Hostile Money: Currencies in Conflict

INTRODUCTION

Money or currency – for the purposes of this book the two terms will be interchangeable – is generally accepted as having three functions: it is a store of value, a medium of exchange and an accounting unit. It is a medium of exchange designed to make transactions easier than they were in the simplest societies where only barter functioned (although at times of direst necessity, people in the most sophisticated societies will revert to barter when monetary systems break down through war or economic mismanagement). As a store of value, money is a relatively reliable means of preserving our wealth beyond the short term. Not as good perhaps as land, but certainly better than foodstuffs, which are a necessity but which lose their value fairly rapidly as they degenerate. As well as these two very material attributes, money also performs a rather more abstract function as an accounting unit, a standardised way of measuring the value of our transactions or stores of value. This aspect of the nature of money is preserved in certain cases by the name of the currency we use. The pound sterling derives its name from the pound of silver used in the minting of a very fixed number of silver pennies. And the lira, the former – and perhaps future – currency of Italy, comes from the Roman term for a pound of pure silver. Similarly, the livre – a pound weight in French, and therefore originally a measure of weight – was used to determine how many coins could be produced from a pound of silver. The dirham of Middle Eastern currency systems and the Greek drachma from which dirham originated were likewise units of weight.

In the beginning, however, long before even the simplest form of currency emerged, transactions between people were carried out by means of barter: the direct exchange of one or more goods or services in return for other goods or services.

But the particular ingenuity of some ancient societies gave rise to new means of recording transactions and these new methods performed some of the functions of money – particularly those of the unit of exchange. In this way, clay tablets from Mesopotamia dating back to the period of 1600 BC act as promissory notes, setting out exactly what goods may be claimed in return for the tablet. These tablets assign no abstract, monetary value to the transaction but occupy the midpoint between simple barter and money.1

In China, a form of currency in the shape of spades and knife blades began to appear as early as about 1000 BC, followed by the introduction of coinage in about 229 BC, attributed to the first Chinese Emperor Qin Shi Huang.2

From an early point, the imperial authorities in China were at pains to ensure that the public should accept the ‘nominal’ value of coins, rather than weigh the coins as a means of valuing them on the basis of their metal content.3 They promoted the so-called cartalist view – the view that the value of money is determined by government – as an expression of imperial power, but also because it offered the opportunity to manipulate the value of those coins. Attempts by the government to increase the nominal value of coinage over and above its intrinsic metal value prompted counterfeiting, inflation and currency collapse.

The valuable commodities that were eventually to become money – gold in ingot form, for example, in Egypt and Mesopotamia – may have started out as stores of value rather than media of exchange and, submitted as tribute to the rulers of those lands, remained locked away in treasuries rather than permitted to circulate.4 At some point someone in authority decided that the precious metals silver and gold might perform a useful function in mediating between the participants in barter transactions, setting an objective measure of value acceptable to both parties. It is generally believed that Lydia in western Asia, a region possessed of quantities of easily mined gold ore usually found in the natural alloy with silver called electrum, was the first to introduce gold coinage as a unit of exchange and as a store of value at some point around 700 BC. Local rulers adopted the measure of stamping the coins as a way of reassuring the populace that the quality of the precious metals used was of a reliable standard of fineness. The impress of the ruler’s symbols was therefore a guarantee of value offered by the central authority in the land.

If the silver content of coins was reduced, but the ‘nominal’ value remained the same, the coin would be said to be debased and its value consequently depreciated by the population. When the precious metal content of the currency in circulation was known to be debased, traders might start to demand more coins for their products and services than they had previously demanded when the currency was known to be of a better quality. Prices expressed in the unit of exchange, therefore, went up. The ruler’s guarantee as expressed by the face value was not worth what it once was. The market preferred to apply the ‘metallist’ view of currency.

However, some alternatives to coins and banknotes persisted in certain societies, long after those societies had had the opportunity to monetise transactions. Ingots and bars of gold and silver might be used for high-value international settlements or for preserving large amounts as a store of value. In an interesting but unsurprising parallel with the social behaviours and monetary policies of the late Roman Empire, gold was held in Han China (206 BC–AD 220) in ingot form and tended to be mostly in the possession of the wealthier aristocratic classes. A thousand years later, during the Sung dynasty (AD 960–1279), silver ingots were still used as stores of value and held in treasuries as tax receipts; when bronze coinage was in short supply, they also counted as the ‘backing’ for paper currency in circulation.5

A complete breakdown in the national monetary system of a country might lead the population to adopt the currencies of another country, or resort to barter, or counterfeit the currency that until recently had been circulating efficiently in that country. By 1294 – the final year of the reign of Kublai Khan – the paper notes issued by his government in Yuan dynasty China had so depreciated that the population not only reverted to barter, but also resorted to trade tokens such as ‘tea tickets’ and ‘flour tickets’ and ‘bamboo and wine tokens’, facilitating trade in certain commodities.6 The authorities perceived these initiatives as a threat to the official currency and attempts were made to ban them.

