[R-G] [BillTottenWeblog] The Power of Money

[Bill Totten]

by Peter T White, Assistant Editor

National Geographic (January 1993)


SAY I'M IN PARIS, it's late evening, and I need money, quickly. The bank
I go to is closed, of course, but outside sits an ATM, an automated
teller machine - and look what can be made to happen, thanks to
computers and high-speed telecommunications.

I insert my ATM card from my bank in Washington, DC, and punch in my
identification number and the amount of 1,500 francs, roughly equivalent
to $300. The French bank's computers detect that it's not their card, so
my request goes to the CIRRUS system's inter-European switching center
in Belgium, which detects that it's not a European card. The electronic
message is then transmitted to the global switching center in Detroit,
which recognizes that it's from my bank in Washington. The request goes
there, and my bank verifies that there's more than $300 in my account
and deducts $300 plus a fee of $1.50. Then it's back to Detroit, to
Belgium, and to the Paris bank and its ATM - and out comes $300 in
French francs. Total elapsed time: sixteen seconds.

This intercontinental electronic wizardry is merely the latest chapter
in the history of that infinitely influential creation of the human
mind, money - meaning something that's accepted as a medium of exchange
and a store of value because it exists only in limited quantities and,
above all, because people have confidence in it.

Ah, money! I'd long thought about it - what a story it would make, to
journey around the globe and across centuries, tracing the beginnings of
coinage in antiquity and of modern banking in the late Middle Ages,
investigating how today money is created by your bank around the corner,
discovering what determines the interest rates you must pay on loans for
your house or car and how the Japanese got all those dollars to buy up
so much of the United States lately. How money launderers do their dirty
work. And with the proliferation of credit cards, are we really headed
for a cashless society?

My journey began in Philadelphia, at the United States Mint. In a hall
the size of a zeppelin hangar I see high-speed presses strike pennies;
yellow sodium-vapor lights and bluish mercury-vapor lights alternating
overhead make the outpouring of coins look like a stream of gold.

"Each machine strikes 200 times a minute", says a Mint official. "And we
don't call them pennies; we call them cents". They're 97.5 percent zinc;
the rest is copper. To make one in 1991 cost .92 cents.

That's $9.20 per thousand, so the Mint makes a profit of eighty cents on
every ten dollars' worth? "We don't call it profit. It's seigniorage."
Very well, the 1991 seigniorage on all US coins, meaning the difference
between their face value and the metal value plus the cost of making
them, was 428 million dollars.

In Washington, and of late also in Fort Worth, Texas, the US Treasury
Department's Bureau of Engraving and Printing turns out paper money -
it's actually 75 percent cotton and 25 percent linen. In 1991 it added
up to 108 billion dollars' worth. Nearly half the notes are one-dollar
bills; these last an average of eighteen months before they're worn out.
Turned in by a bank, they will be destroyed by shredding. But should you
have bills that have been carbonized and shrunk in a fire, gnawed by
termites, or accidentally bleached in a washing machine, the bureau's
Mutilated Currency Section in Washington, DC, may be able to help. Turn
in at least 51 percent of a bill and you'll get a full refund.

Bills and coins make up about eight percent of the US money supply - the
rest is in bank accounts, including checkbook money; at this writing the
sum total is 3.5 trillion dollars, says the Fed - the Federal Reserve
System, which is the central bank of the government of the United States
- and that is three billion more than a month ago. This is how that happens.

Every business day, after a telephone conference call at 11:15 am, the
Federal Reserve Bank of New York, acting on directives from the Federal
Open Market Committee at Fed headquarters in Washington, buys US
government securities from major banks and brokerage houses, or sells
some - usually US Treasury bills, which in effect are government
promissory notes. Say today the Fed buys a hundred million dollars in
Treasury bills from those big securities dealers, who keep a stock of
them to trade with the public. When the Fed pays the dealers, a hundred
million dollars will thereby be added to the country's money supply,
because the dealers will be credited that amount by their banks, which
now have that much more on deposit.

But where did the Fed get that hundred million dollars?

"We created it", a Fed official tells me. He means that anytime the
central bank writes a check, so to speak, it creates money. "It's money
that didn't exist before", he says.

Is there any limit on that?

"No limit. Only the good judgment and the conscience of the responsible
Federal Reserve people".

And where did they get this vast authority?

