Recently, a Snoopy snow cone maker was sold on Ebay for $150. The bidding was out of control. But somewhere out there, someone got exactly what they wanted: a piece of plastic that grinds ice. It is doubtful that anyone discussed the usefulness of this ice grinder in relation to its price. But what's important is that the buyer and seller came together (virtually) and agreed on a price. As novel as this transaction might seem, Ebay didn't pioneer this idea. Rather, this transaction is a modern illustration of how the Romans viewed the concept of commerce in their economy more than 2000 years ago. So, if you want to understand the economic underpinnings of the market today, a brief history lesson is in order.
The key to understanding the early economies is that the idea of money and economy arose independently around the globe, at different times. Eventually, most cultures and societies adopted similar economic tenets. However, the evolution of these differing economic systems provides for an interesting comparison.
Societies had vastly different views on what items were considered valuable. Inherently, money could not be defined in the early days of economics because there wasn't a standard unit of measure. Societies moved from a barter system to a monetary system mainly out of non-economic causes. Prior to money, anything of perceived value was used to trade. Some examples of early money were amber, beads, eggs, feathers, hoes, ivory, jade, nails, quartz, and Manillas. (Manillas were ornamental metallic objects worn as jewelry in West Africa and used as money as recently as 1949.)
Commodities, such as foodstuffs and furs, evolved as a preferred barter tool because of the high value, ease of storage, and durability. Further, because everyone needed them, commodities had a high trade value and became commonly accepted.
The ideas of money and banking developed as early as 3000 BC in ancient Mesopotamia. The Mesopotamians established "warehouses" of sorts that could store valuables ranging from cattle to food and precious metals. The Egyptians had similar ideas five hundred years later.
Coins evolved out of a need for a uniform commodity measurement. Translated, Drachma means "a handful of grains." Grains were a common unit of measure in the ancient world. Coins, as we know them today, started in Asia Minor with the Lydians, stamping round pieces of metal as a guarantee of their authenticity and purity. The idea of minting money later spread to mainland Greece and Persia in 640 BC. Prior to this point, the Greeks were using nails as a form of currency.
Inflation first became a problem in 407 BC, when the city-state of Sparta captured the Athenian silver mines and freed 20,000 slaves. As a result of the Spartan's actions, Athens was faced with a shortage of silver coins. So, the government of Athens started issuing bronze coins with silver plating. This idea backfired, as the "good" coins, disappeared from circulation. This resulted in inflation, as people viewed the silver plated copper as less valuable than the pure silver coins.
In 390 BC, the Gauls attacked Rome. The geese on the outskirts of the city were startled by the coming of the invading army, and in turn started cackling. This alerted the city's defenders that the precious metal reserves were under attack. The Romans successfully defended the structure and later erected a shrine to Moneta, the goddess of warning. It is from Moneta, that the word money is derived.
Alexander the Great (356 - 323 BC) conquered most of the known world and was largely responsible for bringing about monetary uniformity. The Greek city-states were competing for dominance with each other. The competition stemmed in part from which collective could establish the most widely accepted currency. In this manner, economic power could be established and maintained. Alexander, in establishing common rule also brought about a common currency. But in reality, early coins were just as much a form of propaganda as they were a unit of trade.
Prior to the advent of coins, the Greeks and Romans were still using a barter system that utilized metal nails that had little or no intrinsic value. Following this line of thinking, one might assume that money itself had no value. Essentially, this is still true today. The dollar bill is intrinsically worthless, but the belief that it can be exchanged for goods and services is what keeps the monetary system going.
This concept helps to explains Aristotle's views of money and intrinsic value. Aristotle began the philosophy of thinking about money as an economic tool. His line of thinking established a much more modern trend towards economic study.
Aristotle (384 BC - 322 BC) was the first to philosophize about economics, thus creating a barely discernible line between philosophy and economics. In the process, he most likely confused a great many people. Aristotle had no concept of the Internet or of Snoopy snow cone makers, but he did believe that everything had an intrinsic usefulness to man. A notable exception to this paradigm was money. Aristotle believed that because money was a human invention, it had no value. Thus, silver in its pure form had value, but when minted into coin, it had none. Again, this idea may have arisen from the fact that Aristotle lived during the same time as Alexander the Great. Prior to Alexander, city-states were setting their own values and denominations of coins and money, leading Aristotle to believe that the whole idea was worthless.