Production of small denomination coins in Britain had waned in the late eighteenth century when the Royal Mint’s production was focused very much on gold coins. The situation was aggravated by decree of George III in 1775, who commanded that the Mint should cease production of copper coins. Those copper (and silver) coins that were circulating were being melted down and the metal recycled as lighter counterfeits. Large numbers of agricultural labourers had moved to towns to find work in the factories created during the Industrial Revolution. Unfortunately, factory owners were unable to secure access to sufficient volumes of smaller denominations and resorted once again to privately produced copper tokens. As the British government had neglected the demand for smaller denominations, the private sector was forced to meet the challenge. As an exigency of war, officially produced copper coins were sanctioned by a proclamation of George III in 1797. In 1816, the government at last took on responsibility for production of smaller denominations in copper and private coinage was rendered illegal by the 1817 Act of Suppression.7

Thus, the story of token production in Britain in the second half of the eighteenth century represents a case study in the competition between government and market in the supply of money and the effect of major social movements of monetary systems. But it also demonstrates the impact of war on established monetary systems. Economic and social conditions drove up a demand for money that the government not only ignored, but wilfully resisted. Private enterprise filled the gap with an unofficial money in the form of tokens whose production was facilitated by the combination of an easy supply of raw materials and the arrival of ground-breaking technology in the form of steam presses. This failure to provide sufficient currency for the purposes of trade also became a problem for Britain’s fledgling colonies.

Together with debasement and failures in the usual sources of supply, other threats to monetary systems emerged: counterfeiting, coin smuggling, and competitive attempts by neighbouring states to draw large volumes of precious metals in the form of coins to their own mints away from those of the country of origin. Every so often in these circumstances, monetary systems based on commodities such as gold and silver would fall into such disrepair that a major operation to renovate the system would become necessary.

The next stage in the development of money after the replacement of ingots by coins was the introduction of paper money, which had long circulated in China and in Iran before its accidental emergence in Western Europe in the seventeenth century. It began as a certificate of deposit for copper coins in China in the ninth century and in Sweden eight centuries later, by coincidence, the prototype banknote was nothing more than a certificate of deposit for copper coins – of a sort. But, in the case of Sung China when the government over-issued paper currency, it resulted in depreciation and inflation to the point where that currency became worthless. Instead, unminted silver and silk were adopted as substitutes by the population.8

The money that we now handle every day in our minor transactions takes the form of banknotes and coinage (as well as the now rare cheque); but in our age, banknotes and coins make up only a very small part of the overall ‘money’ circulating within and between countries. And, increasingly in our times, more transactions – even minor ones – are carried out electronically, using a smart card or a mobile telephone. The quantitative easing that in recent years has often been described in journalistic shorthand as ‘money printing’ involves electronic transfers rather than paper and ink. From a pound weight of silver to a string of digits, money evolves, while its three purposes remain constant.

Increases or decreases in population, agricultural and industrial activity and innovation in new forms of money would all have a major effect on a country’s monetary supply. And then there were other factors that could have a dramatic effect on a nation’s currency system. Among these are wars, revolutions, diplomatic alliances and the secession or independence of one state from another. There is also the effect that the policies of one country can have on the monetary system of another country through political counterfeiting, sanctions and monetary operations short of outright hostility.

Wise monetary policies are vital to the economic well-being of any country. But the application of wise policies presupposes not only the technical capacity to apply them, but also the power to govern the system. When power is seized or empires extended over some otherwise independent country, the ascendant power usually take control of the issue of money as a matter of some priority. Whoever controls the supply of money commands the army, the civil service and other public services. The stability of the money system and of prices in the market place reflects not only good economic and monetary policy, but also confidence in the political stability of the regime.

Threats to monetary systems can also be internal in origin. When Germany was beset by civil disorder in the aftermath of the First World War, strikes developed into armed revolt involving the Communist Party of Germany and the radical revolutionary Spartacist League. When these armed insurrectionists seized the means of banknote production in 1919, the leaders of the western Allies, Presidents Wilson and Clemenceau for the US and France, and Prime Ministers Lloyd George and Orlando for Britain and Italy, secretly debated how best to restore control of banknote production to the legitimate authorities. As the four powers planned the settlement of Europe and the dissolution of empires in the aftermath of that war, security of the means of production of Germany’s money was a factor in their calculations.

