniqueness of God, and an inscription on the reverse side denying the Christian doctrine of the Trinity. Islam frowned on the use of images of rulers, deities, or animals within a religious context, which in Islam encompassed the coinage.
Plans for an Arab coinage were left in the hands of Al-Hajjaj bin Yusuf, governor of Iran and Iraq. He apparently established the first Arab mint in Wasit in a.d. 702–703. The government tattooed moneyers and moneychangers employed at the mint, and closely supervised them to guard against any sort of fraud. Mint employees caught in fraudulent acts had their hands cut off as punishment. On advice of Al-Hajjaj bin Yusuf, Abd al-Malik ordered that old coins be melted down and minted into Islamic coins, that the new coins be used throughout Islam, and that anyone refusing to accept the new coinage receive the death penalty.
Between a.d. 813 and 833 the caliph Al-Ma’mun reformed the Arab coinage, providing for greater uniformity in the coinage from different parts of the Muslim empire. The coin types of his reforms lasted until the eleventh century among the secular rulers within the Abbasid caliphate, and until the mid-thirteenth century in Iran and Iraq. By the end of the thirteenth century the gold coinage of Venice and Florence began to displace the Byzantine and Muslim coinage systems.

Ancient Chinese Paper Money

In the second book of The Travels of Marco Polo, Chapter XVIII is entitled: “Of the Kind of Paper Money issued by the Grand Khan, and made to pass current throughout his Dominions.” In this chapter Marco Polo, who lived in China from 1275 to 1292, described the paper money system as follows:

In this city of Kanbulu is the mint of the grand khan, who may truly be said to possess the secret of the alchemist, as he has the art of producing money by the following process. He causes the bark to be stripped from those mulberry-tree the leaves of which are used for feeding silk-worms, and takes from it that thin inner rind, which lies between the coarser bark and the wood of the tree. This being steeped, and afterwards pounded in a mortar, until reduced to a pulp, is made into paper, resembling (in substance) that which is manufactured from cotton, but quite black. When ready for use, he has it cut into pieces of money of different sizes, nearly square, but somewhat longer than they are wide. The coinage of this paper money is authenticated with as much form and ceremony as if it were actually of pure gold or silver; for to each note a number of officers, specially appointed, not only subscribe their names, but affix their signets also; and when this has been regularly done by the whole of them, the principal officer, deputed by his majesty, having dipped into vermilion the royal seal committed to his custody, stamps with it the piece of paper, so that the form of the seal tinged with the vermilion remains impressed upon it, by which it receives full authenticity as current money, and the act of counterfeiting it is punished as a capital offense. Nor dares any person, at the peril of his life, refuse to accept it in payment. When any persons happen to be possessed of paper money which from long use has become damaged, they carry it to the mint, where, upon the payment of only three percent, they may receive fresh notes in exchange. Should any be desirous of procuring gold or silver for the purposes of manufacture, such as of drinking-cups, girdles, or other articles wrought of these metals, they in like manner apply at the mint, and for their paper obtain the bullion they require.

(Polo, 1987)

Marco Polo’s account of the paper money system in China may have been a bit optimistic. China had been issuing paper money since a.d. 910 and had already suffered at least one round of hyperinflation before Marco Polo’s visit. Around 1020 inflation and currency depreciation became such a problem that the authorities resorted to perfuming the paper money to make it more attractive. China seemed to have experienced phases of reformed currencies, punctuated with bouts of inflation. By 1448 the Ming note was worth only 3 percent of its face value, and no further references to paper money are found after 1455.

Paper money lost its charm in China owing to inflation, leading to its extinction as a form of state-sponsored money in China until the twentieth century. When the Western world saw a renaissance of paper money toward the end of the seventeenth century, inflation again reared itself as a rock of danger for any paper-money system. Despite the inflation dangers of paper money, however, the societies experiencing the fastest economic development since the beginning of the seventeenth century have been those that learned to use paper money.

