A Short History of International Currencies: Part 1

This fabulous history of currencies was written by our very own “secret” investment advisor. Who has graciously allowed us to reprint it here for you.

You’ll learn about the multitude of empires that have come and gone and how their money was crucial in their rise and fall.

As he says if you like history you’ll love this. But if you like money you should enjoy it too…

A Short History of International Currencies: Part 1

Money From Long Ago:
How it Can Lose Its Value and How it Can Soar

Here I am back in Monaco and it’s dreary and freezing outside. It was just a few days ago, but the sun of Palm Beach and Costa Rica—-[Thanks Adens, for your wonderful hospitality]—seems like so long ago.

It makes you realize that the sun is always shining somewhere. And this is not just meant literally either. I’ve noticed that investment-wise “the sun is always shining somewhere” as well. There is always a bull market in something, even if it just means staying in cash. If everything else is falling, it means your cash is worth more today than it was worth yesterday.

Broadening out this concept further, since I was in high school I have been fascinated by the rises and falls of civilizations, especially as symbolized by money. It not only interests me to see great powers —and their monies— rise and fall. I am also interested in learning how other places stepped into the vacuum as the great civilizations decay.

It used to be thought, in the West at least, that with the fall of the Roman Empire the world was plunged into the Dark Ages. But we now know that other parts of the world saw golden eras at this same time.

This was again forcefully brought home to me as I stood amidst the Mayan city of Copan, now close to the Honduran/Guatemalan border. This intriguing civilization had a mixture of advanced science and seemingly barbaric practices—-the calendars they came up with are extremely accurate, but after ball games either the winners or the losers had their heads chopped off (we don’t know which–it could have been the winners as it was regarded an honor to sacrifice yourself to the gods).

But what interested me most was the fact that the Mayan civilization reached its Golden Age, or Classic Age, from about 250 AD to 800 AD. This was precisely the time when Western Europe and its money fell into chaos.

It is not clear what the Mayans used for money: apparently gold and silver meant nothing to them (though jade was prized) and it might have been a sophisticated barter economy. But most other civilizations have always used some form of money. And I have found that if you “follow the money” you are able to follow history and learn from it.

History has taught me much. For instance, it is amazing to me how fast the currency of the globe’s greatest power at any one time can utterly lose its value, bringing chaos as well as opportunity in its wake.

I think we are in one of those periods today. The very idea of the US dollar losing its role as the world’s reserve currency was laughable even three years ago. Now it is being seriously discussed. How likely is this? What are the signposts up ahead that can tell us the direction things will take? If you are on a road trip and reading signs, it helps to know where you have come from. It’s just the same when the journey involves money. That’s why I thought it would be valuable to look at the story of money and mankind.

I love this subject, but I know that history is not everyone’s cup of tea. So I will try to make it as painless as possible. But while not everyone loves history, most people love money. Maybe you are one of them. If so, then this is your lucky day! After all, when you love something, don’t you want to know all about it, starting with where it came from?

What is Money?

If you were all alone in the world or on an island by yourself, you wouldn’t need money. You’d have to make due with what you could catch or grow for yourself. If there were others around, you could do what the Mayans did: barter. You could be a fisherman and trade some fish for shoes from a shoemaker. But what if that shoemaker hated fish and was a vegan? You’d have to find a grower of vegetables who wanted your fish and then trade those for the shoes.

Barter is simple, but it is not very efficient. It’s far better to have something that everyone wants, something that all people can trade with. But what would that something be?

Anthropologists, archeologists and historians have discovered that for most every group of people that have ever existed, what was chosen as money had at least five properties to it.

1. It had accepted value to everyone. That’s obvious. But what is less obvious is that in all societies, what emerged as money was some commodity that was valued by people for itself first, before it became money.

2. It was durable. What’s the use of money if it falls apart in a short time? It had to hold
its value as long as possible. That’s why lettuce has never been money, though in America during the 1930s, this word was used as slang for money since dollars were green, thin and “leafy”.