To maintain control over the monetary system as well as over the other instruments of public policy, autocrats had to maintain the loyalty of their armies. And in order to maintain that loyalty the pay that troops received had to be ‘good’ money, that is, not debased. Armies can march without pay for some time, but there is a limit and even if troops are content in some exceptional cases to perform their duties without payment so long as they are fed and clothed, the supplies themselves must be financed. History records instances of armies rebelling or simply melting away when their pay was cut or debased or ceased altogether.

The very basis of a monetary system may turn out to be its weakness, exploitable by hostile forces. When coins of precious metal are replaced by paper notes of little or no intrinsic value, a monetary system based on cheap tokens presents a vulnerability to be exploited by hostile powers. Paper money, unbacked by gold and issued by American and French revolutionary authorities in the late eighteenth century, was easily and cheaply counterfeited by Britain in an attempt to undermine her opponents’ finances. ‘The surest way to destroy the capitalist system is to debauch its currency’, a maxim that J.M. Keynes attributed to Lenin in the early twentieth century,9 had in practical terms been tested more than a hundred years earlier, although the observable results do not necessarily prove the maxim to be true. Even without such deliberate acts of hostile attack directed towards a foe’s monetary system, national currency systems are weakened, undermined, overturned or totally destroyed as a result of war or civil war; an incidental consequence of the turmoil, uncertainty and breakdown in confidence of the markets and of the civil population in their own money.

Money gets swept up in the storms of history and either floats or founders. Carthage’s currency went the same way as that state: ultimately overcome by Rome, the majority of Carthage’s coins were melted down for use in the victor’s own currency. Carthage’s currency was deleted. Britain’s wars against France in the late seventeenth and early eighteenth century marked the first steps of sterling’s emergence as the leading international currency, a position it was to hold unrivalled from the end of the Napoleonic wars to the First World War. Sterling’s reputation was the monetary endorsement of Britain’s power in the same way that the international credibility of the US dollar is as much based on Washington’s military and diplomatic power as it is on the real productivity of the American economy. Empires of currency rise and fall.

While the purposes of money may be constant and its forms evolving, conflict, diplomacy and politics apply a seemingly infinite variety of factors to the way in which it operates. Attempts to overthrow a regime or undermine another country in war or peace have often consciously involved a policy of attacking its currency or replacing the existing, authorised currency with an alternative, or indeed resulted in the collapse of the currency as a by-product of war or revolution. This is true whether the currency concerned is based on metal, paper or digital systems.

And in the era of the internet, when it is easier than ever to make transactions across borders, the vulnerability of national monetary systems to hostile attack, now by hackers, especially of the state-sponsored type, is greater than ever.

1

REBELLION, RIOT AND MILITARY COUPS

‘A disordered Currency is one of the greatest political evils.’

Daniel Webster, Secretary of State of the United States

When civil war broke out among rival emperors of Rome in AD 192, the winner, Septimius Severus, granted the troops a pay increase and paid for it by increasing the number of silver denarii in circulation. This increase in money supply could only be achieved by means of a debasement of the silver content to 48 per cent. An old denarius thus had only the same nominal value as Septimius Severus’ new denarius but had a much better silver bullion content. Inevitably, the older, finer coins began to disappear – to be melted down for their higher bullion value. So, a vicious circle would have been created: the emperor minted more coins to pay the army; in order to do so, he debased the silver content of the coin; that in turn caused the older, finer coins to disappear out of circulation, being melted down for their finer silver content. This in turn created a demand for more money – of poorer quality – to be minted and issued to replace those that had disappeared from circulation. Unless the state was able to access entirely new stocks of silver – usually by conquest – the only way to issue new coins was by taking in older ones with good silver content, melting those down for their silver bullion and reducing the amount of silver added to the newest issue of coins. The effect may have been a net transfer of wealth from some sections of society to the army and perhaps an increase in the speed with which money changed hands. The discovery of new mines and their exploitation in conquered countries might to a certain extent hold off debasement. But, if the economy were to expand too quickly and army pay increased too dramatically – and if supplies of new bullion could not keep pace – there were limited means of coping with the problem: debase the coinage, replace some payments with goods in kind or replace the lowest denominations with base metal.

The demand for an increased money supply to pay armies is clearly understood by figures for the average annual pay of a Roman soldier:

Source: Williams, Jonathan (ed.), Money: A History (British Museum Press, 1996).