American Revolution Hyperinflation

On 22 June 1775 the First Continental Congress, struggling to finance the Revolutionary War effort without power to tax or borrow, authorized the issuance of $2 million in bills of credit. These bills of credit, soon to be known as continentals, were issued with the understanding that individual states would redeem them according to an apportionment based upon population. The Congress had considered, but rejected, another option that would have assessed to each state a sum of money to be raised by the issuance of state notes on the authority of each state government.

Congress issued an additional $4 million in bills of credit before the year was out. These were scheduled for redemption between the years 1779 and 1986, and, contrary to a suggestion from Benjamin Franklin, paid no interest. The plan for each bill of credit to bear the signature of two members of Congress fell by the wayside, and Congress hired 28 individuals to sign the bills. Congress continued to run the presses, authorizing the issuance of $241,552,780 in bills of credit before voting to limit circulation to $200 million in bills of credit toward the end of 1779. After 1779 Congress ceased the issuance of bills of credit (continentals).

Congress issued the continentals because the states did not want to levy taxes to finance a war that was partially sparked by anger over English taxation of the colonies. Desiring to tread lightly on taxes, the individual state governments issued $210 million of their own notes between 1775 and 1780, further fanning the flames of inflation.

Although the states shied away from levying taxes to redeem continentals, they complied with the request from Congress to declare continentals legal tender. To reinforce the state action, Congress passed resolutions to shame people into accepting continentals in payment for goods. After hearing of one instance of an individual refusing to accept continentals, Congress resolved (23 November 1775): “That if any person shall hereafter be so lost to all virtue and regard for his country as to refuse, such person shall be deemed an enemy of his country.” Until the end of 1776 price inflation remained relatively tame, but then inflation began to gather momentum, becoming runaway in 1779 when the ratio of continentals to specie in face value increased from 8:1 to 38:1.

In December 1776 the New England states held a price convention in Providence, Rhode Island, that called for less paper money and more taxation, and that developed a recommended set of prices for farm labor, wheat, corn, rum, and wool. The New England states enacted these price recommendations into law and Congress urged other states to do the same. Congress also gave its blessing for states to assume the authority to confiscate hoarded goods. Citizens held mass meetings denouncing price increases, and irate women raided shops that reportedly were hoarding goods. Merchants had to defend themselves in court. Philadelphia protesters hanged in effigy a specie dollar to protest dealers refusing to accept paper money.

In 1778 a second price convention set forth a list of recommended prices, and Congress seemed ready to legislate, calling for a price convention in 1780. Congress also asked the states to formulate price recommendations on the assumption that prices were 20 times higher than they were in 1774. Congress gave up on the idea of fixing prices, however, and in March 1780 Congress asked the states to remove punitive legislation against those refusing to accept continentals.
After 1779 the depreciation of continentals continued, raising to 100 to 1 the face value ratio of continentals to specie by January 1781. The ratio of 100 to 1 became the official ratio at which Congress converted continentals into interest-bearing, long-term bonds under the funding act of 1790.
The experience of the continentals became a lesson in the evolution of paper money—a lesson that had to be relearned many times. The issuance of inconvertible paper money became the accepted practice worldwide as governments learned to maintain its value by restricting its supply.

American Penny

The penny in the United States is a one-cent coin. Presently the United States Mint strikes about 13 billion pennies annually, accounting for two-thirds of all coins struck by the mint. If all the pennies struck by the U.S. Mint since its inception were lined up edge to edge, the pennies would circle the earth 137 times.

Historically, the penny was a copper coin. Copper coinage came slowly to the English-speaking countries, perhaps because of its long association with currency debasement. Early in the seventeenth century Spain had debased its silver coin with copper alloy, eventually striking coins that were virtually all copper with face values commensurate with high silver content. The prevailing opinion in England was that only gold and silver met the standard of a monetary metal. A shortage of small change among tavern keepers and tradesmen, however, prompted the introduction of private tokens. To meet the need for small change the English government in 1613 first struck copper coins. England struck the first copper pennies for home use in 1797.

