Mixed Money Messages

Where does money come from?

Source: Morguefile

Money is a funny thing. Most people around the world look at yen and euros and dollars and say that that’s money. But banknotes are only a small fraction of the money in the world. Most money exists in the form of bank deposits. When we buy a house or a car or pay our credit card bill, we just instruct our banks to make ledger entries transferring some of our account to someone else. When a bank issues a loan, it creates money.

But it wasn’t always this way. “Moneta” was another name for the goddess Juno, or Hera. She was the protectress of wealth. Her temple in Rome is where Roman coins were minted. Coins were a great facilitator of trade: they had uniform weights and materials, they could be used to pay taxes or debts, and they were highly portable. But they have one major drawback: often, there just aren’t enough of them around.

Some years ago I was travelling in a developing country. It was a hot day, and I was thirsty. When I went into a local store to buy a cold soda, the merchant told me that he didn’t have any change – that he could only take whole bills, roughly equivalent to a dollar. That was a lot for a soda there, which normally cost about 20 cents. Most folks would have turned away. The lack of coinage would have impeded commerce. But I was really, really thirsty, so I paid the larger amount anyway.

The first expansion of monetary powers beyond the central government came in England in the late 17th century. William III of England needed money to fight wars on the Continent, but there simply wasn’t enough coinage in the country to pay the army and to keep the economy going. So he allowed banks to issue claims on their deposits – banknotes – and also let people pay their taxes with these notes. The modern, mixed economy started out in England because of a fiscal crisis brought on by a foreign war.

CSA Banknote with Juno Moneta. Source: Wikipedia

Ever since then, the economy has been a partnership, with both the State and the banks sharing the authority and responsibility for creating money – a delicate balancing act. England got that balance largely right, avoiding both massive inflation and crippling deflation, although there were a few speculative bubbles along the way.

When we think about the origins of money, though, It’s useful to remember: money started out in the temples of the gods. And sometimes, the gods seem a little crazy.

Douglas R. Tengdin, CFA

Chief Investment Officer

[catgegory Global Market Update]

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