The Roman philosophy of money and trade characterized their economy as a sort of ancient Ebay. The Romans didn't necessarily care what the products were being exchanged or how much they cost tp produce. The main concept of a Roman marketplace was that buyers and sellers could come together to establish a "market price". They accepted the fact that certain items held different values to different people. This concept helped to establish coins as a medium of exchange in their society. This notion was in conflict with Aristotle's belief.
The Roman army apparently didn't agree with Aristotle either because they allowed themselves to be paid using silver coins. When the army expense got out of control, the Romans started using credit to pay the armies, and invaded the gold and silver rich land of Persia as a way to pay off their over extended credit. This idea could extend to your wallet, if you encouraged the armies of Mastercard to declare war on Visa.
So, with regional economies slowly moving towards a monetary based system, the economic balance became quite delicate. Between 284 and 610, the world saw the continued decline of the Roman empire and the rise of the next world economic power, the Christian church. No where was the decline of Rome felt more than in England, where after Rome fell to the Barbarians, money all but disappeared for several hundred years while England reverted back to the barter system.
In the early days of the fifth century, the church Patricians, (early church fathers) adopted ideas similar in philosophy to communism. Their view of a Snoopy snow cone maker would most likely conclude that it did not "belong" to anyone since ownership of property and goods was generally discouraged by early church doctrine.
Later in the fifth century, The Patricians eventually did away with the ideas of communism, and made it acceptable for the church to own and accumulate property. This event foreshadowed the emerging power of the church and its ability to influence both politics and economics through the accumulation of wealth. In effect, it was now acceptable for the church to own a snow cone maker, but not you.
In 630, the Saxons introduced the first gold coins in England, producing them in significant numbers. This event marked England's return to a monetary system after the fall of Rome.
By 789, word of England's wealth had reached the Vikings, and resulted, not surprisingly, in a Viking invasion. This invasion would herald the beginning of a 300 year period when England was subjected to constant Viking attacks.
Meanwhile, in Ireland, the country was being occupied by the Danes, who would slit the noses of anyone unable or unwilling to pay the Danish Poll Tax. The slang persists to today, it's know as "paying through the nose."
In China, the Emperor Hien Tsung developed paper money between 806 and 821, as a substitute for copper coins. It seems that copper was scarce at the time, causing the Emperor to issue the paper money. By 960 paper money in China was becoming widely accepted. By 1020, the government began paying off potential invaders in silver. This action resulted in a shortage of silver. The Chinese government in turn responded by printing more money. While an appealing idea on the surface, the economic basis underlying a currency system had still not manifested itself in many early economies. This lack of integration generally resulted in runaway inflation. However, this type of currency mismanagement is still going on in many developing countries today.
By the twelfth century, Aristotle had been dead a thousand years, but his ideas and supporters lived on. Championed by St. Thomas, Aristotle's ideas had evolved into the idea of stewardship. The snow cone maker that was once bought and sold based solely on intrinsic value, now became the property of God. The former owner is now simply holding it, but because God made it, through humans, it remains a possession of God. The pervasive idea here was that the concept of ownership was a purely human invention. Since all things were created by God, then God must "own" all things. It is no wonder that modern governments began pursuing the separation of church and state.
The Thomists believed the "love of lucre" was a serious sin. Ideally, what they wanted were people involved in trade without the complicated moral issues of being motivated by profit. It seemed that as long as the Snoopy snow cone maker was being exchanged for the love of snow cones, there were no objections from the church.
The Crusades were probably a major influence on St. Thomas's philosophy. Widespread carnage in the name of God didn't seem to add much value to the cause. It is widely speculated that the Thomists may have been trying to stop the atrocities by offering forth the ideas of stewardship. Thus, if God owned everything, why kill each other over it?
Then again, it was this group that also believed theft was justifiable in times of need, a further extension of communistic ideas. In this case, should you be the "steward" of a snow cone maker, hopefully, no one will need snow cones more than you.
Flying in the face of the establishment of the time was the Franciscans and the Merchants. The Franciscans saw the problem with stewardship and intrinsic value. Under this scenario, the seller could set any price without justification. Rather, they felt prices should be fixed using labor costs and raw materials costs as a basis. The Franciscans wanted price controls and reasonable restrictions on commerce, lest the price of snow cone makers spiral out of control. Otherwise, without some sort of pricing methodology in place, prices could be inflated at the whim of the producer, without reason. That, of course, is the definition of a modern monopoly.