The same source also reports one estimate that during the middle of the second century, 75 per cent of the Imperial budget of 225 million denarii was spent on paying the army of 400,000 troops. The cost of paying a single legion, according to one source,1 amounted to around 1,500,000 denarii a year. Tacitus relates the case brought against Publius Vitellius in AD 32, during the reign of Tiberius, who was charged with ‘offering the keys of the Treasury and the Military Treasury for seditious purposes’.2 Clearly, with such a large proportion of the budget allocated to the army, control of the Military Treasury would make the difference between a successful and an unsuccessful conspiracy or coup.

The demand for increased money supply to pay the army in turn required a substantial increase in coin production capacity. New mints had been established in Gaul, Britannia and elsewhere by rival emperors who had broken away from Rome’s central authority during the third century. The situation in the third century had been aggravated by the fact that army and civil servant salaries had not kept pace with inflation, forcing the authorities to make up the shortfall with supplies in kind. Coin production capacity increased but raw materials were not forthcoming in sufficiently large volumes to keep pace with the enhanced production capacity; the silver content of the denarius was consequently debased to eke out the available silver stocks.

The observation of Milton Friedman that periods of war increase the demand for money3 finds clear support in the record of inflating salaries for Rome’s troops; but it could equally be said that the demand for an ever-increasing issue of money to pay the armies continued during peacetime to guarantee their loyalty in societies where armed forces do not feel themselves to be subordinate to the civil government.

China

In the China of the early Sung dynasty, the army grew in size from 378,000 in AD 975 to 912,000 in AD 1017 and 1,259,000 in AD 1045 and, as it grew, so too did the troops’ demand for additional allowances and perks. The government had no choice but to increase the issue of money on a major scale to cope with these demands. Improved methods of producing silver and copper, increases in the availability of raw materials and in spending on defence led to a massive surge in money supply, the state budget expanding from 22,200,000 ‘strings’ of cash (a cash being a bronze coin and a string consisting of 1,000 coins) in AD 1000 to 150,800,000 in AD 1021. Inflation was the inevitable result.4

Primitive efforts to dupe the military with debased coinage rarely survived exposure and the hostility of the intended victims. Late in the sixteenth century, the authorities in the province of Zhejiang in Ming-era China attempted to force the circulation of state issue coinage by paying one-third of military salaries of the Hangzhou garrison in coin at the official rate of 1,000 bronze coins to a tael of silver, a tael weighing anywhere between 34g and 40g according to the region of China in which it was used. However, it soon became apparent that the market rate was 2,000 coins to a tael of silver, reducing the promised 30 per cent of salary in coin to 15 per cent in real terms, and depriving the troops of the remaining 15 per cent. The predictable result: the garrison mutinied and, without a force to impose law, the city was left in a state of disorder and exposed to rioting mobs protesting against unrelated, but punitive taxation.5

The Power of the Military in the Ottoman Empire

Authorities ignored at their peril the willingness of a military caste to revolt when its demands for payment in sound money went unfulfilled. Until the early nineteenth century, the Janissary corps of the Ottoman Empire was one of the most powerful elements in that empire. Only the elite Janissaries were up to the task of meeting the best European troops head to head and the decision to increase threefold that part of the army demanded a corresponding increase in expenditure.6 However, not only did the Empire have to increase the level of its military expenditure for an expanded Janissary corps, it also had to ensure that the quality of the money was acceptable to this powerful sector of society.

During the reign of the Ottoman Sultan, Mehmed II (1451–81), the Janissary corps revolted in response to regular debasements.7 The sultan had two periods of rule, the first standing in for his father in 1444 when Mehmed II was only 12 years old. That year the Janissaries were paid in newly issued silver akçe, which had been debased by 11 per cent in silver content and weight. Alert to a reduction in the external exchange rate against the Venetian ducat, which was the international standard of monetary reliability, and wise to the likelihood of an increase in prices, the troops gathered around a hill outside the capital city of Edirne and demanded a return to the old standards of silver content and weight or an increase in their salaries. The government buckled and increased the troops’ pay by about 16 per cent. Although this event, known as the Buçuktepe incident after the name of the hill, is viewed as only partly down to the government’s imprudent action in debasing the currency, it and other rebellions in Ottoman Turkey that involved the issue of the quality of money demonstrate the importance in certain militarised societies of maintaining military salaries at an appropriate level to offset the effects of debasement and inflation.

