The sovereign’s capacity to issue money afforded one specific benefit: the creation of seigniorage, the ability to profit directly from the issuance of currency. These days, seigniorage arises because of the interest-free loan that a government obtains by printing money on comparatively worthless pieces of paper. But when currencies were associated with particular weights of precious metals, monarchs exploited this power through more overt methods. Many would “clip” gold or silver coins to melt down and redeem the value of the shavings. Before coins were assigned specific numerical values, rulers would “cry down” the arbitrarily assigned value of a specific coin—by declaring that it could now buy less of a certain useful commodity or contribute less than previously to the settlement of a tax bill. In effect, the monarch was recanting on a promise to honor IOUs at a certain rate and so got to write off his or her debts in accordance with the size of the cry-down. By the same token, the crown’s subjects were forced to come up with more money to meet their debts. Needless to say, this irritated the moneyed classes—the nobles and aristocrats, and later the bourgeoisie, for whom the periodic, arbitrary depreciations could amount to significant reductions in wealth. As their resistance to this abuse of power grew, it gave rise to some of the great liberal ideas upon which modern democracy is based, ideas behind the founding of America and the French Revolution. Now, this same spirit of resistance is found among bitcoin evangelists.
Well before the medieval European monarchs even had coins to tinker with, Chinese emperors were taking money into its next phase of technological development. In the ninth century A.D., when regions such as Szechuan experienced shortages of the bronze they’d used for coins, government officials began experimenting with letters of credit that functioned as a form of paper money. Then, in 1023, the Song dynasty issued full-blown sovereign-issued paper money across the kingdom.
In Europe, the struggle between the private and the public sectors for control over money has a much deeper history. While many complained about the sovereign’s constant debasement of the currency, some developed work-arounds that created de facto private money.
The most impressive of these was the écu de marc, a form of currency developed and used by the merchant bankers who emerged out of the Italian Renaissance and which allowed them to expand their business internationally. Based on an exchange rate jointly agreed upon by the merchants, the écu de marc allowed the exchange of bills of trade from different banks in different countries. The sovereigns in each land kept tight control over their currencies, but this banking class was developing its own international exchanges through the wonder of credit creation. The bills financed shipments—say of shoes made in Venice to an importer in Bruges—that enriched the manufacturer, but the real profit spinner lay in trading the paper, a lesson that would be passed down through generations of bankers to the present day. “For the first time, a private-sector community had come up with a de facto money-creation machine. This direct threat to the sovereignty of monarchs gave rise to a political clash as the kings and queens of Europe feared that their monopoly powers were being eroded.
But the bankers didn’t want political power per se. They were pragmatic businessmen, as they would prove to be for centuries afterward. They would use the leverage of private money to strike deals with governments, sometimes as a threat but mostly to wheel and deal their way to more wealth.
This negotiation between the sovereign and these new private generators of money would find its ultimate expression in the royal charter that founded the Bank of England in 1694. The BOE, as bond traders in London’s City now call it, was formed at the behest of King William III, who wanted to build a world-class navy to take on France, then the dominant power on the high seas. “The privately owned bank—the BOE was not nationalized until after the Second World War—would lend the Crown £1.2 million, a massive sum for its time, and could then issue banknotes against that debt, effectively relending the money. Then, to give the banknotes value as a de facto currency, the sovereign agreed to accept them in payment of taxes. In one fell swoop, the agreement created a form of paper money effectively endorsed by the sovereign, established fractional-reserve banking—a guiding principle of modern banking that allows regulated banks to relend most of the money they take in as deposits—and conceived the idea of a central bank. The Bank of England had, in effect, been given a license to print money.
This was the dawn of modern banking, and it had a profound impact on England’s economy. The new financial architecture not only helped the kingdom develop a top-class naval fleet with which it would rule the world from pole to pole, but also financed the industrial revolution. Bank credit effectively became money, since it was deemed to be backed by the sovereign. This new definition of money has prevailed ever since.
Excerpt From: Vigna, Paul. “The Age of Cryptocurrency.” St. Martin’s Press.