3. It was easily divisible. It could be broken down into small pieces or amounts for small purchases.

4. Even when it was broken down into small pieces, however, it still had to be consistent in value and quality. One unit of it, gram, ounce or whatever, had to be the exact same as any other unit of the same weight or appearance. Otherwise, there would be chaos.

5. Finally, money had to be convenient to use. That’s obvious, too.

Gold and Silver

Hundreds of commodities have been used as money, from seashells to paper. But time and time again, in civilizations far and wide, two things stand out: You rarely find a time or place where either gold or silver, or both, were not regarded as best having what it took to be money. In this way, the Mayans were the exception that proves the rule.

Take the above five attributes of money and both of these metals fit the bill. The paper we now use as money only developed as a convenient substitute for having to carry around lots of gold or silver. When they were first issued, it was clearly written on them that they entitled the bearer to be paid metals on demand.

Paper money used in this way can indeed be valuable, but only as long as people have confidence in it, or in the ones who print it. On the other hand, no one today has confidence that the Byzantine Empire has any power at all, yet the gold coins minted by it so long ago still have real and increasing value.

Archeologists are almost monthly increasing our knowledge of past civilizations, but as of now it appears that the Greeks, about 800 years before Christ, developed the first money that has truly lasted. To be sure, the Babylonians came up with the idea of stamping bars of gold and silver with their weights and fineness, but as far as we know these were just the markings of the particular metals dealer or trader. Outside of the immediate community, these markings could not be trusted and certainly no government stood behind them.

A History of International Currencies

We owe the Greeks much. They have been called the clearest thinking of all people in history, and where money is concerned it is hard to argue with this. All of a sudden, they started minting coins that quickly became the first “international currency”. Not only did they meet all the five attributes of money, but the money they made was often stunningly beautiful. Many coin experts concur that the most beautiful coin ever made was minted by Greeks in Syracuse (modern Sicily) in about 350 BC. The front, or obverse, is the head of Persephone surrounded by dolphins, and the reverse is a charioteer with Nike –Winged Victory— crowning his win.

The very objects on this coin give an idea of the universality and timelessness of appeal of Greek money, and for the first time in recorded history money began to exert its fascination over the minds of men. Non-Greeks thousands of miles away treasured this money and Greek coins have been found in China, India and northern Europe. In fact, even though Rome soon rose to eclipse Greece, most Asians kept using Greek money for centuries.

The main currency of Greece was the Athenian drachma. It was a silver coin, and its weight and quality stayed amazingly consistent through the centuries. From Solon, around 600 BC, to Alexander the Great, around 300 years later, it stayed exactly 67 grains of fine silver (there are 480 grains to one troy ounce, so the silver drachma was about .1375 of an ounce). This was the money Alexander brought to India, and from there it traded yet further east becoming the monetary standard of all Asia. And even as Greece declined and was finally absorbed into Rome, its value did not fall much. By the end of the drachma’s life, it had only declined to 65 grains of fine silver. This is an extraordinary achievement. No other civilization has ever had an international currency that stayed the same value —or pretty much so, since a fall from 67 to 65 grains of silver is a loss of less than 3%. And this was not only during the period of its greatest influence, but even as it declined in power over a period of six centuries.

Whatever the secret of the Greeks was, no international currency since then has ever been able to keep its value, even as the government issuing it started on its seemingly inevitable decline.

Certainly the conquering Romans were astounded at how the Greeks had mastered money. They paid Greece the ultimate monetary compliment by fashioning their own money, the Roman denarius, as an exact copy of the drachma right down to the size and weight.

Rome, Another Story

But Rome was a very different place from Greece. Rome had brutal military might and conquered most of the known world, but it could never keep its monetary system stable for long.

In 277 BC the denarius was born. Rome was still a Republic then, though through the kind of “preemptive” wars we have recently seen in Iraq, they had conquered much of the world even before they officially became an Empire. Rome’s international money began to decline soon after it was introduced. But for the first 250 years or so the decline was modest. From the original 66 silver grains, by the time of Julius Caesar (or the birth of Christ), the value had only declined 10% to 60 grains. But soon afterwards monetary chaos began. Keeping money’s value clear and stable were never big priorities for the Imperial Romans. Indeed, their monetary system was a mess.

