Not Conned by Sehgal’s Coined

A degreed economist (LSE) who works for J. P Morgan, Kabir Sehgal is the author of Coined: The Rich Life of Money and How Its History has Shaped Us. By its title, it is obviously a book with a great breadth of scope for its 257 pages of narrative. However, every story that I already knew was arguable. This is a scissors-and-paste effort, quickly assembled without deep reflection, insight, or questioning. In truth, throughout the book, the author does present the facts approximately. He gets almost all of it almost right. But as we say, “close only counts in horseshoes and hand grenades.” 

As this is a book about the history of money, the origins of money are important. His narrative is incomplete, coming from secondary sources. Sehgal apparently failed to grasp the central facts of the event. The same is true for the invention of coinage. Sehgal does correctly understand the fact that seems curious to us today, that promissory money, “soft” money, preceded precious metals as hard money by thousands of years. That said, the story of ancient Sumer and the creation of promissory notes (pg. 86) is wrong in so many details that it is wrong in substance. His deepest misunderstanding is the claim that clay balls containing tokens were a form of proto-currency (page 104). They may have been a harbinger or foreshadowing of that, but he completely misses the significance of the contemporaneous invention of writing. For the correct accounting see “Debt: the Seed of Civilization” on this blog, which points to the works of Denise Schmandt-Besserat.  

On the invention of coinage, he again relies on secondary popularizations, rather than the best academic research. And he fails to ask delving questions. He claims (as many do) that coins were invented in Lydia before 630 BCE. But he also identifies the famous hoard of the oldest known coins and coin-like objects, from the Temple of Artemis at Ephesus. Why were the oldest known coins and proto-coins not uncovered within the excavation of Sardis, the royal site of Lydia?  Ephesus, Miletos, and Kolophon have been suggested as possible candidates for the first cities to strike coins, not for commerce, but as bonus payments to mercenaries.

Sehgal never questions the economic motive for the origin of coinage. But if they were invented to facilitate commerce, they would have originated at a center of commerce. And they would have been commercially convenient. In fact, the first coins came from a cultural hinterland, the Turkish coastline of archaic Greece. And they were worth more than anything you could buy with them, as if today, the smallest bills were $1000 and relatively rare, while $10,000 bills were common. And Sehgal completely misunderstands electrum, the naturally occurring alloy, nuggets of which the first coins were struck. Lacking anything like an atomic theory, gold, electrum, and silver were three distinct metals, even though the ancients knew that electrum could be made by alloying gold and silver; and that electrum gold could be parted from electrum silver.  

Seghal never stops to ask why but just keeps going with a facile, though interesting, narrative.  He correctly identifies the fact that coinage is closely tied to the development of democracy, but he misplaces the origin of democracy at Athens.

It does not get any better with his stories about Nero, Diocletian, Lincoln’s greenbacks, or Bretton Woods. 

Kabir Sehgal lavishes praise on the deep knowledge base of the numismatic auction house, Stack’s (pgs 247-249) and rightfully so, but simply cites Q. David Bowers as “David Bowers, legendary numismatist and business partner of Harvey Stack.”  Harvey Stack gets all the credit. And he is worthy, indeed. But everyone in the know calls Q. David Bowers “the dean of American numismatics.”

So, as much as I would like to believe that a cash economy created niche employment for the beggars of Jakarta as extra riders to validate a taxi cab’s right to the high-occupancy high-speed traffic lanes, I have to remain doubtful that Sehgal actually understood what was happening.

PREVIOUSLY ON NECESSARY FACTS

Money as Living History  

Numismatics: History as Market   

Numismatics: The Standard of Proof inEconomics  

Scripophily 

What is “Legal Tender”?

Once again, this time on the Galt’s Gulch Online message board, my conservative comrades displayed a disappointing though predictable ignorance about money. For people who claim to honor the bourgeois virtues of trade and commerce, they collectively guard a treasury of incomplete, incorrect, erroneous, and falsified assertions.  In truth, objective investigation demonstrates that the government has the right, the need, and the obligation to define and create legal tender.

 

Gold. Coin-shaped. Issued by Congress.
Not Money. Not Legal Tender.

