Money (12 page)

At the same time that Aristotle’s famous Lyceum was flourishing in Athens, however, another great scholarly academy was being founded five thousand miles away in a country where the identity of ruler and ruled was anything but taken for granted. The doctrines developed there were to provide quite a different understanding of money, and an unequivocal answer to the question of who should control it.

The fourth century
BC
was the height of what is called the “Warring States” period in China. The central authority of the ancient Zhou dynasty had long since collapsed, and its former vassal states had been embroiled in seemingly endless war to reunify the Chinese lands since the eighth century
BC.
They had not made much progress. After nearly four and a half centuries of sedition and warfare, the memory of a peaceful and united China remained as distant as
ever. Numerous smaller territories had been swallowed up by larger neighbours, but by the fourth century the lords of the four most powerful states—Qin, Jin, Chu, and Qi—remained locked in interminable combat, constantly scheming to protect their power and defeat their peers. None was any closer to victory, or therefore to peace. It was in an effort to break this stalemate that in the middle of the fourth century
BC
, Duke Huan of Qi conceived a remarkably modern idea.

Traditional Chinese thought—the philosophy of Confucius and Mozi—was concerned predominantly with ethics: its contributions to the science of government were essentially elaborations of its moral teachings. If the ruler acted justly, and his officials acted efficiently, then the state would be a just and efficient one. In the chaotic situation at the time, this minimalist political theory offered Duke Huan little practical help. He therefore invited the best thinkers of the age to join a new academy in his capital, Linzi. These scholars would be accorded a high rank and granted generous funding. Their only obligation would be to advise the ruler of Qi on how best to govern his country and defeat his enemies. It was a prototype of the modern policy think tank—and the idea proved a prodigious success. In its heyday in the late fourth and early third centuries
BC
, the Jixia academy had a faculty of seventy-six professors and several thousand students, and became the most famous centre of learning in China. Moreover, it was responsible for a significant reformation of Chinese thought. No longer was moral philosophy the sole focus. New schools were born with an explicitly more worldly aim: to explain in detail how a ruler might most effectively organise his state to ensure its survival and eventual domination. Amongst the tools that scholars of the Jixia academy considered most important to this task was the institution of money.

The monetary theories developed at the Jixia academy were collected in the work known as the
Guanzi
. They were to attain near-canonical status in Chinese economic thought for the next two thousand years. Though composed at almost exactly the same time as Aristotle’s works on money, they take a starkly different approach.
Aristotle had founded the conventional Western theory of money when he had written in his
Politics
that “for the purposes of barter men made a mutual compact to give and accept some substance of such a sort as, being itself a useful commodity, was useful to handle in use for everyday life, iron for instance, silver and other metals …”
²³
The scholars of the
Guanzi
took an entirely different view. Money, they wrote, is a tool of the sovereign—part of his machinery of government: “[t]he former kings used money to preserve wealth and goods and thereby regulate the productive activities of the people, whereupon they brought peace and order to the Subcelestial Realm.”
²⁴

If money was a tool of the sovereign, other important questions followed: how exactly did it work, and to what objectives should the sovereign deploy it? To answer these questions, the Jixia scholars developed a simple but powerful theory of money. First of all, the value of money, they explained, was unrelated to the intrinsic value of the particular token used: “[t]he three forms of currency [pearls and jades; gold; and knife- and spade-shaped coins] offer no warmth to the naked, nor can they fill the bellies of the hungry,” the
Guanzi
proclaimed. Instead, money’s value was directly proportional to how much of it was in circulation compared to the quantity of goods available. The role of the sovereign, therefore, was to modulate the quantity of money available in order to vary the value of the monetary standard in terms of those goods. He could choose a deflationary policy—“[i]f nine-tenths of the kingdom’s currency remains in the hands of the ruler and only one-tenth circulates among the people, the value of money will rise and prices of the myriad goods will fall”; or an inflationary one—“[h]e transfers money to the public domain, while accumulating goods in his own hands, thus causing the prices of the myriad goods to increase ten-fold”—depending on the needs of the economy.
²⁵

Varying the monetary standard in this way could serve two purposes. First, it would provide a powerful means of redistributing wealth and income amongst the sovereign’s subjects, as inflation eroded the claims of creditors and eased the burden of debtors, shifting
wealth from the former to the latter—or deflation did the opposite. Moreover, the most important redistribution, if new money were minted, would be to the sovereign from his subjects as he spent new money into circulation at essentially no cost—the miraculous power that economists in the Western tradition would later come to call “seigniorage.” Second, it would regulate economic activity by making the primary instrument for the organisation and settlement of trade more or less readily available. The goal of government should be a harmonious society, and monetary policy was a powerful tool with which to achieve it. Of course, there was a catch. For money’s powers to be effective, the Jixia scholars pointed out, the sovereign must retain exclusive control over them. If anyone else in the kingdom was able to issue money then they would arrogate to themselves control over the value of the standard, and usurp part of the sovereign’s power.

