Why my favorite coinage is Byzantine coinage

What do I like about Byzantine coinage?

Most people probably admire the Byzantine solidus, a gold coin that maintained its weight and purity for over 600 years, which is quite remarkable for a coin. The solidus was exported all over the world, including to Europe, which lacked gold coinage at the time, making it the U.S. dollar of its day.

That's neat, but it's not the solidus that impresses me. It's Byzantium's small change that I like.

The availability of small change is vital to day-to-day commercial life. Alas, the minting of low-value coins has often been neglected by the state. Small change isn't sexy. And it has often been unprofitable to produce. But that didn't stop the Byzantines. After a monetary reform carried out by Emperor Anastatius in 498 AD, Byzantium began to issue a number of well-marked and differently-sized bronze coins of low value. Anastatius, who had been an administrator in the department of finance prior to becoming an Emperor, appears to have had a fine eye for monetary details.

Let's start with the follis, worth 40 nummi. (The nummus was the Byzantine unit of account.)

The follis in the above video was minted in 540 AD by Justinian I, some forty years after Anastatius's monetary reform. At 23 grams, it contains an almost comically-large amount of material. For comparison's sake, that's the same heft as four modern quarters. Allocating so much base metal to a single coin illustrates the Byzantine's dogged commitment to producing a usable set of low denomination coins for the population.

The decision to go with the hulking follis was better than the small change strategy that the English would pursue hundreds of years later. English monarchs either neglected small change altogether, forcing the public to hack up silver pennies into smaller chunks by hand. Or, if they did produce low value coins, did so in the form of silver halfpennies and farthings, the smallest English denominations. Which was not a good idea. Silver has a much higher value-to-weight ratio than bronze, so the half-penny and farthing ended up being absurdly tiny, as illustrated in the video below from the Suffolk Detectorist.  

"Weighing only three troy grains each, these were 'lost almost as fast as they were coined,'" writes monetary economist George Selgin of the farthing. And because the two coins were so small, almost no information could be conveyed on their face. No, as far as small change goes, the Byzantine's bronze coins were the way to go.

Anastatius had another theoretical option available to him, one which wouldn't have tied up so much raw material. He could have made a token coin. With a token coin (say like James II's tin halfpennies, which came almost a thousand years later, and which I wrote about here), the value of the coin doesn't rely on the metal in it, but on the ability of the issuer to repurchase it at the stipulated weight. By issuing the follis as a token, the Byzantines could have been able to make it smaller, say half the size, yet still rate it at 40 nummi, thus saving large amounts of bronze for alternative uses.

But the Byzantines appear to have been committed metallists, abiding by the principle that the value of money comes from the value of the metal in it. And so they bequeathed the world the monster-sized follis.

In additions to the follis, Anastatius introduced lower denomination bronze coins, including the half-follis (20 nummi), quarter-follis (10 nummi), and pentanummium (five nummi). They are illustrated below. Later emperors would add a three-quarter follis, or 30 nummi coin, to the mix. At times, a tiny 1 nummus coin was issued too.

Follis (40 nummi), half-follis (20 nummi), quarter-follis (10 nummi), and pentanummium (five nummi). Source: Cointalk

The decision to produce a full array of base coins illustrates Anastatius's sensibility to the transactional needs of the common person, for whom the gold solidus would have been far too valuable to be relevant to their economic lives, almost like a $1,000 bill. Oddly, Anastatius chose not to mint any silver coins. But as the English farthing example illustrates, silver was too valuable to be useful for the lower end of day-to-day commercial life, better destined to act like a modern $50 bill than a humble $1 or $5 bill.

Another neat feature of Byzantine coinage is how Anastatius and his successors used each coin's surface area to convey useful information rather than to aggrandize god & state. The obverse of each coin bore the obligatory image of the Emperor, but the reverse side provides loads of monetary data: the denomination, the date of the Emperor's reign in which the coin was minted, the name of the mint, the number of the workshop of the mint. Compare this to Roman coinage, for instance, which often bore expressive portraits on either side of the coin, but next to no data.

If you're interested in getting a longer description of how to read Byzantine coins, check out Augustus Coins.  

