Goat Standard of East Africa

John Maynard Keynes in Volume 1 of his Treatise on Money, published in 1930, says that:

A district commissioner in Uganda today, where goats are the customary native standard, tells me that it is a part of his official duties to decide, in cases of dispute, whether a given goat is or is not too old or too scraggy to constitute a standard goat for the purposes of discharging a debt.

Often goats shared with cattle the role of currency, a store of value, and standard of deferred payment in Uganda well into the twentieth century. Like many livestock standards, the rate at which goats and cattle could be traded for each other was fixed. The goats circulated more easily in subsistence economies and were often used to buy weapons and salt. Goats could be loaned out for interest; a chief might send a herd of goats to be kept by his subjects, and receive every third kid born to the herd as interest. The government also fixed fines payable in goats.

In Tanzania 25 goats were equivalent to 1 cow or ox, and 1 goat equaled 1 hoe. The exchange rate between goats and oxen varied between districts. The Masai rated 1 ass at 5 goats, an iron spear at 2 goats, and a big cattle bell or a small ax at 1 goat. They also paid bride money in goats.

In equatorial Africa goats often served as a store of value and a standard of deferred payment, but not a medium of exchange. Bride money was paid in goats and sheep; in order for a man to marry, he had to be able to borrow goats and sheep.

Societies living closer to the threshold of survival found food items useful as money because food was what everyone needed, and a large share of each individual’s activity was devoted to securing food. Therefore food items were an obvious choice as a readily acceptable medium of exchange. The problem with much food, such as grain, was that it was perishable, hampering its usefulness as a store of value, one of the important functions of money. Livestock not only made excellent food, but also reproduced, solving the problem of perishability, and even earning a crude form of interest. Therefore livestock could serve both as a medium of exchange and a store of value. Because livestock could be counted on to maintain their value, creditors preferred to define debts in terms of livestock. Livestock shared with other commodities one important defect as a medium of exchange. The quality of livestock varied because of age and health and people invariably sought to repay debts with inferior animals, creating conflicts of the sort referred to in the quotation from John Maynard Keynes. Also livestock are often bulky and difficult to transport.

Livestock money is not necessarily a symptom of primitive economics and culture. Remote areas often suffer shortages of coins and other forms of money and turn to commodities as a medium of exchange. The American colonies resorted to commodities as money at a time when the world economy was flush with supplies of precious metals from the New World. The Massachusetts Bay Colony enacted a law for cattle being driven to Boston for payment of taxes, providing “if they be weary, or hungry, or fall sick, or lame, it shall be lawful to rest and refresh them for a competent time in any open place, that is not corn, meadow, or inclosed for some particular use” (Nettels, 1934).

Glass-Steagall Banking Act of 1933 (United States)

The Glass-Steagall Banking Act, more than any other piece of banking legislation, shaped the development of the current banking system in the United States. One of the numerous acts of economic reform passed in the first 100 days of Franklin Roosevelt’s administration, it sought to revive confidence in the banking system and reduce bank competition for depositors’ money.

In 1931 the position of banks in the United States caught the attention of the eminent economist John Maynard Keynes, who described it as the weakest element in the whole situation. Suspensions of deposit redemptions by banks had been averaging about 634 banks per year before the depression, already a high level. The banking crisis deepened with the onset of the economic crisis. Depositors pulled money out of banks, sometimes sending it abroad, sometimes hoarding it in homes. Gold reserves declined. From 1929 to 1933 over 5,000 banks suspended redemption of deposits. One-third of all U.S. banks failed during the depression. President Hoover saw the banks as a victim of a crisis in confidence. To prevent panic from spreading, President Roosevelt in March 1933 ordered all banks to close for a week.

On June 16 1933 the Glass-Steagall Banking Act became the law of the land. To help restore confidence in banks, the act banned deposit banks from engaging in investment banking. Investment banks buy newly issued stocks and securities from corporations and resell them to the public for a profit, playing a key role in marshaling capital corporations. After the stock market crashed, banks that had invested depositors’ money in stocks had no way to recover their investment and were forced into bankruptcy. The ban on investment banking remains in effect today, but has been weakened by innovations in the organization of the banking industry, and many people in Congress think it should be repealed. This divorce between deposit banking and investment banking does not exist in many countries, including Germany, France, Switzerland, and the United Kingdom.

The Act also gave the Federal Reserve System the power to regulate interest rates on savings and time deposits. This provision, known as Regulation Q, helped keep the cost of funds down for financial institutions. Another provision of the Glass-Steagall Banking Act prohibited interest-earning checking accounts. The payment of interest on checking accounts increased bank competition for deposits. This added competition might have driven some banks into bankruptcy. The deregulation of financial institutions in the 1980s phased out Regulation Q and removed the ban on checking accounts that pay interest.

The Federal Deposit Insurance Corporation (FDIC) owes its existence to the Glass-Steagall Banking Act. This corporation insures deposits from bank failure up to a maximum limit. All banks that are members of the Federal Reserve System must buy deposit insurance from the FDIC. Today virtually all commercial banks insure deposits with the FDIC. After the savings and loan crisis in the 1980s, the FDIC took over responsibility for furnishing deposit insurance to the thrift institutions. Deposit insurance helps maintain the public’s confidence in the banking system.

