This is the first of three articles discussing the history of fiat money. I chose to write about the Carthagian adoption of fiat money to be aligned with the themes of those articles and because of its relevance in being the oldest form of fiat money. In order to provide the reader with an understanding of fiat money, I will be using the following definition at the beginning of all three articles.
Fiat Money
Fiat Money, or what is known as government money is money issued by decree, authorization or order which are the synonyms for the Latin word fiat. It is important to understand that there is a difference between government money redeemable in gold, and irredeemable government money. The latter is the money that has been used internationally by the start of the world war I while the first was the form of money used by the gold and silver standards. With redeemable money, the government just has the responsibility of minting standard units of metal or printing paper backed by gold. The government does not control the supply of money. After interacting with many Lebanese locals, it seems that people think that their Lebanese pounds are in fact backed by gold in the central bank. There is this huge misconception that current fiat money is still redeemable or at least its value is set by the amount of gold that exists in Banque du Liban. However, Lebanese pounds, are in fact, an irredeemable form of government money, just like almost every other currency post 1913 and beginning of world war I. With irredeemable form of fiat money, the government’s debt and paper is used as money, and the government has the ability to increase its supply as it sees fit. And even if the people decide to use other forms of money as exchange or try to increase the supply themselves, they run into to the risk of being punished. Therefore, fiat currencies were adopted after 1913 by force and not because of the natural hard money beating soft money mechanism.
The Leather Wrapped Money of Carthage
Through my research about the money of the Phoenician era, I was surprised to find out that Fiat Money was not only a modern creation of the 20th century. As the Ancient Phoenician city Carthage in North Africa near modern day Tunisia had a unique Leather Wrapped Money. Carthage was one of the biggest and strongest cities of Ancient history and it was the number one competitor of Rome as it was destroyed by it in 146 B.C. in the third Punic war.
The Leather Wrapped Money of Carthage as Socrates wrote in his dialogues of the fifth century B.C: In a small piece of leather a substance is wrapped of the size of a piece of four-drachmae, but no one except the maker knew what that substance was. After this, it was sealed by the state (Fiat) and issued for circulation. More recent studies speculated that the ‘‘The leather’’ was more like parchment and the enwrapped substance was either tin or compound of tin and copper. By description of such money we can conclude that the creation of it was fairly easy and therefore the Leather Wrapped Carthagian money was easy money and in theory it did not serve as a store of value. However, the Carthagian government, although we can never know for certain, made sure to control the supply of this money in order not to flood the market with it and in turn devalue it and create hyperinflation. Easy money like the Leather Wrapped of Carthage relied mostly on the trust in the rulers and not on the physical attributes it had and the natural stock-to-flow ratio. We can never know for sure why the people of Carthage or the rulers of Carthage chose this form of money during an age when almost every other neighbouring city and civilization was using hard money like precious metals. However, when you look at modern day economies you can at least speculate why the use of fiat money was needed for one of the richest cities of ancient history. Archaeologists suggest that the circulation of such money came to end by the end of the 5th century B.C. which happens to be the same time as the end of the second Sicilian war (410 B.C to 404 B.C.). The Sicilian wars were part of Carthage's imperialistic competition with Rome. In order to finance such wars, the Carthagian government unlike Rome did not have gold coins to "clip", they instead did what every modern day government does and that is introduce a form of money it can control completely, hence the creation of the first Fiat Money in history. From the conquest of Sicily and later taking over some mining locations in Spain financed through relatively endless supply of money, the Carthagians learned about coinage and were able to put their hands on precious metals. Once the Carthagians were able to accumulate wealth in a much harder form of money, everyone gave up on the leathered fiat money. Which is yet another example of harder money beating softer money. Luckily for the people of Carthage the fiat scheme did not last long and the Carthagian Empire went down as one of the greatest empires in human history.
This somewhat primitive money can help us understand the actual definition of fiat money. How it is not its natural physicality that makes it proper money rather the decree made by the rulers that allow it to be. Usually fiat money does not have the problem of salability, it is the its store of value functionality that is always in question. This is why, governments who adopt a fiat monetary system have a set of rules about the issuing of their national currencies. Hence, by definition, fiat money is a currency without intrinsic value that has been established as money, often by government regulation.
In that sense, fiat money’s supply is always at risk to increase quickly compared to its stock, therefore fiat money’s stock-to-flow ratio is increasingly low. Thus, the individual’s purchasing power in fiat money is as well at the risk of being destructed.