According to the Franciscans, the snow cone maker should have a set price, while the Thomists still believed in establishing a market price, even if there is only a single producer. These ideas were the initial precursor to the concept that monopolies aren't in the best interest of the consumer. Expansions on this theme led to the theory of competition and market forces influencing production and consumption decisions.
During the time the Thomists and the Franciscans were arguing over prices, the form of money was changing in Europe. Money was slowly evolving into largely credit based IOU's. In Italy in the late 1200's, banks were beginning to form as an outgrowth of trade groups and the extension of credit became more commonplace. By 1328, the Italian banks started financing both sides of the 100 Years War between England and France. Perhaps this was the earliest application of a "straddle" strategy. Incidentally, the 100 Years War lasted 125 years. Maybe the war was fought on banker's hours.
Along with the extension of credit, the money lending business grew in popularity; it was called usury. The church considered the idea immoral. It's unclear from what doctrine the church's position evolved, but people lent money anyway and eventually the church developed an underground network for lending money. Interestingly enough, usury today implies incredibly high, usually unfair interest rates.
The era of exploration saw Marco Polo (1254 - 1324) return to Europe and introduce the idea that coins were actually real money and their worth could be determined by their weight, whereas paper money really wasn't worth anything. This had a drastic effect on the English economy, as the idea was accepted relatively quickly and prices in England more than doubled overnight. With that revelation, coins again became the accepted medium of money again and IOU's and paper money became virtually worthless.
The 1600's brought civil and religious wars to Europe. Like a phoenix rising from its own ashes, Europe recovered and the reformation started with a marked change in economic power. The church was replaced with a growing population of merchants, who understood the inherent connection between government policy and commercial interests.
Once the connection between commerce and national prosperity took hold, countries began hoarding silver and gold in hopes of establishing better trading routes. It was expected that increasing profits would lead to increasing power and influence. As a side effect, the merchant class began to rise in the social and political hierarchy.
In this environment, prices adopted a market-determined bias rather than a religious or moral bias. Economists at the time were so enamored with the idea of market economies, that they petitioned governments to repeal any and all controls which they felt were restricting free enterprise. The French referred to this concept as Laissez-faire, loosely translated as, "do as they please." This revolution came to be known as Mercantilism.
Across the ocean in America, currency took a step backward, when in 1641, Wampum was declared legal tender in Massachusetts. Wampum were beads of polished shells strung in strands, belts, or sashes. Ironically, beaver pelts backed the value of the Wampum. If that wasn't enough of a blow to modern currency, tobacco was declared legal tender in Virginia a year later.
The next major leap in modern economics came in 1776 with the publication of The Wealth of Nations by Adam Smith. He is considered the father of modern economics. Smith introduced the theory of an "invisible hand" which encouraged people to unintentionally promote society's interests simultaneously with their own. At this point in time, the concept of an "invisible hand" influenced the public's desire to own and operate Snoopy snow cone makers.
The Classical school of economic thought grew out of the publication of Smith's ideas. Smith put forth the idea that a self-regulating economy satisfies the needs of the populace. He further identified land, labor and capital as factors of production. In this manner, land and slave owners became the country's wealthy elite.
Alexander Hamilton helped usher America out of the financial stone ages in 1789, when he had the Treasury create a bimetallic standard, to back paper money currency with gold and silver. The federal government in turn outlawed the states from printing their own paper money and standardized the currency of the United States, which ten years earlier had as many as 42 different forms.
Two years later, the First Bank of America was formed. The bank served as a depository institution for the government and private depositors, issuing notes redeemable for gold or silver. The next year, the coinage act passed, defining dollars as 371 grains of silver or 24.75 grains of gold. For a dollar, that was approximately 7/8 an ounce of silver or 1/20 an ounce of gold.
In the 1800's the Classical School of Thought faced a direct challenge, with the rise of Karl Marx (1818 - 1883) and the founding of the Marxist School of Thought. Marx contended that capitalism was merely a stage of development, rather than a final outcome. Marx predicted that an army of unemployed workers would rise up and seize the means of production, due to the captains of industry exploiting the working class. The basis of Marx's beliefs was that workers provided all value in the economy because they were the ones responsible for production. Yet, all the wealth the workers created was being consolidated in the hands of a few factory owners. Under this theory, the people who were making Snoopy snow cone makers couldn't actually afford to buy one and very well might overthrow the government to get one.