In 1722 the English government authorized William Wood to mint pennies and halfpence for Ireland and the colonies. These pennies were a mixture of copper, tin, and zinc, and had a touch of silver. In 1681 New Jersey sanctioned as legal tender copper coins called Patrick’s Pence, after the Irishman who brought the coins to the colonies.

Under the Articles of Confederation several states established mints that turned out copper coins. The Coinage Act of 1792 established the cent and the half cent and set the weight of the cent at 264 grains of copper. The act made no provision for the actual coinage of copper and the legal tender provisions of the act failed to mention copper coins. Congress soon amended the act to provide for the purchase of copper and necessary arrangements for the coinage of copper cents and half cents. Congress also began to think of the copper coinage as a fiduciary issue, and authorized the president to substantially reduce the copper weight of the cent and half cent.

Congress also banned the circulation of foreign copper coins, a restriction that did not apply to foreign gold and silver coins. The Spanish silver dollar circulated clearly as legal tender currency while the legal tender status of the copper cents and half cents remained in doubt. After President Washington reduced the copper content of the cent to 168 grains, the coinage of cents and half cents accelerated as a profit-making venture.

In 1857 Congress substantially increased the seigniorage on the copper coins. It abolished the half cent, and reduced the weight of the one-cent coin to 72 grains with 88 percent copper and 12 percent nickel. In 1864 Congress again changed the composition of the cent, raising the copper content to 95 percent, and making up the remaining 5 percent with zinc. Congress also made the one-cent coin legal tender.
In 1909, to mark the one-hundredth year since his birth, Abraham Lincoln became the first historical figure to adorn a United States coin. Fifty years later an image of the Lincoln Memorial appeared on the reverse side, and today both sides of the penny commemorate Abraham Lincoln.
Rising copper prices in the 1970s caused a shortage of pennies, then worth more as copper than as money. Pennies were melted down for copper, and to keep pennies in circulation the government reduced the penny’s copper content to 2.5 percent, the remaining 97.5 percent composed of zinc.
At the end of the 1990s the penny’s future is somewhat uncertain. Inflated price levels may have made the penny coin obsolete, but proposals to discontinue the penny have not met with widespread approval. The U.S. Mint contends that coinage of the penny is profitable to the government, and other large major industrialized countries, including Great Britain, Canada, Japan, Germany, France, and Italy, have kept the penny, or penny equivalents, in production.

Almonds

J. B. Tavernier traveled through India during the seventeenth century, and he observed in an account of his travels:

For small Money they make no use of these Shells [in the Province of Gujerat] but of little Almonds which are brought from about Ormuz and grow in the Dessarts of the Kingdom of Larr. If you break one of the shells it is impossible to eat the Almond for there is no coloquintida [colocynth] so bitter; so that there is no fear lest the children should eat their small Money. Some years the Trees do not bear and then the price of this sort of Money is very much raised in the Country and the Bankers know how to make their benefit. They call these Almonds Baden. They give for a pecha sometimes 35 sometimes 40.

(Tavernier, 1985)

Nineteenth-century authors reported the use of bitter almonds, unfit for consumption, circulating in the Sudan as money.

The fact that the almonds were bitter, and not desired as food, leaves one wondering what was the appeal that made these almonds attractive as money. For use as money societies have often raised up commodities that had food value, either nutritionally or as a stimulate or depressant, or had religious significance, or conferred social status. There is no mention that almonds possessed any of these characteristics. However, almonds are reasonably durable, which may have made them useful as a store of value. The use of almond money was restricted to small change, perhaps because almonds never commanded the economic and social significance of most commodities that rise to the status of money.

Alexander the Great (356–323 b.c.)

If the Greek city-states perfected the coinage that Lydia invented, Alexander the Great spread Greek coinage throughout an empire that stretched from Egypt to India, and north to Samarkand. The Egyptians had not coined money before Alexander, and the Romans did not begin coining money until after his death.

