The Paradox of Value

THE ORIGIN OF MONEY

by

Hugh R. Whinfrey

Money pervades our modern society. Indeed, it is a fundamental concept employed in the structure of not only our communal institutions, but our daily personal lives as well. For us, money is primarily an abstract store of value which functions as a medium of exchange. We also recognize it in an aggregate sense as a genuine commodity with legitimate supply and demand market segments. Life as we know it, would be inconceivable without money.

The fundamental aspects of our modern monetary system evolved during a relatively short timespan located over two and a half millenia ago in ancient Greece. The pivotal step that occurred among these Greeks was the acceptance of the concept that coinage was a generic abstract equivalent of material commodities. That this notion of the Platonic 'ideal' of value, that is value disassociated from any particular commodity, could itself be put into some physical form of existence, is paradoxical and the source of much of our philosophical "frustrations" with money in modern times, where the 'ate' of considering a scrap of paper to be equivalent to a host of material possessions all too often becomes readily apparent.

This paradox of the material existence of the Platonic ideal of value will be termed the 'paradox of value' in this paper, which will attempt to briefly reconstruct the story of the sale of this 'paradox of value' to the ancient Greek public. The motivation lies in a desire to discover by analogy what, if any, hidden premises may exist in the modern monetary system.

The idea of a standardized pieces of metal, uniformly sized, weighed, and stamped with the seal of a political authority came to Greece from Lydia. Snodgrass states that in light of recent re-evaluations "it now appears most likely that Aigina - agreed to be the first state in Greece proper to issue a silver coinage - did so only after 575 [B.C.]."¹ It should be emphasized that these coins, and the subsequent issues of other Archaic Era city-states, were not distributed with instruction manuals.

The world this coinage entered was a barter and gift-exchange economy that already had some very crude forms of money - iron spits, tripods, cauldrons, and oxen for example. Early finds indicate that any actual circulation of this coinage was limited to the immediate environs of the issuing polis, and that small denominations were not very common.² They therefore do not appear to have done much at the outset to facilitate increased commerce on neither a retail level nor across a broader spectrum of trading partners.

The scholarly literature frequently deduces that the initial function could only have been primarily political, which implies that the coinage served chiefly as symbols of political legitimacy. However, payments in coinage to the state's suppliers seems to be counted as a 'political' activity. What does seem reasonable is that the first issuers of coinage were not in general trying to beneficently stimulate the local economy, but rather had hit on an advantageous way to purchase goods and services for the state which additionally afforded the opportunity to do some cheap advertising. Whereas production of small quantities of coins could be justified on the symbolic value only, larger quantities, particularly of higher-denomination coins, simply would have had to have been economically self-supporting enterprises in order for the practice to have been continued.

While receipt of coins from the state could have been forced by legal requirements, the only substantive effect would have been on local suppliers, non-citizens could always take their business elsewhere unless an appropriate barter arrangement could be worked out. This in fact appears to be precisely what happened, as it accords with the aforementioned pattern of early finds. This does give the early coinage issues the color of local pyramid schemes, with the state permanently positioned at the top level, and it is furthermore not at all unreasonable to expect such a coloring in the infancy of the innovation.

The 'real' value of the coins originally could not have been anything other the market value of the metal content, granted the standardized weight and consistency probably added a premium. While they undoubtedly had ornamental uses, the point is that for a private individual to actually spend a coin in the barter economy, finding somebody who knew of a use for it was required. The coins at this point do not yet seem to embody the 'paradox of value' that sets a cash economy apart from a barter economy.

The major breakthrough seems to have come gradually in the last half of the sixth century with the realization that states could not only supply coins, but also demand them. The earliest evidence of this is from circa 550-525 on a fragmentary legal inscription from Eretria which mandates that fines be paid 'in legal tender'.³ By requiring fees, tributes, taxes, fines, etc. to be paid to the state in coinage, a genuine demand for the coins as purely abstract tokens of value was created.

This re-cycling of the coins was certainly profitable to the state: the coins involved in a state expenditure did not necessarily all have to be manufactured from scratch, and they could be drawn back into the state by simply creating various taxes which involved little expenditure of resources by the state. The state could now potentially profit by both issuing and receiving coins. The logical consequences of this for both the state and the population are staggering, and this certainly needs to be ranked among the major 'revolutions' that mark the turning points of human civilization. First and foremost, the 'paradox of value' appears to have attained critical mass by the expectation of monetary debts to the state. This also implies a change in the conceptualization of the state itself. An entity, which gives and receives tokens of the Platonic 'ideal' of value, must itself exist on some kind of 'ideal' plane. We have at least the midwife if not the birth itself of political ideology.

Secondly, the combination of denominated coinage and fines and penalties payable in precisely mathematically determined increments, to a degree unobtainable when reckoning in goats for example, leads to a theoretical potential for the perfection of 'justice'.

The Spartan reaction to the events of the sixth century is often depicted by scholars as containing a component of conservative ideological revolt against the effects of coinage. Their system seems to have been designed to bring the conceptual benefits of coinage mentioned above without the drawbacks of the gradations of wealth among the citizens. It may be absolutely incorrect to cast it as a 'conservative' response, in that it appears to be a radical attempt to jump completely onto this perfect 'ideal' plane, leapfrogging what could have been considered an intermediate stage in a fast-changing world.