Another group of the time, the Marginalists, believed that price was determined by demand for the specific product or service, combined with the amount of satisfaction provided to the consumer by the product or service. Macroeconomics remembers the Marginalists for their contribution to the mathematical framework of the dynamics of supply, demand, and consumer utility. They also demonstrated that, in a free market economy, the factors of production - land, labor, and capital, receive returns equal to their contributions to production. Economic theory began to develop and grow to encompass the intricacies of an expanding economy.
With the start of the Civil war, the American government chartered new territory by issuing "greenbacks," the first paper money that was not backed by precious metals. Faced with the prospect of fighting a war with the South, President Lincoln solicited New York bankers for loans. He was told, however, that he could have his money, at thirty-six percent interest. Obviously, bankers were familiar with the demand side of the equation. Rather than pay the high interest rates, Lincoln took the advice of his Secretary of the Treasury, Salmon Chase, and issued legal tender greenbacks. In essence, the government created $450 million overnight.
A historical side note, eight years after greenbacks were issued, the Supreme Court declared them unconstitutional. A year after that, the court reversed it's decision and made greenbacks legal. Salmon Chase was the Chief Justice presiding over the Supreme Court for both decisions.
The next major advancement in economic theory came in 1914, with the formation of the Federal Reserve. The Fed was charged with two primary responsibilities: to serve as a lender-of-last-resort in times of crisis and to provide a national currency that would expand and contract as needed to help moderate economic growth.
The Fed's origins arose from the Banking Panic of 1907. There were four banking panics in the preceding 34 years, but 1907 was one of the worst. Congress set up a commission to study the problems with the nation's banking system that contributed to the panic. The commission found that banks were operating completely independent of each other. The lack of a national economic policy created regional banks that were frequently subject to failure. At the time, two thirds of the banks were trying to obtain cash while the other third had stopped granting credit. The country's lending system had essentially come to a complete halt.
The Federal Reserve was implemented to standardize the nation's banking system. The act which created it was left intentionally vague because the rules were being determined as the Fed developed. In fact, one of the very situations the Fed was created to stop occurred anyway with the onset of the Great Depression. Fed officials were unprepared to deal with the economic slump, and the Fed was criticized as having failed in its mission.
In the midst of the Great Depression, John Maynard Keynes revolutionized macroeconomic theory and changed the way government got involved in the economy. These developments led to the creation of the Keynesian School of thought.
In 1936, as a reaction to the worldwide depression, Keynes split from the Classical School, saying that falling prices and falling wages depressed people's incomes, thus preventing them from spending. Since people's wages were smaller, they couldn't afford the luxuries of life, such as the Snoopy snow cone maker. In fact, they couldn't even buy ice, much less the maker. So Keynes insisted that the governments get involved and start spending so that increased wages would encourage further spending, thus stimulating the economy.
Keynes' arguments became the modern rationale for utilizing government spending and taxing to stabilize the economic engines that drive the economy. The government would increase spending and decrease taxes when private spending was insufficient and there was a threat of a recession, as it did in 1936. Likewise, the government would decrease spending and increase taxes when private spending was too great and threatened inflation. Had these policies been implemented in Germany, the hyperinflation that caused the collapse of the German Mark in the 1930's could have been prevented. The resulting economic slump is perceived as one of the many events that led to World War II.
Modern economics has evolved into a scientific discipline. Aristotle tried to mix philosophy with economics. Others tried to mix politics and economics. Further, religion has also played a role in our economic history. We've seen lending as legal, illegal, and legal again. Adam Smith claimed an invisible hand would guide the price for snow cone makers while Karl Marx thought ownership of a snow cone maker would result in labor revolt. The Marginalists thought prices were determined by the value-added flavors of the snow cones. Finally, John Maynard Keynes came onto the scene and showed us that it was the government's responsibility to make sure those Snoopy snow cone makers didn't drive the economy from one extreme to another.
Two-thousand years of economic theory and development has provided us with a good measure of confidence in our monetary systems. Outside of this development, the concept of free markets, for now, has survived the test of time. The Romans might not be all that unfamiliar with the core concepts of today's free market economies. They might, however, wonder what happened to togas. To provide an answer that they would understand, we might tell them, "the market just wouldn't bear it."