At the top was gold in the form of the aureus, made under Caesar’s orders to be 125 grains of gold: about the same weight as the old US 5$ gold coin. Gold was used to pay the army and the Emperors themselves. Then came the real money of international trade, the silver denarius. Finally came the copper coins, used by the poor people in daily life. There was never any official ratio between these different metals.

The history of Roman finance and money makes for depressing reading and sounds disturbingly like that of modern day America. Over time, first the poor and then the middle class got ever more heavily in debt. To make it easier for debts to be paid or simply to steal, the Emperor Nero in 54 AD started to inflate and debase the value of Rome’s money. The gold coin was devalued all at once by 11% and the silver one by 14.3%.

Nero did this by reducing the amount of gold or silver in the coin and increasing the amount of base metals, but having it still be officially the same. It was very similar to what happened to American silver coinage in 1964, with one important difference. In the US in the 1960s, all the silver was taken out of the coins at once. But in Rome it was a gradual process.

After Nero Emperors competed to further debase their currency. Even during the “golden age” of Rome, gold and silver were steadily being removed from the money and just as steadily money lost its value. There is also a parallel to modern America in this as well. After the US went off the gold standard in 1933, the US dollar began to lose its value. It continued to do so during the 1940s and 50s, and real assets like food and homes and cars needed more dollars to be bought, meaning that the value of each dollar declined. And yet we are accustomed to thinking of this time as the heart of the American Century.

(This fabulous history of currencies was written by our very own “secret” investment advisor, who graciously allowed us to reprint it here for you.

Note: Want to learn more about who our “secret” investment advisor is? And how you could benefit from his uncanny ability to enter and exit not just the precious metals markets but many other markets too, at just the right time? Then go here to learn more now.)

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Follow History through the Money

You can clearly follow the decline of Rome through its money. Exactly 150 years after Nero’s first devaluation, the denarius, formerly made up of 99% silver, only had 50 to 60% silver. During the reign of Septimus Serverus, which started in 193 AD, a real turning point was reached. He reduced the silver content of the denarius to 26 grains of silver from 32 grains (a 61% devaluation from the original 66 grains).

Though the devaluation had been gradual, this act was the straw that broke the camel’s back, the “tipping point”. Within a very few years, the denarius stopped being the world’s leading international currency. After Serverus, it completely stopped being accepted by the rest of the world.

India was the first foreign country to stop accepting the denarius and insisted on payment in pure gold. And then the rest of the world followed. This blow to Roman trade translated into a huge decline in Roman living standards. Imports became beyond the reach of any but the very wealthy.

When India started to insist on gold, the Romans began to cheat again. They issued “gold” coins that had up to 50% base metal. But this fooled no one for very long, and soon India and the rest of the Asian world stopped accepting these.

I want to stress just how fast this all happened. By the time Serverus was crowned in 193 AD, the denarius was still the international currency, even though for the last few generations it had gradually been devalued. But a mere 22 years later, in 215 AD, India first rejected the denarius and then the devalued gold coins.

And of course the world moved much slower in those days, with trade between Rome, India and China taking months. Seen in this light, 22 years was very fast indeed.

After 215 AD and the final loss of Rome’s position as the owner of the world’s currency, Rome’s trade, economy and living standards went into tailspins. The “silver” denarius lost so much more of its value that even Roman’s wouldn’t take it. Emperor Caracalla introduced a new silver coin, the antoninianus, but immediately started to remove silver from it. Within 45 years, by 268, this coin was nothing but base metal with a thin silver coating.