Macedonia, the country of Alexander, began its rise to world leadership with vast holdings of mineral deposits, including iron, copper, silver, and—unlike the Greek city-states—gold. The king of Macedonia owned these resources as personal property under his sole authority. Macedonian coinage made its appearance around 479 b.c. Over a century later King Philip II minted a golden stater bearing an image of the head of Zeus on one side and a depiction of his kingly victory in an Olympic chariot race in 356 b.c. on the other side. These coins found their way to the Celtic tribes of central and northwestern Europe, and are among the oldest coins discovered in England. Some observers saw Philip himself in the image of Zeus, and these coins helped raise the prestige of Macedonia in the Greek world. Before his death, Philip had accumulated a large stock of gold philippeioi and silver tetradrachms to finance an invasion of Persia.

Alexander ascended the throne in 336 b.c. already commanding this huge stock of gold and silver coin, which he could use to pay mercenaries. The chief Macedonian mints were at Pella and Amphipolis, and these mints began to rival Athens as the largest source of coinage in the Mediterranean world. Alexander put both the gold and silver coins on the Attic standard, and he used his large reservoirs of gold to maintain a ten-to-one ratio between silver drachmae and gold drachmae. Alexander’s own golden stater bore the head of Athena wearing a Corinthian helmet on one side, and on the other side a winged Victory with a wreath and a stylus. His silver tetradrachm bore the head of a young Hercules with a lion-skin headdress, and the other side a Zeus, complete with throne, scepter, and eagle. Alexander never struck coins bearing an image of himself, but after his death coins with his image appeared in parts of his empire.

Perhaps Alexander’s greatest contribution to the spread of coinage was his practice of paying his soldiers in cash. Cavalrymen averaged two drachmae a day, infantrymen one drachma, and a common mercenary two-thirds of a drachma. Midway through his Asia Minor campaign, Alexander was spending 20 talents (half a ton of silver) per day paying and rationing his army. The Persian campaign brought virtually unlimited supplies of gold and silver bullion under Alexander’s control. He coined bullion that he found hoarded in temples and royal treasuries.

Amphipolis was the most prolific of the mints in Alexander’s empire, minting some 13 million silver tetradrachms alone over an 18-year period. Alexander turned the mint of Babylon into the most productive in Asia, second only to Amphipolis in his empire, and he established lessor mints at Tarsus, Sicyon in the Peloponnese, Lampsacus, Sardis, Miletus, and Sidea in western Asia Minor, at Ardaus and Sidon in Phoenicia, at Citium in Cyprus, at Alexandria in Egypt, and at Ecbatana, now in Iran. Alexander’s army accepted the Attic standard, which acted to spread that standard throughout the empire.

In the course of Alexander’s coinage, the image of the head of Hercules on his coins began to resemble an idealized engraving of Alexander himself, marking a departure from the emphasis on religious themes of the more democratic Greeks. Under the influence of the example set by Alexander, the Romans would be the first to put the head of a living person on a coin. Alexander also paved the way to making coinage a jealously guarded sovereign prerogative, and he infused coinage into the economies of the ancient world on a greater scale than had ever been seen before. One of his legacies was a vast increase in the use of coins as a form of money.

Alchemy

Alchemy was a pseudoscience that flourished during the Middle Ages. Its chief aims were the transmutation of base metals into gold and silver, and the discovery of an elixir of eternal youth. The alchemists searched in vain for the philosopher’s stone, a substance that, if properly treated, would allegedly transmute lead, iron, copper, or tin into gold or silver—but particularly gold.

Perhaps it is only coincidental that Sir Isaac Newton, the master of the London mint from 1699 to 1726 and one of the towering intellects in the history of humanity, spent years conducting experiments in alchemy, leaving behind manuscripts on alchemy of 100,000 words. Between 1661 and 1692 experiments in alchemy accounted for most of Newton’s laboratory work. He experimented with alchemy while he was writing his masterpiece, the Principia.