Last week (about January 8, 2017), this discussion was launched:

Which is worse, government“printing” money or government “borrowing” money”

Posted by $CBJ 1 week ago to Economics

Several writers declaimed against “legal tender laws.”  So, I asked (rhetorically) for definition of “legal tender.” dbhalling, an attorney-at-law who specializes in intellectual property rights wrote this:

(cut and paste) Posted by  dbhalling 5 days, 20 hours ago [January 9, 2017 --mem]

Here is the exact statute. "Today the legal tender law in the US is 35 USC § 5103 which states: United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts. Why legal tender laws do not require government monopolies on money absolutely, they are almost always used for that eventually. You just wrong that any Legal Tender law is consistent with Objectivism..  (/cut and paste)

Of course, that is not actually a definition. As a lawyer, dbhalling only cares about what the law says. He does not need to investigate further. Moreover, he was not alone in claiming that an “Objectivist government” would not have the power to create legal tender. But if there were such a thing as an “Objectivist government” it would need to define legal tender, as does any government. 

Deed for Sale of Federal Land.
A valuable paper promise of the Government.
Perhaps negotiable. Not money. Not Legal Tender.

According to Ayn Rand’s Objectivism, and in line with much else on the libertarian right wing of American politics, the proper functions of government include operating courts of law. It is for the courts that the legislature defines “legal tender.” If the legislature did not define legal tender, there would be no way to know when a debt has been discharged, or when payment has been made.

 

One Dollar in Lawful Money.

Like much else in our traditional laws, the idea of debt is still mired in the agrarian feudal Middle Ages, and not yet enjoying the free air of commercial city life, i.e., civilization. In fact, very little trade is “cash on the barrel head.” It never has been. Since at least 2000 BCE, merchants have dealt at distances in both space and time, making and keeping promises to buy now and pay later. (See, for instance, The Kingdom of the Hittites by Trevor Bryce, Oxford University Press, 2005.) We now enjoy a vast global city. Cash is accepted – even preferred – on the street, but retailers buy from wholesalers who buy from manufacturers, all on credit and via debt.

 

One of the most valuable
coin-like objects issued by
the Federal government.
Not money. Not Legal tender.

Contrary to common myths, money did not evolve out of barter; and barter did not originate in the desire for economic gain. (See David Graeber’s “Debt: The First 5,000 Years” here.) Ritual gift exchange is the taproot of commerce.  For tens of thousands of years, including two ice ages from about 35,000 YA to about 10,000 YA, strangers became friends by exchanging gifts.  Finally, after writing was invented to keep track of commodity promises, we abstracted “money” as a safety to mitigate risk.  If you promise a sheep, but all of your sheep have died, what can you give instead? 

Wheat was first. Then after about 2000 BCE, silver was accepted. The astonishing attribute of silver is that it is useless.  It is pretty when polished, but it cannot hold an edge without being alloyed.  (The same is true of copper, which is why the Bronze Age is a demarcation along our common advance. And we have archaeological evidence of large “oxhides” of bronze offered in trade.) Silver served as “legal tender” i.e., money recognized by the “courts” (king or temple).  Gold is likewise useless, but has the added value of not tarnishing, and being far less commonly found. 

Code of Ur-Nammu
(fragment)

 18. If a man knocks out the eye of another man, he shall weigh out one-half a mina of silver. 

19. If a man has cut off another man’s foot, he is to pay ten shekels. 

22. If a man knocks out a tooth of another man, he shall pay two shekels of silver.

24. [...] If he does not have a slave, he is to pay 10 shekels of silver. If he does not have silver, he is to give another thing that belongs to him.
The Law Code of Ur-Nammu, about 2050 BCE at Real World History here.

In modern times, the governments of the British American colonies created paper money. Whether and to what extent the new Federal government would be allowed to do that was debated. The Constitution did not forbid Federal paper money, and the necessities of commerce almost demanded it. The Federal government had the power to borrow money. That created the power to create promissory notes under the Necessary and Proper clause.  

Coinage Law of June 28, 1834 recognized several foreign coins
as legal tender. Laws before and after this also 
defined the legal tender status of foreign coins.

Moreover, in the USA until 1857, several types of foreign coins were commonly recognized by law as being “legal tender.”  The Spanish Dollar was the foundation of commerce, both for international and local trade. Bank notes from the early 19^th century promise to pay fractions of a dollar, but display images of Spanish or Mexican coins.  (See “Spanish Coins on American Notes” here.)

