02 Metallic Money

Metallic money

Most people think of early Money as being metal, or old coins, and as we’ve discovered from the previous post, the earliest form of money was a debt, and this debt could be represented as an item. It is therefore feasible to believe that these items became uniform over time, standardised and eventually intended pieces of monetary units that we’re used to transact. But during this time, the knowledge of metallurgy was not known yet, the idea of using heat and melting down metals to produce certain standardised units, or the knowledge may have been known, but the idea of applying it in the way of coinage was not yet applied. So initially, rare metals, elements were used just like rare shells and stones. This was the case with gold and silver as well, the idea to make standard units was an idea first implemented in an ancient Lydian empire, which was 650-600BC. Before that, gold and silver was used to transact by weight. So people had with them scales and they would weigh what you had. What this meant was that there was a natural friction to do business and commerce. You had to:

1. Have your scales,
2. Have your counter weights,
3. Both parties had to trust in both those scales and counterweights,
4. It would be difficult to get exactly what one wanted as each piece of metal had different weights. Maybe you wanted 2g of gold for your sheep, but they had 1.9g or 2.1g.
5. If they didn’t have the exact weight, they had the choice to either clip metal pieces to get the exact weight or accept the loss/gain of the piece.

It was an inaccurate way of doing business and made each transaction take time. Not very useful when in a rush.

The first minting of coins

Then the Lydians decided to use the knowledge of the forge and standardise money. Each piece having the same weight, design and exact ‘Unit’. By doing this they effectively:

1. Removed the need to have scales all the time
2. Removed the need to have counter weights
3. Removed the need to trust each and every person you transacted with, you only needed to trust the one who minted the coins
4. One could specifically ascribe a Unit measurement to each item bought or sold.

In essence, by standardising the gold and silver pieces of currency, they removed the friction in trade. Instead of taking 5 minutes to conclude a transaction, it could take less than 1. Because Gold specifically (and metal in general) is infinitely malleable, this allowed specific pieces of detailed information to be moulded onto its surface. This was the ‘latest tech’ at their time, an important piece of innovation and set the trend for money for thousands of years. So looking at gold, especially in a coin form, held the following properties, or enhanced them:

1. It became an easy medium of exchange
2. In the coin form, it became a socially accepted unit of account, whereas the non-coin version only achieved that by weight.
3. It was portable, as it would be easier to carry a bag of gold than a herd of sheep (to transport value)
4. They were durable, as gold is inert and does not react with anything. It wont go off like food, would not rust and would outlast its owner.
5. Gold, being infinitely mallable 

But they fluffed it

As we stated above, by minting coins, you were able to remove the need for trust between every single person you transact with. All you had to do was trust the one who minted the coin. As long as they were trustworthy, the system would work. But thats not the nature of man. Mankind will always try to get a free lunch, and one consistent trend from the beginning of time is that if man could try to get free money, they will take that chance. And this is what the Lydians did. They fell into war, and needed the funds to fund it. But as with all wars, they are expensive, and they ran the risk of running out of money before winning or even losing the war. So they made a decision to dilute the metal coins with other metals, like copper so that they could produce more coins without the added cost of finding more gold. They tried to print themselves free money. But they failed to realise that the system only worked as long as people trusted the system, and it only had value due to the scarcity, work and effort behind golden coins. Other metals have less work and effort, and at some point that decreased value would manifest itself in their new coins. Meaning that it would eventually debase the value the coin was trying to represent. And that was, along with other factors, what lead to the end of the Lydian empire.

Much of the same

After the Lydians, other civilisations adopted the same technology. And why not considering it was extremely useful for their time and needs. But as with the Lydians, the history or man is filled with repeat events where those who mint the coins eventually manipulate the coins, dilute the currency and eventually debase and destroy the very thing that give it value, trust. The phrase ‘take it on face value’ actually comes from this very process. Where the coins no longer held the value it was supposed to represent, so the government said to their people ‘take the coin on its value stated on its face’, ie ‘take it on face value’.

Ribaa al Fadhl

We have a hadeeth of the Messenger of Allaah صلى الله عليه و سلم where he stated that if one wishes to transact gold for gold, it needs to both be the same value, same weight. One would ask “But who would exchange one piece of gold for another piece of gold? And why would they not be the same weight?” To understand this one needs to understand that during their times, it was not uncommon for coins to be different weights due to different minters, and due to ‘coin clipping’. It was possible for one gold coin to be nice, and in pristine condition and another not to be so nice, maybe clipped, damaged, diluted etc. So what could happen and what was happening was that some were exchanging 2 ‘bad quality coins’ for 1 ‘good quality coin’. Islam came to put a stop to various forms of deception, and therefore if any gold or silver is exchanged, they must be the same weight, as weight is a sure way to guarantee fairness. So 2 gold coins could be exchanged for 1, as long as those 2 coins weighs the same as that 1 coin. Such an exchange was described as Ribaa, and Ribaa means ‘increase’. We actually see this during the time of the Messenger of Allaah صلى الله عليه و سلم , but with Bilal ibn Rabbaah. He exchanged bad quality dates for good quality ones, by giving more of the bad quality dates for the less of the good quality ones. The Messenger of Allaah صلى الله عليه و سلم said:

أواه أواه, عين الربا

Ah!! This is specifically Ribaa. He instructed him to first sell the bad quality dates for a price, and then use that money to buy the good quality dates. That way all involved can guarantee a fair trade.