"It was delegated to them in the Federal Reserve Act of 1913, based on
the Constitution, Article One, Section Eight. 'Congress shall have the
power... to coin money, regulate the value thereof ...'"

Now watch how that Fed-created money lets our commercial banking system
create even more. The Fed requires banks to put aside a portion of their
depositors' funds as reserves. Say this reserve ratio is set at ten
percent - then for every $1,000 in new deposits, a bank must keep at
least $100 in reserve but can loan out the rest, namely $900. On the
bank's books this loan remains as an asset, earning interest until it is
paid off. The customer who got the loan is likely to spend it right
away, say for a used car. The car dealer deposits the $900 check in his
bank, which then has an additional $900 in reserves and can in turn loan
out ninety percent of that - $810. And so on and on, until the original
$1,000 put into one bank may enable dozens of banks to issue a total of
$9,000 in new loans.

Thus a hundred million dollars injected by the Fed into the commercial
banking system could theoretically stimulate the appearance of 900
million dollars in new checkbook money - money that didn't exist before.
And it's all built on the assumption that the system is sound.


WE'LL RETURN TO THE FED LATER, but now I'm off to Yemen, where, so I've
heard, quite a few people cling to old-fashioned views on what sort of
money one can have confidence in, what can be considered sound. At Suq
al Talh, the Saturday market not far from the Saudi Arabian border and
close to the ancient city of Sadah, I see bearded money changers sitting
on concrete steps, curved daggers strapped around their waists,
automatic rifles across their laps or propped within reach. In front of
them are bundles of bank notes - Yemeni rials - and stacks of coins the
size of US silver dollars. These are silver too, but they're all dated
1780, and the large-chested lady portrayed on them is the Austrian
empress Maria Theresa. A man just bought a thousand of them for 75,000
rials, and I ask him why.

"It is the main currency", he says. Isn't that what the rial is? He says
in this area these coins are omla saaba, meaning hard currency, and off
he goes with sixty pounds of silver in a woven bag. "He bought them to
make a profit", another man tells me - they've been going up in price;
or, one might say, the rial has been going down.

"The people you saw in Sadah may be illiterate, but they know economic
affairs", says Mohamed Said Al-Attar, the minister of industry, who has
long been active in the country's financial affairs. Back in the
capital, Sanaa, he tells me that in the 18th century, when French
traders came to the port of Mocha to buy coffee, the Yemenis didn't want
French money, but they liked the Austrian coin, called a taler, because
of its high silver content. (From "taler", incidentally, comes the word
"dollar".)

The reputation of the Austrian taler spread to much of the Arabian
Peninsula and to Ethiopia, where the coin circulated until the 1950s.
"We introduced the rial bank note", Dr Al-Attar adds, "after the 1962
revolution had ousted the monarchy. But for years we had difficulty
getting people to trust paper money".

Today the official Austrian mint in Vienna still turns out Maria Theresa
talers, still dated 1780. So do imitators elsewhere, notably in Saudi
Arabia, says a merchant in the Sanaa suq. "They have agents in Yemen buy
talers, which are 83 percent silver", Dr Al-Attar tells me. "They melt
them down, strike new ones, and send them back to Yemen - less than 80
percent silver". Alas, debasing coinage for a bit of profit is almost as
old as coinage itself.

Many of today's currencies, the Italian lira, the British pound, the
peso and peseta of Spanish-speaking countries, are named for units of
weight once used to measure amounts of metal - mostly silver, which
along with gold and copper has functioned as money throughout most of
recorded history. The earliest documented use of silver for payment
appears around 2500 BC in Mesopotamian cuneiform tablets.


SOME OF THE OLDEST known coins were struck, in Asia Minor, in the
ancient kingdom of Lydia, in the seventh century BC - tiny to
thumbnail-size lumps of electrum, a pale yellow alloy of gold and
silver, washed down by streams from limestone mountains. Such Lydian
coins, of specific weight, eventually bore the royal emblem of a lion's
head.

The late Oxford scholar Colin Kraay surmised that they were conceived as
a convenience to the state, as a standard medium for payments to
officials and for public expenditures, also for the collection of taxes
and fines. But merchants, long accustomed to settling accounts in
precious metals, must have found them useful too; by using coins, they
didn't have to do as much weighing for each transaction.