I'm new to Byzantine coinage, but I'm impressed by how much information they managed to pack into such a small area. Here's a great introduction on how to read Byzantine coins: https://t.co/46sVeROIKx

The example below shows how to read a follis issued during Justin II's reign: pic.twitter.com/OSsH930c2g

— John Paul Koning (@jp_koning) March 14, 2022

A particularly unique feature of Anastatius's monetary reform was his decision to inscribe the unit of account directly onto his coins. As you can see, the follis has a big "M" on its reverse side, which is Greek for 40. The half follis has a "K", which means 20, and the quarter follis an "I", which is 10. Finally, the pentanummium displays an "Є", equal to 5. All of these numbers indicate the value of the coin in terms of the Byzantine unit of account, the nummus.

Nowadays, we take this format for granted. The coins in your pocket all include the coin's value on their face, just like Anastatius's coins did. But what you need to realize is that the coinage of most civilizations, both before and after the Byzantines, rarely displayed how many pounds or shekels or dinars that coin was worth. Take a look at Rome's Imperial era coinage. There's plenty of religious symbolism to be found on the sestertius, as, and dupondius. The monarch's face appears, as do dates and names. But there's not a single digit to indicate how many units of account the coin is worth. The same goes for most medieval European coinage. (A lone exception is Roman coinage from the Republican period beginning around 211 BC).

Anastatius's decision to stamp the denomination directly on the coin represents a big improvement in usability. No need for transactors to seek an external source to determine how many nummi a follis was worth. It was right there for everyone to see.

Some of you may be wondering: why did so many civilizations avoid numbering their coins? 

Ernst Weber, an economist, has put forward one possibility. A lack of "value marks" may suggest that coins were intended to circulate at "market determined exchange rates" according to their metal content. Coins might have had varying amounts of metal due to inadequate manufacturing technology, people preferring to weigh them prior to payment so as to assess their market value. In this context of non-fungibility, striking a universal unit of account on each coin would be a nuissance, or at least a waste of time.

According to Weber's theory, Anastatius may have had so much confidence in the ability of his mints to produce durable and homogeneous bronze coins that he dared to affix the nummi unit-of-account onto them.

Another reason for not numbering coins may be that a blank slate gave authorities a degree of flexibility to set monetary policy. If a coin isn't indelibly etched with a value, a monarch can alter a coin's purchasing power, or rating, by mere proclamation. This was known as a crying up or a crying down of a coin's value. For instance, an English king might wake up one day and declare a certain type of already-circulating coin that had been worth £0.10 the day before to be worth £0.09 today, thus decreasing its purchasing power. This sort of abrupt change in value would be awkward to implement if said coin already had £0.10 struck on its face.

A ruler might have good monetary policy reasons for wanting this flexibility. But this same malleability could be abused, too, in order to profit some at the expense of others. Anastatius decided to forfeit this flexibility by freezing his coin's value in time. The Byzantine public no longer had to deal with the uncertainty of coins being suddenly revalued.

Unfortunately, the full array of Byzantium small change introduced by Anastatius would only survive for two or three centuries. As time passed, weights would be reduced and workmanship would become "increasingly slovenly," according to numismatist Philip Grierson. The quarter follis and pentanummia would be discontinued by Constantine V (741–775). The half-follis ceased under Leo IV (775–780).

As for the follis, it would stick around for a few more centuries, but around 850 AD, Theophilus would drop the emblematic M in favor of the unhelpful inscription "Emperor Theofilos, may you conquer," writes Grierson. Thus ended the great period of Byzantine low-value coinage. But during the brief period of time after Anastatius, Byzantine produced one of the best examples we have of good small change, presaging the coins we carry in our pockets today.

The first round of U.S. secondary sanctions on Russia is working

Turkish banks halted transactions with Russian banks last month and are only slowly reintroducing payments for a narrow range of products that are on a so-called "green list," reports Ragip Soylu. This broad debanking of Russia by Turkey is part of the fallout from President Biden's first round of secondary sanctions, announced on December 22. 

Ukraine/sanctions watchers around the world are breathing a sigh of relief. At last the cavalry has arrived! While the Russian sanctions program has often been described by the press as the "world's strictest", in actuality it has been (till now) alarmingly light-touched due to its lack of the toughest tool of financial warfare: secondary sanctions.