I must stress again how quickly and completely Roman living standards fell from the time that the rest of the rejected its money as the world’s currency. I want to quote from a book written in 1934, called Money and Man by Elgin Groseclose. The year is important as it was during the depths of America’s Great Depression. And yet in that year Groseclose could write the following:

“The situation of the Roman Empire in the latter half of the third century [i.e., 250 to 300 AD] was a condition of depression and despair to which the modern world, with its dips in the business curve, its paroxysms of commercial expansion and contraction, can present no parallel. Trade was stagnant, the imperial treasuries were empty, money was depreciating, and trade, such as existed, had almost reverted to a barter basis. Everywhere land was falling to waste, untilled, empty, gaunt, the water courses dried and the poplars sere and yellow, the walls crumbling under the elements, the huts and cottages deserted and succumbing to ruin. Peasants had forsaken the soil, seeking the greater safety of the town or the city, where, if employment was not to be had, there was free corn and amusement. The vast estates, which had been built up under the influence of slave labor, the imperial system, and commercial economy, were untended and falling into desuetude, the slaves running away and revolting, the hired managers, sensing the ‘end of things’ and the futility of effort, hastening to line their pockets with such profits that could still be eked out, and the patrician owners, fearful of the stability of the regime, taking their liquid capital, their gold and silver and jewelry and hiding it against the day of inevitable collapse.” (p.28)

We know a lot about those times. The story is told to us by the many Roman coins that have survived and come down to us, many in excellent shape. There is a reason for this good condition. They were rarely used.

Think about it and put yourself in a Roman’s place. First, he had pure gold and silver coins, and then gradually coins started to come out with ever-less precious metals in them, yet they were officially worth the same as the ones of pure gold and silver.

Would you trade your pure silver denarius for goods when you could use the base metal ones? Of course not. The real gold and silver coins went into hiding, exactly like the pure silver coins quickly did in 1965 after the copper-nickel “silver” quarters and dimes came out.

And because these real gold and silver Roman coins went out of circulation and were kept safe, we still have them today. Any collector can own them and feel the story behind them, the glory that was Rome falling apart.

But there is another, more poignant story for any modern day coin collector. Remember that the gold and silver coins were hoarded by the rich. They had been going out of circulation and hoarded starting in 54 AD, when gold and silver coins began to be filled with copper. Copper coins were the money of everyday life for most people. But by 300 AD, even these coins were debased with metals worth even less than copper. For the poor, this was truly chaos.

As Groseclose puts it: “A pathetic commentary on the times is the large quantity of Roman money that went into hoarding, the finding of which has enriched the cabinets of collectors. The hoards secreted toward the end of the third century consist almost entirely of copper. In the patina encrusted pieces one reads the frantic uncertainty of the age—the emperor an embezzler, the government a liar, and frightened men clutching at bits of copper as the sole reality in a crumbling world.” (p 41)

The history books tell us that Rome fell in 476 AD. This just shows how long the Praetorian Guard of the Roman army was able to terrorize the population and install and remove emperors at will. But all that was truly great about Rome had died over two centuries before. In fact, though historians never date it from the time Asia stopped accepting the denarius as the world’s money, from that point on Rome’s final collapse was only a matter of time.

To sum up, we have seen the rise and fall of the first two great empires that had money: Greece and Rome. The experience of each is extremely different. Greece declined “gracefully” and its money never lost its value. Rome declined violently and had its money collapse completely. However, it took time….400 years for its currency to lose its value completely. The stored-up goodwill sound Greco-Roman money of the rest of the world was such that there had to be generations of devaluations before Rome’s largest foreign trade partners got fed up and stopped accepting the currency.

The US Dollar Loses 92% of its Value Since 1971

The US dollar has been depreciating for generations. Seventy years ago it was first devalued from $20.67 a gold ounce to $35. Then 35 years ago the devaluation started gaining strength. The dollar has lost over 90% of its gold value since August 15, 1971.

More to the point of lessons for today, once again the world’s currency has been devalued for decades. And once again, Asia is its most important trading partner. What if, once again, Asia stops accepting the world’s currency? History never repeats itself exactly, but if you are looking for signposts to the future, then the day when India, China and the rest of Asia that is still tied to the US dollar slip off the peg, will be a very important one. Asia, particularly, is now facing the fact that they are holding a depreciating currency for nearly all of their currency reserves and they are moving to diversify. As I write this, it has just been announced that the central bank of South Korea will diversify its reserves out of the US dollar, at least to some extent.

