Prior to written documents being exchanged as representations of mutually agreed perceived value, the concept of money arose amongst multiple trading groups. This may have taken place prior to the credit/debit system as a substitute for direct barter. Money, whether composed of species of shells or artistically created beads, metals, etc., was a commodity created specifically for enabling exchanges of value. As such the money object had to have intrinsic value in and of itself; it did not represent someone else’s liability to the current holder. Various forms of money came to be exchanged, one for the other, again at an individual mutually agreed perceived value, and so the new economic technology of financial service had been invented.
All these advances along with humanity’s other technological and energy-usage innovations coincided with broader communications and larger communities and ever greater market driven specialization in production of goods and services. A new category of services, government, developed very locally and expanded just as widely and rapidly initially as methods of protecting and marshalling markets amongst and between groups. Regulation of market activity was enhanced greatly by the conversion from money as valued token to metal money that had immediate utility and more generally agreed upon intrinsic value. Both private metal money and governmental metal money coexisted, but that based on some level of accepted governance gradually extinguished, often by edict or force, private sources. After all the local lord, prince or king “guaranteed” the coinage’s metal content with inscriptions, symbols, or faces stamped thereon. This was key to further expansion of the benefits of the division of labor, or specialization, as Jean-Baptiste Say has written, as it requires a medium of indirect exchange, i.e., money. As Nathaniel Brown wrote in a November Mises Wire article, “money is one half of all economic exchange”.
All economic exchanges, or markets, are ultimately expressions of the preferences of individuals who agree to those exchanges. All individuals see the efficiencies of available resources (goods, labor, knowledge, and services, now including financial services) change through resource supply and a desire to maximize one’s individual profit and minimize cost. This establishes prices in the market. Those prices, established by individuals in real time, guide consumers to efficient alternatives and producers towards more valued and profitable products. Despite the best efforts of newly evolving governmental entities this disseminated optimization of resource supply and use could not be (and still cannot be) centralized. But the type, value, and supply of money could be. Thus, the ever greater control of actual money (gold, silver, copper, etc.) taken by broadening and evolving governmental authority.
Individuals, based on seeking the greatest individual advantage in markets, may have invented inflation, but governments quickly followed. Inflation is the debasement of the purchasing power, the exchangeable value, of money. Individuals quickly learned to “shave” the edges of coinage since the metal had intrinsic value itself. The crudeness of original coinage led to easy attempts at forgery using less or more base metal. Minters quickly solved this problem by milling the edges. However, the ever-growing desires of governing entities to enhance their control over subject populations as well as the recognition that the economy could not be taxed out of existence led rulers to adopt the methods of the illicit debasers. The hidden debasement of real money (precious metals have no “price”, only purchasing power or intrinsic value) by diluting its precious metal content began and accelerated with each new ruler and often within the same time in power, often to finance wars of acquisition. Ruling classes indirectly learned the Cantillon effect, pointed out in the 18th century by the French economist who noted that the first receivers of this expanded supply of “money” benefitted from its perceived initial value at the expense of all subsequent receivers, the populace at large. The public, via von Mises’ Regression theory, accepts this expanded money supply as though it retained its original, pre-expansion value. The enlarged more readily available supply of “money” results in rising prices (lower purchasing power) for goods or services, caused by true inflation (of the supply of “money”). Subsequent users of this new money could purchase less than the initial users. A new kind of silent tax on the population had inadvertently been invented, a primitive Ponzi scheme. This process was central to the decline of the Roman empire in the early centuries of the common era. It also explains the very gradual and silent transfer of wealth to the wealthiest classes of any society, including our own.
Such expansion of the “money supply” readily allowed further expansion of credit and other new financial instruments of exchange—letters of credit, etc. Banking developed beyond the level of money lenders or exchangers and coalesced within and beyond nation-states. As trade expanded intra-nationally and internationally, banking developed newer and broader methods of value exchange that required more sophisticated methods of tracking and agreeing upon relative values of different and ever-changing prices of commodities and monetary values. Technology answered this need with massive improvements in transportation and communication that paralleled the progress of industrialization (exponential efficiencies in production and consumption of goods). While marketplace actors and business owners were always free to choose the form of payment acceptable when conducting a transaction and did so with continued barter and credit parallel to the growth of money as an exchange medium, governments sought broader and tighter controls on these exchanges to help fund their treasuries and future unfunded obligations.
Somewhere within this process of invention of non-money-based financial instruments the birth of “legal tender” occurred. As always, the government tries to imitate the efficiencies of the market, but due to its inability to know the market, fails and falls back on compulsion. Economic observer Emile Woolf notes legal tender may be loosely defined as “anything recognized in law as a means of settling a public or private debt or meeting a financial obligation, including tax payments, contractual payments, and legal fines or damages”. The government rules “that which is Caesars’” must be rendered only in its self-defined legal tender, and all private market actors must also accept that same as payment. Initially governments reassured their populations by making legal tender a paper convenience, a representation of money readily exchangeable for real money such as gold or silver. However, completely free debasement of that currency cannot occur without lowering its exchangeable value officially and frequently, with adverse consequences as trade amongst nations became routine. Coincidentally banking came under governmental control as part of controlling the “means and methods” of market activity. Economics as a “science” was invented; first as the study of individual self-advantaging behavior and then as the study of the market behavior of a whole nation or other group. That which can be studied can be quantified; that which can be quantified is subject to intervention.