Primary sanctions vs secondary sanctions

Secondary sanctions, especially when applied to foreign banks, are far more damaging than primary sanctions, which to date have been the dominant type of sanction levied against Russia. 

With primary sanctions, it is the "primary" layer – U.S. citizens and companies – that are cut off from dealing with the designated Russian target(s). However, primary sanction don't prevent non-U.S. individuals or non-U.S. companies, say a Turkish bank, from filling the void left by departing American counterparts, often acting as a re-router of the very U.S. goods that can no longer be moved directly to Russia by U.S. firms. So rather than reducing the amount of Russian trade, primary sanction often lead to little more than a displacement of trade from one route to another. That's a nuissance for the targeted country, but hardly a game changer.

Secondary sanctions are an effort to combat this displacement effect. They do so by extending the trade prohibitions placed on the primary layer, U.S. actors, to the second layer, that is, to non-U.S. actors. In the case of Biden's December order, foreign banks can no longer facilitate certain Russian transactions that have already been off bounds to Americans for several years.

So far, Biden's secondary sanctions appear to be working. In addition to halting all transactions with Russia for a month, Turkish banks have completely stopped opening accounts for Russian customers. According to Reuters, Turkish exports to Russia fell 39% year-on-year in January. In China, reports say that banks have "heightened scrutiny" of Russian transactions, in some cases going so far as to cut off Russian banks. UAE banks have also begun to restrict linkages to Russia.

Why comply with the U.S.?

Why do non-U.S. actors bother complying with U.S. secondary sanctions? After all, if you're a Turkish banker in Istanbul, Biden has no jurisdiction over you. America can't put you in jail, or fine you.

The way that the U.S. is able to sink a hook into non-U.S. actors is by threatening to take away access to the U.S. economy. Foreign banks, for instance, are told they will be exiled from the all-important U.S. banking system if they don't severe or constrict their Russian relationships. Since access to the Ne York correspondent banking system is so important relative to the small amounts of sanctioned Russian business they must give up, foreign banks are quick to fall into line.

Biden's secondary sanctions on foreign banks only apply to a narrow range of transaction types, specifically those that support Russia's military-industrial base. In short, any foreign bank that is found to be conducting transactions involving military goods destined for Russia can be penalized. Those foreign banks that deal in, say, Russian food imports needn't worry.

In addition to obviously prohibited military items, like missiles and fighter jets, the U.S. Treasury has provided a list of not-so obvious items, such as oscilloscopes and silicons wafers, that it deems fall under the category of military-industrial goods. I've appended this list below. The Treasury suggests that these additional items might be used for, among other things, the production of advanced precision-guided weapons.

Source: OFAC

That's quite an extensive list.

Turkish banks appear to have overcomplied by dropping any transaction that even has a whiff of Russia. This de-risking effect is a common by-product of various banking controls, both sanctions and anti-money laundering, whereby banks cease dealing not only with prohibited customers but certain legitimate customers that are superficially similar to prohibited customers that they are deemed too risky and expensive to touch.

According to reports, Turkish banks have reintroduced transactions for green-listed products such as agricultural products, which aren't actually targeted by the U.S. secondary sanctions.

Turkish financial institutions may be particularly sensitive to U.S. sanctions given the fact that an executive of Halkbank, a Turkish government-owned bank, was sentenced to 32-months in U.S. jail in 2018 for helping Iran evade U.S. sanctions and money laundering. One of his evasion routes was the notorious gold-for-gas trade, which I wrote about here. Halkbank itself was indicted in 2019 for sanctions evasion; the case against it is ongoing.

An unforgiving legal standard

An important element of any alleged crime is the mental state of the alleged criminal, or their "intent." This gets us to another reason for the rapidity and breadth of the debanking of Russian trade. Biden's secondary sanctions have a novel legal feature. The legal standard on which they rely, strict liability, does not require that the prosecution prove intent.

Up till now, U.S. secondary sanctions have not deployed this sort of a strict liability standard. To demonstrate that a foreign bank has engaged in evading secondary sanctions on Iran, for instance, U.S. prosecutors have been required to show that the foreign bank did so knowingly. If the banker conducted prohibited Iranian transactions unknowingly (i.e. inadvertently or unintentionally), then they couldn't be found guilty of sanctions evasion.