The Spartan need to make ends meet was really solved by the conquest of Messenia instead of by international trade. Lycurgus' system was also put into place before Greek coinage evolved into any role in international trade. "Very late in the Archaic period, a few silver-producing areas (notably Athens and the Greek colonies on the coasts of Macedonia and Thrace) seem to have hit on the idea of using their coinage for overseas trade, and their high-denomination silver coins are found dispersed over a wide area. But this serves only to draw attention to the absence of this practice elsewhere and earlier. Even the view that Archaic coinage was intended for internal trade is open to the second objection [low incidence of small denominations]".⁴ The Spartan leap may have been premature in that it occurred before any of the economic productivity benefits of a cash economy were known.

The transition to a cash economy marks the dividing line between the mere conception of the 'paradox of value' and the general acceptance by the public of it. It also marks a dividing line between Archaic and Classical Greece. At this demarcation line a system of coinage is now a well-defined product. The extent to which the Classical Greeks bought it can be seen by the fact that fourth century Greeks could not even conceive of a society without it, as evidenced by disbelief at the story of Pheidon's demonetizing of the iron spits on Aegina.⁵ The purchase was so thorough that Plato, in his Republic, written around 380 B.C., seemingly accepts the necessity of a system of currency and the accompanying 'paradox of value' without further comment:

A further point: how are they going to share the things that each group produces within the city itself? This association with each other was the very purpose for which we established the city.

Clearly, he said they must do this by buying and selling.

It follows that we must have a market place and a currency for this exchange. - Certainly.⁶

Several things needed to come together to make the cash economy a reality. The major ingredient required was simply a sufficient quantity of circulating cash in the first place. The Attic silver mines at Laurion provided this, supplying not only Athens directly, but certainly also indirectly other cash economies in Greece. Evidence of a sharp increase in production at Laurion occurring at the beginning of the Fifth century comes from Herodotus:

The Athenians had amassed a large sum of money from the produce of the mines at Laurium, which they proposed to share out amongst themselves at the rate of ten drachmas a man; Themistocles, however, persuaded them to give up this idea and, instead of distributing the money, to spend it on the construction of two hundred warships for use in the war with Aegina.⁷

A quantum leap in the governmental extractions from the populace, in the form of coinage, which would stimulate the demand for coins to unprecedented levels was the next stage in the transition to a cash economy. While governments can always be greedy in imposing taxes and the like, the motivational element of a moral imperative is necessary to get the population to accept and internalize a radically different way of thinking. The very concept of taxes creates moral resistance rather than acceptance on an individual level.

The required moral component materialized in the form of the Persian threat, not without coincidence appearing at roughly the same time the cash economy in Athens seems to have begun to take off. Themistocles' aforementioned quote set the ideological precedent. The victory at Salamis proved the method. The leap to realizing that how the surplus was actually accumulated was irrelevant to the result, is not very difficult to make.

Acceptance of the 'paradox of value' as a subtle consequence of responding to the fear of enslavement by foreigners seems to have been the packaging of the penultimate sales pitch in the process. The focus was on a common self-defense and it slipped through unnoticed in the moral shadow of this distraction. What does seem to have been noticed is the way that the economy was stimulated as a result. The connection between preparations for war and substantial economic stimulation are still with us today.

The pride the victory at Salamis and the consequent accruement of material benefits provided by the economics of the Delian League lead to the other half of the psychology of the moral component - the final sales pitch was why the 'paradox of value' should be permanently accepted, rather than viewed as a temporary concept to be invoked in times of external threat. The key stroke here was to make these benefits felt by the individual. The institution of giving out coins in exchange for civic participation forced the bulk of the citizenry to confront the paradox face-to-face individually, and in a setting that set the instinct of greed against any opposing philosophical enigmas.

The civic participation payments also added more fuel to the fire by increasing the need for small denomination coins and creating a further intrusion of the cash economy into the daily lives of the citizens. The man who may never before have had reason to think of coinage for purposes other than taxes, now had reason to think of coins as both the abstract store of value that we know today and as the generally accepted medium of exchange which we also know today.

In modern times, we require that everything rest on sound scientific principles. The classical Greek philosophers did the same. However, more often than not, then as now, the grounding explanation comes after the concept has already been sold. This philosophical grounding is really a defensive step to keep the concept in place.

Plato's Republic can be viewed as one of these self-defense mechanisms. Plato's 'theory of forms' lays out a formal theoretical justification for 'disembodied value'. It is highly unlikely however that the 'paradox of value' escaped him. At this point Plato becomes really interesting. On the face of it, the Republic is a kind of speculative utopian treatise on where the cash economy can lead in the context of his times. However one often gets the strange sense in reading it that Plato is in fact having a private joke at the reader's expense and really means the opposite of what he is saying.

The Republic is, in my view, a social commentary akin to Orwell's 1984, wherein Plato is driving the reader to recognize the 'ate' inherent in the 'paradox of value'. One is tempted to see Spartan principles in his ideal society. The commonalty may be in the fact that they are both revolts against the society spawned by 'paradox of value'. The need for such a reactionary stance in 380 B.C. would indicate that the sale had been completed.

Seattle, March 1994.

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