The origins of alchemy stretch back into the murky recesses of history. One legend suggests that Jason’s golden fleece was actually a papyrus manuscript describing the gold-producing secrets of alchemy. Probably a combination of Greek speculation, Eastern mysticism, and Egyptian technology conspired to make Alexandria, Egypt, one of the first centers of alchemical studies in the West. The Roman emperor Diocletian ordered all Egyptian texts on alchemy destroyed after crushing an Egyptian rebellion at the end of the third century. Apparently his action was taken only to punish the Egyptians. Evidence of alchemical studies in China show up as early as the second century b.c., and India also boasts of an ancient tradition of alchemy.

The Arabs inherited both the Eastern and Western traditions of alchemy, and went far toward developing the science of chemistry while practicing alchemy. The greatest of the Islamic alchemists was the Great Geber, regarded in medieval Europe as the father of alchemy. To the Arab alchemists we owe the terms alcohol, alkali, borax, and elixir.

The study of alchemy passed from the Arabs into Europe through Spain. In 1181 the University of Montpellier was founded in southern France. It became the birthplace of European alchemy, producing in the thirteenth century several of the most famous alchemists, including Albertus Magnus and Roger Bacon, the most renowned of the medieval scientists. Another famous graduate, St. Thomas Aquinas, also wrote on alchemy. Like their Arab predecessors, the European alchemists believed that all metals were constituted of varying proportions of two metals, mercury and sulfur. Much of their research centered on the quest for an elusive elementary solvent with which metals could be broken down into these two basic elements and then reconstituted in different proportions, resulting in different metals.

It was with good reason that alchemists were perceived as charlatans promising more than they could deliver, yet at the same time they were suspected of being in league with dark forces and, akin to sorcerers, using black magic and charms.

The European monarchies also suspected alchemists of fraudulent and heretical practices, but were always in a bind for money. Although fearing alchemists as potential counterfeiters, they could not resist the lure of the alchemists’ promise to convert lead and other base metals into gold. James II of Scotland is reported to have dabbled in alchemy himself. King Charles II of England inherited a bare treasury and sought a solution to his fiscal problems in the magic of alchemy. He built his own laboratory for alchemical investigations connected to his bed-chamber by a secret staircase. France also turned to alchemists to help finance wars with England, and both countries issued gold-colored currency as soldiers’ pay. In the twentieth century Adolf Hitler is reported to have sought the services of scientists engaged in alchemical studies, hoping to bolster Germany’s gold reserves.

The famous English philosopher Sir Francis Bacon, in his book Advancement of Learning (1605), may have caught the significance of alchemy when he wrote, “Alchemy may be likened to the man who told his sons that he had buried gold in the vineyard; where they by digging found no gold but by turning up the mold about the roots of the vines procured a plentiful vintage.”

Aeginetan Silver Standard

Aegina was the first Greek city-state to make use of techniques for coining precious metals developed on the Asian side of the Aegean Sea. In the ninth and eighth centuries b.c. Aegina was the leading trade center in Greece proper, and carried on a lively trade with the cities in Asia Minor that first developed methods of coinage.

Whereas the cities of Asia Minor coined a metal called electrum, a mixture of silver and gold, Aegina coined silver exclusively. Silver was readily at hand from the Greek islands and the mines of Laurium in the south of Attica. As the premier commercial power on the west side of the Aegean Sea, Aegina monopolized the shipment of silver and was the logical place for minting silver for the export trade. The value of silver coinage rested on the importance of trade with Egypt, where silver was valued above gold.

Aegina probably began striking silver coins around 750 b.c., and its coins bore an image of a turtle or tortoise, the symbol of Aegina. The opposite side had only a punch mark. Greek tradition bestows the credit for this first Greek coinage on Pheidon, tyrant of Argos, whose rule cannot be precisely dated.

Aeginetan silver coins superseded an iron spits currency that circulated in ancient Greece. Aristotle, writing in the fourth century b.c., gives the following account of the development of money:

As the reciprocity in importing articles that were wanted and exporting those that were surplus spread more widely, they were obliged to employ coin. For it is not easy to value the necessaries of life one against another: so, for purposes of exchange it was agreed to give and receive some commodity that was readily adaptable for practical use, such as iron and silver and so forth: this was first regulated simply by bulk and weight, but finally had a stamp impressed on it, to save measuring it: for the stamp was meant as an indication of quantity.