Under the strict liability standard set out in Biden's December 22 order, there is no onus on U.S. sanctions authority to show that a foreign bank has knowingly conducted transactions linked to Russia's military-industrial complex. Even an unintentional transaction can be punished. Because this strict liability standard makes it so much more likely that foreign banks run afoul of sanctions and get cut off from the U.S. banking system, bankers are rushing to comply.

What's next?

When the U.S government asked domestic entities to stop dealing with Russia a few years ago, many of these transactions were quickly displaced to third-parties like Turkey. By deputizing foreign banks to be equally vigilant, secondary sanctions will likely crimp the original displacement effect, resulting in a big and permanent decline in Russian trade.

To get an idea for what might happen to Russia's military-industrial goods trade, take a look at how Iran's oil exports were halved after Obama imposed secondary sanctions on Iran in 2012, leapt when they were lifted in 2016, and crumbled again when Trump reimposed them in 2018.

The lesson is that secondary sanctions on foreign financial institutions can be very effective.

Evasion efforts will begin very quickly. When secondary sanctions were first placed on Iran in 2012, Turkish bank Halkbank introduced a forged document scheme in an effort to disguise trade in sanctioned crude oil shipments as legitimate food transactions. The U.S. will have to step up its enforcement efforts to plug these holes. Without proper enforcement, the effect of the secondary sanctions will remain muted.

Using the secondary sanctions on Russia's military-industrial complex as a model, there are many more sectors of the Russian economy on which secondary sanctions might be placed. The next round could extend to Russian automobile imports, its central bank, or the diamond industry.

Secondary sanctions to strengthen the oil price cap 

Even more useful would be to use secondary sanctions to strengthen the most important piece of financial artillery heretofore deployed against Russia: the $60 oil price cap. 

The price cap endeavors to force Russia to accept a below-market price for the oil that it ships, thus hurting its ability to finance its invasion of Ukraine. The cap is currently underpinned at the primary level by threatening banks, insurers, shippers and other businesses located in the EU, U.S., and other G7 countries ("the Coalition") with penalties if they trade in Russian oil above $60. Because Russia has historically been dependent on Coalition service provides for shipping oil, it has been getting less revenue for its oil then it would otherwise receive. 

However, over time a growing chunk of Russia's oil exports has been diverted away from Coalition service providers to third-parties in jurisdictions like Turkey and UAE that are not subject to the cap. This has allowed Russia to sell at prices in excess of $60 and thus recover much of its forgone revenues. If the cap were to be applied not only at the primary Coalition layer, but also at the secondary layer by requiring foreign financial institutions to join in via the threat of secondary sanctions, then much more Russia oil would brought back under the $60 ceiling, and Russia's ability to finance its war against Ukraine would be significantly crimped.

How to debase the coinage in order to pay for wars

Henry VIII, after Hans Holbein the Younger

It's fun to imagine traveling back in time and engaging with the then-prevailing technologies. Would you be able to ride a boneshaker or use a counting board? It's probably harder than you think: kids today can't even use a 1980s rotary phone. In this post I'm going to write about one specific techno-institution, the mint, and a particular function that it sometimes played many centuries ago; funding wars.

If you had to go back to 16th century Europe, and you were asked to operate the mints in a way such that they raised enough revenues so that your patron, the king, could wage war against a neighbouring country, how would you go about that?

I think the general sense that most of us have is that you'd need to somehow "debase" the coinage. The majority of coins back then were made of precious metals. If you could sneakily remove some of the silver and gold from each coin, and replace it with cheaper copper, then you'd be able to amass a hoard for the king (albeit at the expense of the public), and he could use that to hire an army.  

Now, if you went back in time with the above hazy notion of debasement, you wouldn't have much luck, and might even get your head chopped off. There's a grain of truth to it, but much of it won't work.

So before you head off in a time machine, here's what you need to know about the business of minting.

The first thing you need to know is that the King (or Queen) owns the royal mints, which they rent out to private parties to operate. Another important fact is that the public brings their own personal supply of precious metal – raw silver, silver cutlery and dishes, old coins, etc – to the mint, and then after waiting a week or two for the order to be processed, walks out with the final product; newly-minted coins.