Promises 25 cents. Offers 2 Reales.
(Hence, "2 bits" means a quarter dollar.)

Finally, all governments create a plethora of medals, medallions, certificates, promises, and warrants that may be valuable, negotiable, even fungible, but are not recognized in courts of law as legal tender. That is why a government must define the term in order for objective law to be possible.

  

PREVIOUSLY ON NECESSARY FACTS

Money as Speech and Peacemaking 

Debt: the Seed of Civilization  

Industrial Medals: A Currency of Fame  

Tokens of Capitalism  

Impossible Usually is Not

Oil at $100 a barrel is “impossible” the headlines said. But I remember Tom Peters in the early 1990s warning us that we would never again see oil at $35 a barrel. And today’s dollars are even smaller than they were in 1992. In terms of 1992 purchasing power, we are living with oil at about $15 a barrel right now.

 “If true, that could also eliminate the threat of $3 a gallon gas. In an interview with the Middle East Economic Survey, an oil industry newsletter, Ali al-Naimi responded "we may not" when asked if oil markets would ever lift prices to $100 a barrel again.”  (The Middle East Economic Survey website requires a login. The news was widely reported on CNN, Reuters, CNBC, etc.)

“Impossible” is an absolute claim. Physical absolutes are primaries. As Ayn Rand pointed out in Galt’s Speech in Atlas Shrugged whether you have your cake or eat it – or whether your neighbor eats it – is an absolute. Either-or, the excluded middle of logic, is an absolute. Whether the price of crude oil can never again be below $35 or above $100 is not an absolute. 

Calculators at Walmart cost
a fifth or a tenth of their prices
in 1976 when the dollar was
three times as large as ours.

It is pretty easy and common to create a list of statements of impossible outcomes that are now integral to our lives. No steamship could carry enough coal to cross the Atlantic. Heavier-than-air transport was a pipe dream. The world only needs five computers.

Most events and circumstances that are open to human action are objective. “Objective” means rational-empirical: at the same time both logically consistent and evidentiary to the senses. 

A better explanation, a better theory, is better logic. Cartesian geometry is an example. It does not contradict Euclidean geometry, but subsumes it under a wider set of truths. Epigenetics improved upon Darwinian evolution. Statistical mechanics completely replaced phlogiston as an explanation of “heat.” 

New discoveries  – the atom, the chromosome, distant planets, accelerating galaxies – lead to new inventions: stainless steel, Kevlar, rayon. Those are the new facts that require and validate new theories.

I forget where I read it, but it has been pointed out that physicists have no Journal of Phlogiston, but philosophers still have peer-reviewed periodicals for Aristotleanism, Platonism, and other archaic collections. Another expression is, "The news is always the same. It just happens to different people." Researching 19th century America from newspapers in order to write about numismatics, I found many stories that could be reprinted (almost) verbatim today. 

Previously on NecessaryFacts

Harriman’s Logical Leap 

Greg Browne’s Necessary Factual Truths 

Browne on Kuhn 

Numismatics: the Standard of Proof in Economics

America Pawned is America Pwned

Rod Steiger in The Pawnbroker. 
It does not matter which side
of the counter you stand on.

Pawn shops have taken one or two thousand years of criticism.  The bottom line is that they are resources for the community.  If you want to go into business, which would offer the best opportunity: a pawn shop or a lending library? That said, the fact that pawn shop have proliferated in the suburbs is a stark narrative not captured in government statistics about gross domestic production and unemployment claims.

A new suburban tradition

The fact is that the Reagan-Clinton years were the longest period of economic expansion in American history because America was involved in no large wars and no strong government programs.  Moreover, the House and Senate majorities were close and changed frequently, denying an "imperial presidency" to the White House.  All of that changed with the 21st century.  From the Dot.Com Meltdown to 9/11 and the subsequent wars in Iraq and Afghanistan, the so-called Mortgage Crisis and the Bush/Obama Bailouts - protested by Occupy and Tea Party alike - America and the world have suffered a long recession.

Can't tell a pawn shop from a bank.