Large numbers of bank and thrift failures during the 1980s showed that financial institutions remained vulnerable to disinflation and recession. The Glass-Steagall Banking Act went a long way toward instilling resiliency and public confidence in the banking system.

Ghost Money

During the late medieval period, money units of account arose that did not correspond to real or tangible pieces of money or coin. Some historians have labeled as “ghost” money units of account without real counterparts. Some of the ghost money owed its origin to coins that were minted in the past, but were no longer minted or found in circulation. Two important units of account, however, the pound and the shilling, began as ghost money.

King Pepin the Short of France, father to Charlemagne, decreed that a pound weight of silver be struck into 240 pennies. He also introduced the shilling as a unit of account equal to 12 pennies, comparable in value to the popular Byzantine solidus. In the Carolingian system, one pound equaled 20 shillings or 240 pennies. The only coin that was actually minted for several centuries, however, was the penny, and the pound and shilling remained only money units of account or ghost money. Rather than recording 2,400 pennies in a ledger, or pricing a good at 2,400 pennies, merchants found it much easier to write 2 pounds. The silver weight of pennies dropped in time but a pound remained the equivalent of 240 pennies, losing all connection with a pound in weight of silver. The shilling was also a money unit of account for several centuries. England minted its first shilling during the 1500s.

In 1252 Milan began minting gold florins equivalent to 120 pennies. Perhaps because of the debasement of pennies, the value of the florin rose to 384 pennies and remained at that value for 60 years. A ghost florin emerged that was equal to 384 pennies, meaning that a florin came to signify 384 pennies. Later the value of the real florin rose to 768 pennies, leaving a real florin at twice the value of the ghost florin. Venice and Genoa developed ghost money in a similar fashion.

In Florence the florin also established itself, after a period of stability, at a rate of 384 pennies, another ghostly multiple unit of account. The Florentines, however, kept the real florin as a unit of account, and made the penny a ghost penny equal to 1/384 florin, and the shilling, also a ghost, 1/29 florin.

The subject of ghost money touches on an issue always important to debtors and creditors—the stability of the purchasing power of a unit of money. Debtors invariably prefer contracts expressed in depreciating units of account, while creditors prefer contracts expressed in a stable coin. Put differently, debtors in Milan preferred to pay off debts in ghost florins rather than real florins. Creditors wanted to receive payment in real florins. Depreciating units of money and ghost monies created the same divergence of interest of debtors and creditors as found in modern societies suffering inflation.

German Hyperinflation

The German hyperinflation of the early 1920s stands as a constant reminder of the monetary insanity lurking beneath the surface of modern systems of money and banking. The German money supply grew during and after World War I. In June 1914 the German marks in circulation stood at 6,323 million, but by December 1918 the number of marks in circulation had grown to 33,106 million. Prices over the same time span more than doubled. Germany had financed the war largely by monetizing government debt rather than raising taxes or borrowing in capital markets.

After the armistice in 1918 German marks in circulation continued to expand and by December 1921 German currency in circulation stood at 122,963 million marks. Prices then were slightly over 13 times the 1914 level. Prices now began to catch up with money growth. By June 1922 German marks in circulation had risen to 180,716 million, but prices were now over 70 times the 1914 level. The Reichsbanks abandoned all pretense of monetary control as marks in circulation rose to 1,295,228 million by December 1922. By June 1923 the number had increased to 17,393,000 million.

After June 1922 price increases broke into runaway inflation. By December 1922 prices stood at 1,475 times their 1914 level, and prices stood 19,985 times their 1914 level by June 1923. Prices were rising so fast that workers were paid at half-day intervals and rushed to spend their wages before they lost their value. Customers at restaurants would negotiate prices in advance because prices could change before the meal was served. Grocery shoppers rolled to the store wheelbarrows laden with sacks of money, which was also balled up and used for fuel. Prices continued to rise into November 1923. A newspaper that sold for 1 mark in May 1922 rose in price to 1,000 marks in September 1923. By 17 November 1923 the same newspaper sold for 70 million marks.

In December 1923 the money supply and prices stabilized. The German government reformed its monetary affairs, issuing a new unit of currency called the rentenmark, equal to 1 trillion marks. The new currency was issued by the Rentenbank, which replaced the Reichsbank as the note-issuing bank. The only asset of the new bank was a mortgage on agricultural and industrial land, and the paper money issue of the new bank was strictly limited.

The inflation began with the stress of wartime finance. After World War I Germany needed to restock its warehouses with imported raw materials and pay war reparations. This led to an outflow of German marks and a depreciation of the German mark in foreign exchange markets. This depreciation caused inflation in the prices of imports, and the inflation spread to the rest of the economy. The Reichsbank kept the money supply rising faster than prices to ward off unemployment. The French occupation of the Ruhr aggravated the matter considerably. The German government encouraged passive resistance, banned reparation payments, and printed money to pay striking miners. The French blockaded the area and Germany lost the tax revenue.

The German experience with hyperinflation was the most spectacular the world had seen. Since World War II Germany can boast of one of the best records for controlling inflation of any advanced industrialized country. In the book Economic Consequences of Peace (1920) John M. Keynes saw the inflation trends and commented:

By a continuing process of inflation, the governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. While the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.

Many observers blame the episode of German hyperinflation for creating the political conditions that led to the rise to power of Hitler. Partly because of the German experience, modern societies consider price stability an important ingredient of social stability.