But the mint's customers don't leave with as much silver (or gold) as they arrived. For each ounce of precious metals that gets minted into coin, the King collects a fee, known as "seigniorage", usually around 5% in the case of silver. The private individual who runs the mints gets a much smaller cut too, called brassage.  

If you're scrambling for a modern analogy, I suppose you could think of the medieval business of minting as very much like a modern laundromat, where customers bring their clothes, have them processed, and leave with their clothes, paying a small fee to the laundromat owner, who in turn pays a big chunk of this to the franchisor.

Like a laundromat owner, the monarch would have earned a fairly steady stream of revenues from their mints. Coins were more useful and liquid than raw silver, so there was an ever-present demand to convert raw silver into coin for transactional purposes. But remember, the challenge you face isn't just to generate regular profit. The king wants a massive surge in revenue. He's got a war to wage. How are you going to repurpose the mints to provide this gusher?

Your first attempt to raise money for the king might be to boost the minting fee from the low single digits to 20-25%. That might work. And you wouldn't be the first to go this route. For centuries, the English seigniorage rate on silver typically hovered around 5%, as illustrated in the chart below from a paper entitled The Debasement Puzzle, by Rolnick, Velde, and Weber. For gold, the minting fee was typically at 0.5% to 2%. To help fund his war against the Scots and the French, Henry VIII raised the seigniorage on silver to a remarkable 50-60% in the 1540s. Gold fees skyrocketed to 15%.

Source: Rolnick, Velde and Weber [pdf]

Mind you, fee hikes alone aren't going to work. Dissuaded by sky-high costs, many people will stop bringing their silver and gold to the mint to be coined, and the King's seigniorage revenues will dry up. A bothersome coin shortage will probably develop, too. Off with your head! says the King.

After thinking about it some more, you realize that, like a modern laundromat owner keen to make more revenue, you need to dramatically increase the amount of material going through the mint. How to do so?

You've got a few levers to increase throughput. One option is to introduce new products. If you offer new denominations of coins, for instance, people may bring more silver to the mint because those denominations are useful to them.

There's certainly precedent for that. To help pay his armies, Henry VIII brought back the testoon, a coin worth 12 pennies (or a shilling) in the hope that there would be significant demand for them, and that this would boost throughput and thus mint revenues. Testoons complemented Henry's silver halfpennies, pennies, groats (4 penny pieces), and sixpence (six pennies), in addition to a range of high denomination gold coins.

Below is an example of one of Henry's testoons, first minted in 1542. Because they had so much copper in them (more on that later), many of the testoons that exist today have a greenish tinge (due to copper oxidation). In the 1540s, Henry VIII's silver coins still hadn't turned green, but had a reddish tinge, which tended to reveal itself on his nose. Which is why Henry's nickname was Old Coppernose.

English groat (4 pence) issued 1547-49. Source: The British Museum

But introducing new denominations probably isn't going to generate a huge rush to the mints, since a new denomination will to some extent cannibalize existing demand for other denominations. Anyone who orders more testoons is likely to order fewer groats, for example. You'll have to do more.

In addition to introducing new coins, another strategy you might try is to cancel old ones. By having the King demonetize a popular coin, or declare it to be "no longer current," those coins will cease being legal tender or acceptable for taxes. The public will be forced to bring their demonetized coins to the mint to be converted into legal coins, the rush to do so creating a revenue windfall for the King.

And indeed, Henry VIII's successor Edward VI (who continued his father's wars) did this exact same move in 1548, declaring the testoons his father had reintroduced just four years before to be no longer current, as recounted in a paper by C.E. Challis (1967). I've clipped the relevant part below:

The demonetization of testoons is announced. Source: C.E. Challis

But we still haven't broached the main method: debasement. This is where the gusher begins.

Together with the King, you announce to the public that anyone who brings precious metals to the mint will now get more coins than before, for the same weight of precious metal. So for example, if someone used to be able to bring, say, 10 grams of pure silver to the mint and got 100 pennies minted, now they can bring 10 grams and get, say, 200 pennies. Same amount of silver, more coins.

As the operator of the mint, you could enact this change by cutting the weight of each penny by half, or, if you wanted to be more clever, maintain the same weight but reduce its fineness by 50%, by introducing more cheap copper to the mix. Either way, you've just debased the currency.

But how exactly does this raise revenues for the King?

