the history of the vampire squid, episode 2.

Kings and merchants, power and trade, have always had an uneasy relationship.

Kings – better to use the generic term sovereigns, need money to maintain their states; they levy taxes, and from time to time they need to borrow money from merchants. Merchants are those who have accumulated wealth through trade, and thus have money to lend.

Merchants need kings to secure the peace so that they, the merchants, can trade.

Sovereigns claim an exclusive right to vouchsafe the money, by embossing the coinage or by signing the banknotes; “sound money” makes trade easier and more reliable. One of the earliest laws in economic theory, Gresham’s Law, is concerned with sound money: bad money (he meant money that wasn’t pure gold) drives out good.

Eventually, paper money replaced gold.  Printing money is easier than mining bullion from which to strike coins. During the Napoleonic wars, Britain had a paper currency and the government printed more notes to finance it; the currency depreciated, because the war – and the blockades associated with it – meant that there wasn’t enough stuff to buy with it.  After the war, for most of the Victorian era, Britain reverted to a gold standard. During the First World War, Britain built up debts, and trying to repay those debts in gold led to the prolonged depression of the 1920s and 1930s.

Wars, on the whole, ruin economies; yet there is often an economic pressure for war – to secure trading rights (the Opium Wars, for example), or access to resources – a lot of the First World War was driven by German desire to access the coalfields of Northern France, and the Second World War was about petroleum – as was the Iraq War.  The defence sector prospers during war and in preparation for war and government spending in this sector is often beneficial for the economy; rearmament in the 1930s brought Britain out of the Depression.

So from these needs – the need to trade, the need to finance government, and the (highly questionable) need to wage war, our financial system developed.

The twentieth century saw a continuing power battle in economic management between the merchant class, who by the end of it were “investment banks”, and the sovereign states.  That power battle is continuing, with the balance now firmly in the hands of the banks.  The technology of money changed dramatically, too. At the start of the century, money was still largely gold, or paper certificates for actual holdings of gold. By the end of the century all the money was electronic, numbers in a vast network of computers, with a small amount circulating as cash notes and coins.

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