The idea of coinage spread from Asia Minor across the Mediterranean
world. By the fourth century BC a weight unit called the shekel, used by
ancient Babylonians, Phoenicians, and Israelites, had lent its name to
silver coins in the Middle East; some weighed half an ounce, slightly
heavier than the silver Kennedy half-dollar of 1964. As for gold, it was
coined into the aureus of the Roman Empire and the solidus of Byzantium,
also the dinar of Muslim lands, the florin of Florence, and the ducat of
Venice.

Coins may have begun as a convenience, but some of them have taken on
fabulous value today. In southwestern Anatolia I found the Turkish
countryside crawling with folks bent on finding an ancient bonanza.
Coins of Greece and Persia, Rome and Byzantium are often turned up by
rain or the plow, and people prowl with metal detectors, seeking a hoard
like the one reportedly dug up in a field in 1984.

Near the little town of Elmah, in the valley between the mountain ranges
called Ak and Bey, I'm shown the spot where I'm told a detector
discovered a terra-cotta jar holding 1,900 pieces of silver, possibly
buried by a Greek commander getting ready to battle the Persians around
465 BC. Included were fourteen brilliant ten-drachma coins thought to
have been struck by the Athenians to commemorate their victory over the
Persians at Marathon.

Most of those decadrachms are said to have wound up with a millionaire
investor in Boston, with one piece going to a collector in Beverly Hills
for $600,000. Illegally, according to the Turkish government. Turkish
law says you must turn in such finds to the local museum; if they're
valuable, you'll get a small reward.

The earliest paper currency issued by a government appeared in China in
the 11th century. In Persia the Mongol ruler Geikhatu decreed paper
money in 1294, but merchants refused to accept it. They closed their
shops and hid their goods. Trade stopped. Facing revolt, Geikhatu
rescinded his edict; the official who had suggested it in the first
place was torn to pieces in the bazaar. The first European bank notes
were printed in Sweden in 1661, when coins were in short supply.

But money hasn't always been metal or paper. One of the oldest forms may
well be a shiny white or straw-colored mollusk shell, about an inch
long, from the Indian Ocean - the cowrie; from it derives the Chinese
character cai, standing for wealth, money.

I remember a display of other forms brought to a coin collector's
convention in Seattle by John Lenker, then head of the International
Primitive Money Society. A bronze drum from Malaysia. A block of salt
from Ethiopia. From Fiji a kava bowl with eleven legs. And wampum, once
prized by North American Indians - tiny clamshell pieces laboriously
drilled and strung together like beads. "All these tell stories just as
coins do", said Mr Lenker. (See "Money From the Sea", pages 109-117.)


THE HISTORIAN Fernand Braudel has pointed out that for most of recorded
history the majority of people, living off the bounty of the land,
hardly required money for day-to-day needs, and this was still true for
many Americans early in this century when my father-in-law was young. He
never forgot the exciting day, once a year after the harvest, when his
grandfather hitched up the horses to drive a couple of miles to the
little town of Greenfield, Illinois, with the wagon full of wheat.

Fred Heck, the miller, would grind it into flour, keeping a bag for
payment. Then to Samuel Wilhite's grocery, to leave flour for a year's
supply of sugar and salt, canned goods and candy. Finally Fred Quast,
the blacksmith, got flour for shoeing the horses and sharpening the
plowshare.

"Everybody knew the flour price", Dad told me, "it was in the paper
every day". Payments could have been in those green dollar bills with
yellow backs-gold certificates that could be redeemed anytime for gold
coins. But it wasn't necessary.

Historian Braudel also delineated how in the Middle Ages the role of
money, and hence trade and the entire economy of Europe, got a boost
from Italian ingenuity. A new way was found to get around the ban of the
church on usury, the lending of money at interest. Merchants of Tuscany,
especially from Siena and Florence, employed this new wrinkle at the
fairs in the Champagne region of northeastern France in the 13th
century. It was called the bill of exchange, and it opened the door to
modern banking.

Michele Cassandro, professor of modern economic history at the
University of Siena, tells me how it worked: "It would say, for example,
'Signor A, having received so many Sienese scudi, will pay to Signor B
so many Florentine florins at such and such a place on such and such a
date'. That looks like a currency exchange transaction, but in fact it
is a loan agreement, with the interest hidden in the amount of florins
Signor A will be paying. But it doesn't say loan, it doesn't mention
interest - so, no usury!"