Recessions are not necessarily bad.  The last "long recession" ran from the "Crime of '73" to the Panic of 1907.  Workers formed unions and agitated for the eight-hour day while farmers called for cheap silver money to pay off their debts.  In fact, prices fell because of increased productivity from industrialism, just as our "information age" lowered transaction costs.  Back then the new technologies were the railroad, telegraph, telephone, and typewriter. That did little to assuage the farmer or factory worker who found their incomes falling faster than the prices of the things they wanted to buy.  So, too, today, are suburbanites ready customers for pawn shops because their own real incomes have fallen because  the federal government tripled the money supply.

ALSO ON NECESSARY FACTS

Supplies and Demands

Employee Theft

The Pretense of Sociology

SLOW DOWN AND THINK

Thinking, Fast and Slow by Daniel Kahneman (Farrar, Straus, and Giroux; 2011)

Humans generally have two modes of perception.  System 1 is intuitive and it tells us all about a person and their immediate context relative to us by looking at their face.  You know when someone is happy, sad, angry, puzzled.  System 2 is effortful and computational; it informs us of our choices for agency by engaging mental concentration.  This book is about the very many errors caused by confusing the two modes.  For example when statisticians intuitively assess statistical data, they are predictably wrong. 

Kahneman is primarily a psychologist, but his Nobel prize was awarded for his work in economics.  Economics is all about choice; and yet since Adam Smith economists have had only a rough, poor, or wrong understanding of how people choose.  Economics is supposed to be about our calculations to maximize our advantages.  This book examines our habitually wrongful processes of intuitive calculation. 

Kahneman’s advises that for anything involving computation, we must slow down and think to avoid error and arrive at the right conclusion.

We easily think well in terms of metaphors.  We can identify causes.  We can associate facts and processes.  But we do not think well easily about statistics.  This leads to overconfidence supported by erroneous inferences of hindsight.  System 1 makes up stories to explain what System 2 misunderstands. 

• You see a woman reading the New York Times.  Is she more likely to hold a doctorate or to lack a high school education? 
• Tom W. is of high intelligence, but lacking true creativity.  He has a need for order and clarity.  His writing is dull and mechanical, but sometimes flashy with puns and allusions to science fiction.  Is he more likely to be a librarian or a farmer?

 If you are primed to spot trick questions, you guessed that the woman was more likely to lack a high school education, and that Tom W. was more likely to be a farmer.  If these, and the many other examples throughout, were just the amusing foibles of the average citizen, this book would have limited value.  Kahneman and his collaborator, the late Amos Tversky, found by careful sampling that scientists who should know better routinely rely on their intuition and therefore produce research results that have a 50% chance of being wrong.

The Law of Small Numbers is the complement of the gambler’s fallacy, the so-called “law of large numbers.”  Flip a coin five times.  Most people will say that HHTHT is a more likely outcome than HHHHH.  But in any large run, both small sets will appear.  The fallacy is the assumption that a small sample reflects the larger population.  The Law of Small Numbers leads us to conclude that recent profits are the result of good management.  That is System 1 talking, telling you a story to explain an intuition. 

This book is dense, replete with examples that are citations to research conducted by Kahneman and Tversky (and others).  A large array of basic truths supports the many thematic points. 

• You cannot refrain from understanding a simple sentence in your own language.
• If you are shown a word in a language you know, you will read it.
• Conservatism is defined as the underestimation of the impact of evidence.
• Frowning increases your vigilance and reduces your overconfidence for intuition. 

Kahneman claims (pp 411-415) that the libertarian policies of the Chicago school of economics must fail to bring the greatest good to the greatest number because humans are not the System 2 rational calculators that economists suppose.  My reply is that if this book were assigned to all 12-year olds, we would be.

ALSO ON NECESSARY FACTS
Science versus Common Sense
Two Books on Fermat's Last Theorem
The Man Who Loved Only Numbers
Science in the Middle Ages

Gresham's Conjecture

We learn it as "Gresham's Law" the claim that "bad money drives good money from the market." But the general rule has many exceptions.

Free market economists quickly amend Gresham's Assertion to insist that both moneys must be legally equivalent. If a gold dollar and a silver dollar both circulate, and if their relative value changes, then the under-valued one will be hoarded.  If you can get $1.10 in silver for a gold dollar, you will save the gold coin and pass off the silver dollar, which is overvalued: worth only 90.9 cents in gold; it is good for 100 cents of a dollar. Therefore, people will hoard the coin with the greater intrinsic value.  This has some truth; history provides examples. 


