So if credit preceded hard currency, why was hard currency developed?
The emerging consensus among historians over the last ten years is that markets based on the use of actual bullion or currency in daily transactions are almost everywhere a side-effect of war. If you think about this, it makes sense. Why did they choose gold and silver as the universal currency of exchange? Well, gold and silver were the sort of things that soldiers were most likely to have a lot of on hand, since that is the easiest and most valuable thing to carry off if you’re looting and pillaging somewhere. But on the other hand, a soldier is the last person you’re going to want to extend credit to, since they are heavily armed and just passing through. So, soldiers wants of stuff (marketplaces always formed around an army), and they’ve got lots of these bits of precious metal; it makes sense that that’s where cash markets would emerge.
What seems to have happened is that states started systematizing the division of the loot into uniform pieces, eventually making them into coins. Then – and this is the big trick – they demanded those coins back, in taxes. One of the great mysteries, if you take the Adam Smith theory of the origin of money (that it arose from the inconveniences of barter), is, why did ancient kings want taxes at all? If gold and silver were naturally money, why not just grab the gold and silver mines directly and keep all of it? Indeed that is in fact what they did, so what’s the point of taking the gold that you already own, stamping your picture on it, handing it out and then saying, ‘OK, everybody, give it back’? The only logical explanation is that they were trying to create a market, and that also explains who they were giving it to. One of the big problems in the ancient world was how to feed one’s army. You have 50,000 people sitting around, and they’re going to eat pretty much anything standing in the area within about three weeks. How do you feed them? The easiest solution is to give the soldiers these metal coins and say, ‘OK, everyone in the kingdom is required to give me one of these coins’. Suddenly the whole population has to figure out a way to give the soldiers what they want in exchange for the coins. So you’re effectively employing your entire kingdom to feed your soldiers. Commercial markets are essentially, then, a by-product of military operations by states.
(via theamericanbear)