The pattern repeated itself in the late sixteenth century. The army had expanded as a result of lengthy wars with Persia and Austria and, to cope with vastly increased national expenditure, the sultan’s government debased the silver coinage, leading to a drop of 230 per cent in the external exchange rate. The fixed rate of pay of the Janissary corps was insufficient to cope with the inflation in prices and the problem came to a head when, in 1589, the government chose to pay them in debased coin rather than in the older, higher quality coin. Almost inevitably, the Janissaries revolted, demanding the execution of the high official deemed responsible for the debasement, a demand to which the sultan acceded. The episode became known as the Beylerbeyi incident after the unfortunate scapegoat.8 Prior to this event, the demands of the military caste for ‘sound money’ had had a curiously stabilising effect on the Akçe over a period of about a hundred years from 1481 onwards, with one single exception of debasement in 1566.

By the end of the sixteenth century, the Ottoman administration appeared to have learned the lessons of these mutinies. A very high proportion of payments from the Ottoman Treasury went towards the payment of troops. To get a measure of the importance of securing the army’s loyalty: documentary evidence of Treasury payments over two sample periods, the first over a period of nearly a year from July 1599 and a second period of two years beginning in 1602, indicate that 70 per cent of all disbursements went to the army. It is difficult to ignore the similarity with the estimation that 75 per cent of payments from Rome’s Treasury were allocated to the army. Moreover, the fact that 67 per cent of payments made to the Ottoman army were in gold, the best store of value, seems to be further evidence that the state had begun to take the army seriously.9 Even when the state resorted to military payments in the higher quality silver coin known as the shahi during wars with the Iranian Empire in the second half of the sixteenth century, it was evident that production of those coins noticeably increased at the mints in the eastern part of the Ottoman empire, the region where there were large concentrations of troops. Conversely, high-volume production slowed down and mints were closed at the end of the war and troops were dispersed.10

The power of the military in Ottoman Turkey was undisputed. When Sultan Mehmed IV was deposed in 1687 and replaced by Suleiman II, the new sultan had to pay the obligatory ‘accession gift’ to the army. Attempts to raise enough money through new taxes on the population of Istanbul backfired when the people revolted. The administration addressed the challenge by minting copper coins with an enhanced face value of one akçe (previously a denomination reserved for silver coins), using new presses that had been installed the previous year and making use of various sources of copper for the raw material. Additional rooms were added to the Istanbul mint, expanding the minting capacity simply to satisfy the military demand for a gratuity on the accession of a new sultan.11

Only the suppression of the Janissary order in 1826 by the reforming Ottoman Sultan Mahmud II, who ruled from 1808–39, removed this powerful obstacle to repeated debasements, the first serious one being implemented during the period 1828–31. The seigniorage yield (the profits a government or central bank can make from the issue of money) as a result amounted to half a year’s total revenues.12

Source: Pamuk, Şevket, A Monetary History of the Ottoman Empire (Cambridge University Press, 2000), p. 191.

The power of the military in monetary matters in certain societies could still be seen in the twentieth century.

Chile

The First World War had changed definitively the relative economic strengths of Britain and the United States. The strength of the City of London as a centre for the financing of international business and Britain’s position as the world’s leading gold standard country prior to the war had given the country a pre-eminent position in world trade. Prior to the war, America had been heavily in debt to the banks of Britain and France, among others. During the war, however, America’s economic position was transformed from that of net debtor to net creditor. Much British gold had been shipped via Canada to America to pay for materiel and foodstuffs. As the war progressed, Britain was forced to take significant loans from America, some of which were passed on to Britain’s allies, France and Italy. Emerging from the war years as indisputably the world’s leading economy, the US expanded its commercial interests in Latin America and, as the possessor of the world’s largest gold reserves and naturally, therefore, a committed adherent of the gold standard, it wanted its trade partners in Latin America to operate on the same system. Contracts denominated in gold-backed convertible currencies where debts could be settled and profits repatriated in gold were reassuring. However, the issue of notes detached from a gold standard in Chile in the immediate post-war period, adding to the depreciation of currency that was a feature of South American economies, was not attractive to American government and business.13

On the demand side of this relationship, Latin American states were ready to believe that there were benefits to be had from their membership of the gold standard and adoption of other US requirements such as protection for foreign property. American advisers, pre-eminent among them Princeton University Professor Edwin Kemmerer, known as ‘the Money Doctor’, undertook technical missions at the invitation of various governments in South America. Kemmerer’s missions made recommendations on the reformation of local economies and monetary policies, and on fiscal and banking systems.

Different states saw the benefits in different ways, but often the fundamental attraction was that membership of the gold standard would make it easier for them to borrow on the international markets. For Colombia, adherence to the gold standard enabled the country to borrow on foreign markets to the extent that its public debt increased ten-fold between 1923 and 1930. The