Even that thumbnail explanation may be too broad; and unwarranted extensions and expansions are issued by shallow thinkers such as the "anarcho-capitalist" Murray N. Rothbard (1926-1995) of the Austrian school. In his book, A History of Money and Banking in the United States: The Colonial Era to World War II, on page 126, Rothbard claims that the nickel-copper small cent was hoarded (true) and exported (not true). Rothbard also asserts: "The penny shortage was finally alleviated when a debased and lighter-weight penny was issued in the spring of 1864, consisting of bronze instead of nickel and copper." This is utter nonsense.

There was no incentive to export a coin in the uncommon nickel alloy 88% copper 12% nickel. Nickel was chosen largely from the influence of Joseph Wharton who owned a mine. The Mint found the nickel alloy too hard: dies wore out.  The Mint turned to the more familiar and softer "French bronze" 95% copper with a 5% tin-zinc mix. The lighter coins did not drive the older issues from the market. The success of the Northern armies in the War Between the States brought confidence to the markets, though perhaps any peace  would have, regardless of who won.  In point of fact - facts often being absent from the works of Rothbard - when the smaller cents (called "nicks" or "nickels") were first issued in 1854, people lined up at the Philadelphia Mint to turn in their heavier (and therefore more intrinsically valuable) Large Cents (1793-1857). The Mint was exchanging old cents for new, one for one, but boys who had been early in the lines sold their Small Cents for premiums.  They were curios.  Eventually, they fell to parity ... and Large Cents (now scarcer) were pursued even more passionately by numismatists.

Proof  Three Cent Silver  1858
Heritage Auctions Sept. 2010 Long Beach Signature Sale Lot 5029

Proof Three Cent Nickel 1870 
Heritage Auctions Sept. 2010 Long Beach Signture Sale Lot 5132 

The history of United States federal coinage provides other counter-examples to Gresham's Conjecture.  The silver half dime circulated alongside the nickel 5-cent coin. The 3-cent silver circulated alongside the 3-cent nickel. While gold and silver did fluctuate in value, causing problems for the Mint, which was a huge consumer and reseller of both, mostly, US silver coins and US gold coins went into separate channels.

Proof Seated Half Dime 1870 
Heritage Auctions 2010 April-May Milwaukee Lot 2515 

Proof Shield Nickel  1870
Heritage Auctions 2010 January Orlando, Lot 3679 

From 1878-1904, the US Mint struck over 24 million ounces of silver dollars per year, far in excess of anyone's demand, to meet the political agenda of Western mining interests. The Comstock Lode and other strikes flooded the markets with cheap silver and the price of it fell relative to gold.  Nonetheless, silver dollars sat in bags; and even today fully one-third are in uncirculated condition.  According to Gresham's Suggestion, silver dollars should have driven gold dollars from the market.  They did not. It seems that gold dollars were not in demand at all. (See http://www.coinbooks.org/esylum_v18n30a13.html)

The tendency just described is, however, limited by the fact that coins of different metals are unlikely to be equally useful in different transactions. In particular, gold coins will generally be of larger denominations and as such cannot supply the need for smaller change (cf. Sargent and Velde 2002). Consequently, even though gold may be legally overvalued relative to silver, and silver may cease to be voluntarily rendered to the mint, silver coins are unlikely to disappear from circulation altogether.  "Gresham's Law" by George Selgin at Economic History here.

Gresham's Rule does have some validity.  In the Middle Ages, when coins hundreds of years old still circulated, old, worn coins were spent while new, heavy coins were held.  As Europe experienced perhaps putative "silver famines" the purity of coinages fell. As silver became relatively more valuable, it took less to buy the same goods and services. Coins fell in purity.  Had they not, you would have needed tweezers to hold a penny's worth of silver. Debasement was a convenience.  But it still meant that if two coins are both "pennies" and one has more silver than the other the common choice is to spend the lighter coin.  Even so, history provides many examples of heavy coins such as the stable and reliable English sterling penny being the engines of commerce.

ALSO ON NECESSARY FACTS
Numismatics Informs Economics
Numismatics: the Standard of Proof in Economics
Supplies and Demands
Murray Rothbard: Fraud or Faker