Let's think about this change from a merchant's perspective. Say that our merchant owes a supplier 1 pound (a pound is 240 pennies). He's about to pay his debt off with everything he has, 240 pennies, when the debasement is announced. He can now bring his 240 pennies to the mint and have them recoined into 480 pennies. That allows him to pay off his debt, which is still denominated at 1 pound, and still have 240 pennies for himself. What a great opportunity! The merchant heads off to the mint with his silver.

Or imagine our merchant need to buy some property that's priced at 10 pounds, or 2,400 pennies. If he has only 1,200 pennies on hand, he can't afford it. But with the debasement having just been announced, the merchant can now convert those 1,200 pennies into 2,400 pennies and make the purchase.

Congratulations, you've created a revenue gusher! What you've effectively done is offer a short-term arbitrage opportunity to those who are paying attention, most likely the rich and well-connected, at the expense of the not-so-aware. To take advantage of a profitable situation, these enterprising individuals will immediately bring all their silver and gold to the mint. And you'll collect a toll on all that metal as it passes through.

But that arbitrage opportunity won't last forever. Debts will be recalibrated to account for the 50% decline in the penny's silver content. Prices of things like property will eventually double to reflect the new true value of the penny. At that point it will no longer be advantageous to bring one's silver to the mint to be recoined, and the revenue gusher you've created will subside.

You might try announcing debasements every few years or so, thus milking your mint's throughput on a continual basis. Too many debasements, though, and this trick will stop working, since that portion of the population that is the victim of the arbitrage you've created – the less aware – eventually wises up and protects itself by quickly increasing prices whenever a debasement occurs.

A constant series of debasements is exactly what Henry VIII and his son Edward enacted between 1542 and 1551 to keep paying their soldiers. Using data from a paper by John Munro, The Coinages and Monetary Policies of Henry VIII, I've charted out (above) how the penny's silver content changed over that time period. Going into the 1500s, an English penny contained 0.72 grams of pure silver. At the end of the Great Debasement, (the term used for Henry VIII's operations on the coinage) the penny contained just 0.11 grams of silver, constituting an 85% reduction in silver content.

We can further split out how Henry VIII's debasements were distributed between changes in fineness and changes in weight. Going into 1542, the English penny was 92.5% fine. Nine years later its purity stood at just 25% silver, the other 75% being base metal such as copper. As for weight, a penny weighed 0.79 grams in the early 1500s, but only 0.43 grams by 1551. 

These changes are illustrated in the chart below.

Thus it was diminutions in purity, not weight, that drove the biggest chunk of the penny's debasement, although weight did have a role to play.

How successful were these policies in creating a financial gusher for Henry and his son?

The charts below from Rolnick, Velde, and Weber (which I've clipped from  a second paper authored by the trio) show how the combination of mintage policies enacted in the 1540s – debasement, new testoons, and a demonetization of the testoon – led to a large influx of silver and gold to the English mints.

Source: Rolnick et al

According to Challis, the combination of these inducements, along with a big boost in fees, resulted in minting profits of £1.3 million for the two kings from 1542 to 1551. This would have paid for a big chunk of the £3.5 million in military expenditures over that same period, much more than actual taxation, which only yielded £976,000.

Of course, the final result of all this was a significant number of deaths, and what one account describes as "an episode of sixteenth-century ethnic cleansing which in its aims and implementation was not dissimilar from ...the former Yugoslavia in the 1990s or, most recently, with the Myanmar government’s actions against the Rohingya." It also caused one of the worst episodes of price inflation that England had ever seen. According to Munro, the English consumer price level rose by 123% between 1541 and 1555.

So there you have it. If you had a time machine, you now know how to go back to medieval Europe and operate the royal mints in order to fund big ticket items like wars. (Whether you should actually do so is another question.)

The gold trick, the 2023 edition

Along with the trillion dollar platinum coin and premium/perpetual bonds, the gold trick lies in the genre of strange-accounting-tricks-to-evade-the-US-debt-ceiling.

With the debt ceiling getting closer every day, gold bugs like James Rickards are calling for the U.S. to trigger the gold trick with "just one simple phone call."

I've explained the gold trick three times before [ here | here | here ]. I don't really feel like rehashing the intricacies of it again, so reread my posts if you want to absorb all the complexities.