From their inception, the precepts of the Jixia academy were hailed for their clarity and logic. But it took bitter experience to establish them as the unchallenged axioms of Chinese monetary thought—and in the meantime, the matter of monetary control was sometimes fiercely contested. In the chaotic decades following the overthrow of the Qin dynasty in 202
BC
, the emperors of the newly installed Han dynasty pursued a loose fiscal and monetary policy, spending beyond their means and financing their deficit by issuing new money. Eventually, a radically deflationary monetary policy aimed at restoring confidence in the imperial currency had to be imposed. The squeeze that followed proved as painful and unpopular as ever: but in this instance so painful and unpopular that in 175
BC
Emperor Wen was persuaded to attempt an unprecedented experiment that contravened the most sacred teachings of the Jixia school. Henceforth, issuers other than the emperor would be allowed to mint money. The Han dynasty Grand Historian Sima Chen explained the consequences:

Monetary entrepreneurs had managed to convince the emperor that to alleviate the effects of his stabilisation policy he should permit them to issue money. The problem was that private issuers require political authority in order to make their liabilities liquid. A vicious circle therefore emerged. The private issuers sought to build their political authority in order to enable the supposed monetary palliative to take proper effect; the financial power this gave them increased that authority, and so on. Before long, it became clear that whatever their economic merits, the private moneys and their issuers posed a political challenge to the integrity of the empire. Palace counsellors warned that the growing political chaos was the direct result of ignoring the monetary axioms of the Jixia academy, and in 113
BC
the Emperor Wu re-established the imperial monopoly over money. Sang Hongyang, his chief adviser on economic matters, explained the explicitly political reasoning that lay behind the crackdown: “If the currency system is unified under the emperor’s control, the people will not serve two masters.”
²⁷

The experiment with monetary heterodoxy had failed. The academy’s conception of money and the policy recommendations that derived from it had been proved correct. Whoever wished to remain in power and see his domain well governed should jealously guard the management of the monetary standard and the monopoly of issuance.
As the
Guanzi
put it, “[t]he prescient ruler grasps the reins of the common currency in order to bridle the Sovereigns of Destiny.”
²⁸

The ingenious initiative of Duke Huan of Qi meant that the first great work of Chinese monetary thought was a creation of court
employees, intended to bolster the monetary franchise of the sovereign. In Europe, the situation was to be quite the opposite. Not only was European monetary thought to take many centuries to develop beyond the maxims of Plato and Aristotle, but when it did, it was not the sovereign but his subjects who were responsible for the progress—and its aim was not to reinforce the sovereign’s control over money, but to relax it. In the next chapter, we will discover why.

With every passing year, we realise that the technological achievements of the Roman world are greater than we thought. Fifty years ago, we tended to take the view that Virgil popularised in a famous passage of the
Aeneid
: that the Romans may not have been much good at science, technology, or the arts, but that they made up for this by excelling at their vocation to build empires and rule the world.
¹
Now, we know that their generals owned computers and that their entrepreneurs built mechanised factories.
²
But if Rome’s technological achievements were impressive, they were as nothing to its financial sophistication. Within a few centuries of its birth in the Aegean, money was everywhere in Rome. The financial infrastructure was vast and complex. There was of course a trusted coinage, but as in any sophisticated monetary economy, coins were principally for small transactions. Big tickets—and in Rome’s heyday, there were some very big tickets—were settled using
littera
or
nomina
—promissory notes or bonds. The great politician and orator Cicero summarised the normal method of large payments in the late Republic as
“nomina facit, negotium conficit”
(“[one] provides the bonds, and completes the transaction”).
³
Nor did the credit economy
extend only to large payments. In the poet Ovid’s satirical textbook for young lovers,
The Art of Love
, he warns the prospective Lothario that girlfriends need presents—and it is no good making the excuse that you have no cash on hand, because you can always write a cheque.
⁴

Already by the beginning of the Imperial age, the days when the smart Roman’s wealth was entirely in land were long gone.
“Dives agris, divespositis in faenore nummis”
(“Rich in fields, rich in money out at interest”) was how the poet Horace described the worldly Roman of his day.
⁵
He would hardly have seemed out of place in Victorian England, with its rentiers begging to be excused from paying a bill because they are “all in the funds at the moment.” Then, as now, there were even those who spurned real assets entirely, and preferred to be rich in monetary form alone.
⁶
Bankers could take deposits, make loans, and settle international payments.
⁷
Then as now, this financial elite specialised in dazzling the uninitiated with the sophistication of their technique: the jaded Cicero wrote of them with pointed irony that “concerning the acquisition and placing of money and its use, certain excellent fellows, whose place of business is near the Temple of Janus, converse more eloquently than philosophers of any school.”
⁸

In such an extensively monetised economy, it is hardly surprising that the Romans were also well acquainted with another familiar feature of modern finance: the credit crisis. Occasionally, the similarities with the modern age are nothing short of eerie. In
AD
33, the Emperor Tiberius’ financial officials were persuaded that the recent boom in private lending had become excessive. It was decided that regulation must be tightened in order to extinguish this irrational exuberance. After a brief review of the statutes, it was discovered that none other than the father of the dynasty, Julius Caesar, had in his wisdom instituted a law many decades before specifying strict limits on how much of their patrimony wealthy aristocrats could farm out in loans.
⁹
He had, in other words, introduced a rigorous capital adequacy requirement for lenders. The law was clear enough: but not for the first time in history, industrious lenders had proved remarkably
skilled at circumventing it. Their ingenious evasions, the historian Tacitus reported, “though continually put down by new regulations, still, through strange artifices, reappeared.”
¹⁰