But just as the old international money was falling apart, another was being quietly born and this one would have a much more healthy life than the money the Romans came up with. The story of how this happened will be told in the next issue.

The Dollar of the Dark Ages

A few kilometers up the hill from where I live is one of only two remaining “Roman Trophies”, designed to celebrate Roman greatness. This one (the other is in Romania) is called the Trophee des Alpes. It was built around 5 BC when the young Roman Empire had clearly conquered the Alps. Now partially restored, you can still sense the pride –and maybe arrogance– that built it.

A bit down the hill from my home is another type of Roman monument. This one, though, is from a very different era. In the gardens of the National Museum of Monaco lies a sarcophagus (ornate stone coffin) of the period just before 300 AD. Death symbols are written all over it, as one would expect.

But knowing the conditions of the Roman world in both those times, the extremes of those two living reminders on either side of me become poignant. From one to the other they symbolize the peak, as well as the collapse of Rome.

History is never very far from where I live and it can jump up on you quickly. The man who installed my satellite TV dish lives just down the street from that Alpine Trophy. He was digging in his yard about three years ago and found a small cache of Roman coins.(This is not uncommon. It happens all the time and accounts for the relatively cheap prices that Roman coins can be bought with: $200 will still buy you a very nice collection.) These coins were in a jar -obviously someone’s savings. The coins were from when Roman money was honest, so they were much more valuable then if the stone coffin had somehow rendered up coins from its era.

As we saw in Part 1, by 215 AD the rest of the world (India and Asia) had stopped accepting new Roman money as the international currency of trade. They had become too debased with base metals and were no longer pure gold or silver. You simply don’t dig up Roman coins minted after 215 AD beyond the borders of the Empire because by that time no one outside of Rome would accept them.

After that, Roman living standards started to fall fast. By 300 AD there was true chaos. Money was losing its value at a breathtaking rate. Ever more of it was needed to buy the same goods and services. Put another way, prices were soaring. As a response to this, in 301, Emperor Diocletian decreed a comprehensive system of wage and price controls. Every good or service you can imagine (from hair cuts to race horses) had its price set literally in stone and was not allowed to increase. Meanwhile, the currency continued to be debased. Prices in reality had to keep rising. Now real misery ensues: black markets developed for everything, and everyone broke the law many times a day just to survive. The Empire began to come apart at the seams. About this same time, Diocletian does the one other thing history remembers him for… Realizing that the Empire was getting too hard to manage, he divided it for administrative purposes into East and West. In just a few years, this would have tremendous consequences for international money.

Making the Same Mistake All Over Again

However, before we get to this, a word about wage and price controls. Diocletian’s Law of the Maximum was such a disaster you would think that smart policymakers ever since would have learned the lesson and never put them on again.

But you would be wrong. The last time inflation reared its ugly head, in the 1970s, then- President Nixon put them on, not once, but twice. Both times they failed and shortages quickly developed. When they were removed, prices soared to make up for lost time. We may be coming into a period where inflation again accelerates. If so, I would not be surprised to see price controls again instituted. No one in power ever seems to learn from the past.

One thing: if they come again, there will be almost guaranteed profits for those who buy the right commodities in the right way. My first foray into the “soft” commodities markets (e,g, soybeans) came in the summer of 1973, when Nixon’s second set of price controls came on. It was a rewarding time for me, if not for the economy, mangled as it was by the maladroit controls and rising inflation.

A New Money is Born

Back to our story,,, For the first time in human history, a world currency had collapsed, and a new one was born. So this period of a very few years —a mere 20 years or so, when things changed radically– is very interesting to me.

It is impossible to talk about this time period without looking at the early Christian church. Its fortunes are tied to those of Rome and Byzantium.

As Rome began to crumble with poverty, brutality and dishonesty permeating every aspect of everyday life, the Christian church— not too long before a persecuted fringe group— quickly gained astonishing popularity.