The idea, in brief, is that by increasing the U.S.'s official price of gold, which currently lies at $42.22, to the current market price of $2000 or so, the accounting value of the U.S. Treasury's stock of gold would suddenly be worth hundreds of billions more. The Treasury could then take the newly-realized extra value of its gold (known as "free gold") and submit it as collateral at the Fed, in the form of gold certificates. Once that collateral is submitted, the Fed can in turn instantiate a bunch of fresh dollars that the Treasury can spend.

Since none of these gold-related accounting changes qualifies as an increase in the official debt, voila, the Treasury can spend without running into the debt ceiling.

There's one big caveat. Rickards, for instance, goes off the rails when he writes: "one phone call from the Treasury to the Federal Reserve could reprice the Treasury’s gold from $42.22 per ounce."

It's just not that easy. All previous gold price increases, including the 1934 increase to $35, the 1972 increase to $38, and the 1973 increase to $42.22 required approval from Congress. Given that it is Congress that is the impediment to a straight debt ceiling increase, why would that very same Congress consent to a pseudo-increase via an change in the official gold price?

I suppose there may be enough gold-loving Republicans that the bill would pass. But as you can see, the gold trick is just not as effective as the premium bond/perpetual bond trick or the platinum coin trick, both of which avoid Congressional approval altogether.

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The official price of gold illustrated:

The puzzle of electrum coins

From the Israel Museum in Jerusalem’s 2013 exhibition White Gold

 [Originally published at Bullionstar.]

For several years Brits have been hearing rumours that their 1p and 2p coins were on the cusp of being discontinued. Not so. Last month the UK Treasury announced its commitment to both coins. The 1 and 2p coins will continue to be produced for ‘years to come.’

Few bits of monetary technology have enjoyed as long an existence as the coin. The earliest coins were produced around 640 BC, some 2600 years ago, by the Lydians, who had built an empire in the western half of what is now Turkey.

To most of us, the usefulness of coins is self-evident. Sure, small coins like the 1p are a bit of a nuisance. They tend to accumulate in our pockets or piggy banks, never used. But compared to barter, or exchanging bits of unrefined metal, coins are a much better alternative.

One would assume that’s why the Lydians created coins in the first place: convenience. But the true story is much more puzzling than that. To this day we don’t entirely know why the Lydians began to turn precious metals into circular discs.

The traditional origin story for coins

The classic story for the adoption of coinage involves the efficiency gains that society enjoys when trade can be conducted by tale rather than by weight. Tale is a sum or a tally. All modern payments are done by tale. A payor counts up the right amount of coins (or notes), then passes the stack to the payee who – if they wish – can glance at the inscription on each coin’s face to ensure that it is legitimate. Circulation by tale is a convenient way of doing business.

But we take it for granted. Before coins appeared on the scene 2000 years ago, numismatists believe that people typically transacted with silver ingots and bars, otherwise known as hacksilber. These pieces could be cut up into smaller amounts in order to cover a range of different transaction sizes.

Because the bits of hacksilber were irregularly shaped, or non-fungible, they couldn’t by counted. Rather, they had to be weighed first, and only then could the transaction proceed. Weighing different bits of silver is a laborious process. A scale must be produced along with a set of weights that both the buyer and seller can trust.

Counting is much easier than weighing. If the stamp on the coin is reliable, buyers and sellers can trust to issuer to have already pre-weighed and standardized the metal for them. And so coinage would have dramatically reduced lineups and waiting time in busy markets all across the ancient world. What a fantastic invention.

Perfectly standardized

At first glance, Lydian coins have all the hallmarks of this classical origin story.

To begin with, they are quite beautiful. Each coin was typically stamped on the obverse side with a design in the form of an animal, human, or myth. On the reverse, or back-side of the coin, a square or rectangular design appears (see image at top). Did these designs constitute some sort of official guarantee of the coin’s weight and fineness? Or did they symbolize something else?

The coins generally lacked any sort of writing on them. Numismatists are thus unsure who actually issued the coins. Was it the city, the king, a merchant or some other rich individual?

One fact that all numismatists agree on is that the Lydians were assiduous to a fault about ensuring standardized weights for their coins. The biggest denomination, the stater, weighed 14.1 – 14.3 grams. Half staters contained half as much metal, followed by third staters (or trites), 1/6, 1/12, 1/24, 1/48, and 1/96th staters, the last of which contain just 0.15 grams of metal.

