Gold – according to Dominic Frisby: The fragility of paper

“Money is gold and nothing else”, said the legendary financier J.P. Morgan when testifying before the US Congress.

That’s something I want to think about today as we investigate the history of paper money. Gold is one of, if not the most malleable metals known to man. It is similarly ductile. And yet it has little industrial use, apart from in electronics, dentistry and a few other things.

You can beat gold into a sheet barely an atom thick, but it is almost impossible to destroy it. It can be dissolved through using aqua regia, but the gold can be reconstituted again. All the gold that has ever been still exists. Gold is perhaps the oldest substance on earth, thought to have originated as a result of collisions and explosions in the stars billions of years ago. All that gold created still exists – somewhere. Some of it embedded in rocks deep beneath the earth’s surface, some of it hanging from people’s necks.

This permanent substance with no use. What a contradiction.

Gold’s only purpose is to be wealth, to be a store and display of wealth. It is money, pure money.

Gold was the first metal that man made use of. He was hanging from his neck the gold nuggets he found in riverbeds as he hunted and gathered to display beauty, wealth and status, and giving them to other humans as reward, thousands of years before he discovered smelting and began using the other metals he encountered – tin, copper and silver – to make tools.

Stone Age man used gold to store and display wealth, and to transfer it. He used gold for exactly the same reasons as does his 21st century descendent. Gold is pure wealth. It is pure money.

But it is not the only money, and it never has been, not since the dawn of civilisation. In Ancient Mesopotamia, man used mud tokens, representing sheep or barley, baked inside clay balls to log debts owed. He began inscribing bits of mud for the same purpose, and so did man begin writing. In Ancient China, man recorded his debts on bits of leather. After the invention of printing he started using paper. Today the records are stored on and exchanged with computers. This is promissory money, debt money – the credit JP Morgan was referring to in the pre-amble to the above quote.

Promises disappear. Gold doesn’t. They are two quite different forms of money and it’s important in one’s mind to distinguish between the two.

Promissory money has evolved as communication has evolved. Shortly after the first cables were laid across the Atlantic Ocean in the mid-19th century, the first money was sent – hence why the pound-dollar exchange rate is still known as cable. But gold wasn’t actually sent across the Atlantic. Just a promise was sent, between two parties who trusted each other. Today millions of promises are sent across the internet every second. Promissory money evolves with communication technology. In fact, promissory money is often the spur, the impetus for communication technology to evolve. Promises transfer as quick as words.

The history of promissory money, the history of credit in other words, and the history of communication technology are thus intertwined.

The breakthrough communication technology of the Middle Ages was of course Gutenberg’s printing press, and paper money soon followed.

China had been using leather promissory notes as far back as 118BC, and Carthage even earlier in 146BC. Carthage is generally thought to have been the first user of lightweight promissory notes. Bank notes began appearing in China in the 7th century, during the Tang and Song dynasties – China was ahead of Europe as far as printing was concerned.

During the crusades in the 12th century, the Knights Templar issued promissory notes to pilgrims. A pilgrim could deposit valuables with a local Templar before embarking on his quest for the Holy Land and receive a document indicating the value of his deposit. On reaching the Holy Land, he could use his document to receive funds from the treasury of equal value. I imagine fraud must have been an issue for the Templars, but at least the pilgrim mitigated any potential financial damage from being mugged en route.

The use of paper money spread for this very reason. Paper is more portable than metal. The trader, merchant or voyager carrying paper is less vulnerable than if he were carrying metal, and the use of paper promises grew. They became written orders to pay the amount to whoever had the note in their possession. The term “bank note” is thought to derive from the benches (“banchi”) of Florence in the 14th century – the stone benches and tables that once proliferated on piazzas, streets, loggias, and palace façades, where people sat, talked, traded and exchanged. In many cases there were rows of benches and tables – effectively outdoor civic centres. A holder of “nota di banco” – a note from the bench – could exchange his note for the gold or silver of a banker. Although the practice of banking goes all the way back to Ancient Babylon, the word derives from those benches of Renaissance Italy.

But Gutenberg’s invention opened the door in Europe for paper money to proliferate. Paper would become currency, and by the 17th century those Italian paper promises would become institutionalised with the first central banks.

*Dominic Frisby is the author of Daylight Robbery – How Tax Shaped The Past And Will Change The Future, out now at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.