But maybe its growth was not so surprising when you consider the message it proclaimed. In a period of growing hopelessness and chaos, that message was simple, but revolutionary; that of a brotherhood of man watched over by a universal loving God and a promise of a better world after the hell of this one. Bands of Christians began to form communities that gave its followers the only condition of organized humane treatment that could be found.

However, as the fourth century (300 AD) opened, they were still subject to Roman persecution. In 303, Diocletian began a new campaign against them, partly using them as frustrating scapegoats for the failure of his massive price controls. But just like his controls on prices, his persecutions backfired and even more Christians were created.

This was the “tipping point” for Christianity. In 305, a frustrated Diocletian took the rare step of abdicating as Emperor and caused his co-Emperor in the East to do likewise. The next year, Constantine was declared co-Emperor.

Constantine turned out to be one of the rarest men in history. He not only had great military prowess, but he was a superb politician who saw the writing on the wall long before most others.

He had rivals to the throne and war broke out. But soon he came to the crucial realization that if he could win the Christians over to his side, he could win. After centuries of persecution, he grasped that the Empire needed the Christians more than the Christians needed the Empire. At the Battle of Milvian Bridge in 312, a legend was born. Though it was not mentioned at the time, years later the story was told that the night before the battle Christ appeared to him in a dream and said that if he tells his soldiers to mark crosses on their shields, they would win. He did, and they do.

Constantine’s grasp of actual Christianity was somewhat superficial, and he was never baptized until he was nearly on his deathbed in 337. In fact, while I am writing this I am looking at a copper Roman coin minted in southern France (Lyon) with Constantine’s picture on the obverse and Sol, the Sun God, on the reverse. Sol is naked, except for a cloak over his shoulders, and he is raising his hand in blessing. The motto on the reverse lets all know that Sol is a friend of Constantine: SOLI INVICTO COMITI, or Sol Invincible Comrade (of Constantine). At the same time, coins were minted in the Eastern part of the Empire with Constantine on one side and Christ with a crown of thorns on the other.

Yes, he clearly played both sides of the street. But the existence of both these coins graphically points up the transition phase of not only Rome, but money itself. The year after his battle, in 313, he issued the Edict of Milan, which ended the persecution of Christians. For the first time, there was religious tolerance of both Old Gods and the New One.

Over the next decade he went to war with his main rival to the Roman throne, but gradually won. Finally, in 324, he defeated and executed his rival and was proclaimed sole Emperor of Rome.

The next year, 325, was a vital —even revolutionary– year. Constantine did three things:

  1. HemadeByzantium,ontheHellaspontwhereAsiaandEuropemeet,thenew capital of the Roman Empire. He renamed it Constantinople. (Today we know it as Istanbul.)
  2. TheCouncilofNiceamadeChristianitytheofficialreligionoftheEmpire.From persecuted sect in 303 to official religion 22 years later, it was almost dizzying. In fact, this may have been a turning point of Christianity in another way. In becoming an official power, it lost the very independence and informality that were so attractive in the first place. This change, as we shall see, later came back to haunt both it and the monetary system created along with it.
  3. This monetary system was extraordinary. Constantine created the gold “solidus”. The very name evokes a yearning for solid, honest money. For its model, he reached directly back to the last solid money in the world, the Greek drachma. As that coin had weighed 65 grains of silver, the ‘solidus’ weight was fixed at 65 grains of gold. One has to remember that all through the Roman triumph, Greek coins had remained in circulation in the Eastern part of the Empire, where modern day Greece and Turkey are. In fact, Greek was the spoken language by the people there not Latin. The Byzantine Empire –as it came to be called– gradually realized this and changed the official language from Latin to Greek.

In Part 2 of “A Short History of International Currencies” you’ll learn about the Byzantine Empire and the old Islamic Gold Dinar. Plus the possibility of a future one? Go here to checkout Part 2.

(This fabulous history of currencies was written by our very own “secret” investment advisor, who graciously allowed us to reprint it here for you.

Note: Want to learn more about who our “secret” investment advisor is? And how you could benefit from his uncanny ability to enter and exit not just the precious metals markets but many other markets too, at just the right time? Then go here to learn more now.)

Secret Investment Advisor Banner


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