International Currency (Part 1)

Today USD is considered as an international currency. However this was not always the case.

Older International currency
1. Denarius (silver coins issued by the Roman Empire) First stuck in 211 BC was in trade till 275 AD. The coin weighed 4.5 gms in silver. The legions of Rome provide stability and its widespread empire provided liquidity/acceptability to these coins. Its influence went beyond the borders of the Roman Empire and even today many Islamic country use the word Dinar for their currency.

2. Ducat: it weighed about 3.5gms of gold and was issued by Venice in 1140 AD. Till the time Venice was the center of trade, Ducat remained the measure of gold and wealth. Even in Merchant of Venice (Shakespeare), the loan was given in Ducats. Mediterranean has always been the center of exchange of goods between Asia, Africa and Europe. Since Venetian Galleys ruled the water there the currency was widely accepted.

3. Soon after the discovery of the New Worlds and the Passage to Asia via Cape of Good Hope Italy’s influence in the world trade declined. The center of international trade and finance shifted to Spain and then Finally to England (because of its widespread colonies). Pound Sterling hence became the currency of choice. All other currency were pegged against Gold or this currency.

4. Dollar: Dollar’s rise to supremacy was not smooth. Early dollars were issued by the merchant bank (and not the US Government) Hence it was not uncommon for an individual owning 10-15 different issues of dollars each valid in different states. Even after the Civil War when US government started issuing dollar, the currency initially failed. Till 1932 there were 2 dollar the Green paper (fiat money) and the Gold Coin. The exchange price of the two were determined on the basis of gold prices. It was only after the World War 1, when the European government owed US huge sums of money that Dollar Supremacy was established. The Fact that Fort Knox had at one time almost half the known bullion in the world further strengthened US Dollar’s position as the international currency of choice.



Spain (Too much wealth is a problem)

Too little gold/wealth was always scary. The kingdom with empty coffers were always on the verge of annihilation. They never had money to build defenses, raise armies/navies, build cities/roads/ships/canals, import food (in case of drought) or even pay tribute so that the lives of its citizens would be spared. However people never realized that too much wealth can also be a problem.

Spain and Portugal, by the 1500, has discovered massive sources of gold and silver in the New World (Latin America). It won’t be wrong to say that the half of the world’s gold flowed through Spain. Yet in 1557 and then in 1597 Spanish Government was bankrupt.

The influx of gold from Caesar’s campaign in Gaul caused a plunge in the value of gold by over 25%. Its no wonder that the strongest nation in the world faced a civil war soon afterwards which destroyed the republic for ever.

It was only after 1568, that people realized the problems of too much wealth. Jean Bodin (1530-1596), a French lawyer, writing in 1568, while analyzing the the inflationary effect of the (Latin) American money concluded
there were several reasons for the rising prices in the sixteenth century but that “the principal and almost the only one
(which no one has referred to until now) is the abundance of gold and silver, which is today much greater in this kingdom than it was four hundred years ago”.

However, there was little one could do about it. Take Spain for example. There are tonnes of silver and gold in the New World which was getting mined, and shipped to Europe. Because of this sudden influx of gold, nothing was too expensive. The demand and the prices of goods rose many folds, but in that Pre-Industrial age, the production of goods could not be scaled up. Hence, this demand resulted in increase of wages making production to be commercially inviable in the whole of Spain.

The situation was so bad that by 1590, 80 per cent of all goods shipped from Spain to its new colonies were goods that had already been imported from elsewhere in Europe. (source)
England and rest of the Europe on contrast build manufacturing capabilities. They used their colonies as a source of raw materials and a destination for manufactured goods. Making their economy more robust.

This manufacturing capabilities fueled the industrial revolution and made their economies stronger. Hence, even after the loss of major colonies, other European Counties were not suddenly reduced to poverty. In contrast, Spanish grew weaker because of too much wealth. Their wealth forced them to fight too many costly battles which emptied their coffers. The Britisher Privateers disrupted the supply of gold using Guerrilla tactics and weakened the empire. Finally the Spanish Armada was defeated and Spain lost control of the High seas and the New world reducing them to almost nobody in the arena of Wealth, Power and Influence.