(Aristotle, 1952)

Aegina gave to Greece two denominations of coinage that were to outlast the Aeginetan standard—the obol, derived from the Greek word for “spits,” referring to iron spits, and drachma, equal to six obols, or a “handful” of six spits. The standard coin of Aegina, called a stater, equaled two drachmas in value.

Aegina seems to be the first state to coin money and stand ready to maintain its value in terms of an objective measure, such as six spits. The cities of Asia Minor contented themselves with letting their currency fluctuate in value with the market for precious metals.

In the seventh century b.c. the Greek city of Corinth introduced its own coinage, improved in many respects and rivaling Aeginetan coinage as the favorite medium of Greek commerce. The Aeginetan coinage was losing ground to Corinthian coinage in the sixth century b.c. when Athens began its own coinage, which soon dominated Mediterranean trade.

Act for Remedying the Ill State of the Coin (England)

In 1696 Parliament enacted the Act for Remedying the Ill State of the Coin, after one of the famous currency debates in history that pitted those who favored return to a historical currency standard against those who favored ratifying past depreciation.

Toward the end of the seventeenth century the old hammered silver coinage accounted for the bulk of England’s circulating coinage. The coinage was worn and clipped, some dating back to Elizabeth I, effectively reducing the silver weight relative to the face value of each coin. Freshly struck milled coins disappeared as fast as they left the mint as Gresham’s law played itself out—bad money chasing out good. The milled coins, immune from clipping, enjoyed greater silver value and were far more beautiful.

Once the government committed itself to recoinage, two schools of thought rose up about the principles that should guide it. John Locke, the famous philosopher who influenced the American Revolutionaries, stood firmly in favor of maintaining the historical weight standard of English coins. Locke’s proposal required that the lost silver content of worn and clipped coins be restored in recoinage, substantially increasing the government’s costs. William Lowndes, secretary to the Treasury, proposed recoinage at a lower silver content for a given face value, bringing the silver content of freshly minted coins into line with the silver content of worn, clipped coins. Wear and clipping had on average cost the coinage 20 to 25 percent of silver content. Supporting Lowndes’s proposal were numerous historical precedents for stabilizing depreciated coins at current levels. Locke described the proposal to reduce the silver content relative to face value as “a clipping done by public authority, a public crime.” Lock was also concerned that reducing the silver content enabled the government to repay debt with cheaper money.

Sir Isaac Newton, another towering figure who was a player in this drama, served as warden of the mint during recoinage. Newton appears to have favored devaluation, and apparently foresaw that refusing to devalue would increase the amount of silver each gold coin would buy, increasing the value of gold at home, causing gold to flow in and silver to flow out.

Parliament sided with Locke, and the Act for Remedying the Ill State of the Coin, with minor exceptions, mirrored Locke’s views. The cost of the recoinage surpassed all expectations, totaling 2.7 million pounds, more than half of the government’s revenue. In the spirit of the Enlightenment, the government enacted a tax on windows to help pay for the recoinage. In addition to the Tower mint, several branch mints were pressed into service, and the recoinage was completed in three years.

The mechanics of the plan for calling in the old coinage caused no small amount of discontent. For a certain period of time, the government accepted at face value worn and clipped coins for the payment of taxes and government obligations. Landowners with

property taxes to pay, and merchants with customs’ duties to pay, benefited from the plan, buying up worn and clipped coins at a discount and paying their taxes with them. Wage earners and the poor had less need of the money to pay taxes, and often found the soon-to-be discontinued money accepted only at a discount by shopkeepers.

The act struck a blow for upholding the sanctity of a monetary standard, even at great expense, to protect the interest of creditors, especially when government was a major debtor. Newton correctly anticipated, however, that the act would put England on the road to the gold standard. Gold flowed into England, where it could purchase silver cheaply. The silver was then sold abroad at a profit.