Smoothed distribution of Lydian coin weights around each denomination. Source: On the Origin of Specie, (2012)

Francois Velde, an economist at the Federal Reserve who dabbles in numismatics, has catalogued thousands of Lydian coins owned by private collectors and museums around the world. Using this data, one can see the remarkable precision of Lydian coinage (see chart above). The weight of the largest coins – staters and trites – tend to be tightly clumped near the standard weight.

Interestingly, the smallest denominations – the 1/96th staters – are much more loosely distributed around the standard weight (see the dark blue line). Velde (2012) attributes some of the lower accuracy of smaller denominations to the fact that they would have circulated more, and thus deteriorated faster.

The inconvenience of electrum

By carefully calibrating the weights of each denomination and stamping them with a seal, surely Lydia qualifies as the first society to make the technological leap to circulation by tale. But it’s here that the story begins to fall apart.

One of the curious facts of early Lydian coins is that they were made from a material called electrum. Electrum is a naturally occurring alloy of silver and gold, often found in streams and rivers. The problem with natural electrum is that the mix between gold and silver is variable. The silver content can be anywhere from 10% to 30%, according to numismatist Robert Wallace (1987).

Given this variability, Lydians must have had difficulties valuing electrum. A given electrum coin wasn’t fungible, or interchangeable, with its cousins. A coin with more gold in it would have a slightly different colour than one with less gold, as the chart below implies. And since gold was probably worth around 10 times more than silver in ancient times, electrum coins with more gold in them would have had a much higher intrinsic value than those with less. But how much more? According to Wallace, this lack of certainty would have caused “endless doubts and disputes over particular coins."

Approximate colours of Ag–Au–Cu alloys [Wikipidia]

What a contradiction Lydian coins are! The Lydians had evidently gone to extreme lengths to perfectly calibrate coin weights, and thus potentially exchange coins by tale, only to undo all the benefits of standardization by making coins with an arbitrary gold-silver mixture. Now buyers and sellers would have to settle on some laborious means of determining a given coin’s mixture, say like using a touchstone, before they could consummate a trade.

The Lydians could have avoided this problem at the outset by issuing coins using silver rather than electrum. Silver, after all, was already traded in ingot form. With silver coins, at least there would be no confusion about intrinsic value. But the Lydians chose not to go this route.

Which leads us to what may be the most popular theory for electrum coins, what I will call the “token" theory.

Electrum coins as tokens

It is Robert Wallace who can be credited with creating what is probably the most widely-accepted theory for electrum coins. Wallace (1987) began by imagining himself in the shoes of an owner of an electrum hoard around 640 BC. This individual had the following problem. His stash of metal was not uniform, and so fellow Lydians didn’t really trust its quality. How could our electrum owner get his suspicious counterparts to accept his metal for its full value?

The easiest solution available to our Lydian would be to refine his electrum into its silver and gold constituents, then sell each separately. But Wallace tells us that the technology for “parting" gold and silver – cementation – would not be available for almost a hundred years, circa 550 BC. So our electrum owner was stuck with his mongrel metal.

According to Wallace, our Lydian stumbled on the solution: turn his raw electrum into stamped coins. Why would a potential buyer trust electrum in coin form but not bar form? The answer is that the owner of electrum didn’t create just any regular coin. Rather than issuing discs that were valued for their (uncertain) metal content, our Lydian electrum owner designed them as tokens.

Electrum coin from Ephesus, 625-600 BC with a stag grazing [source]

A stamped piece of metal can be valuable either because of the material of which it is made or the symbol that is stamped on its face. A token is of the latter sort. By contrast, a piece of hacksilber is the former. It gets its value from the silver itself.

How did a mere stamp create value? Wallace hypothesizes that the issuer’s stamp indicated a promise to “accept back or redeem his coins" at a fixed rate. A skeptical buyer would therefore have no problem receiving an electrum token in trade. After all, the stamp guaranteed that the issuer would buy it back at that very same rate.

Fungibility regained

By setting his redemption price for tokens high enough, the issuer ensured that the market value of his coins would always exceed their intrinsic electrum value. This would have had the beneficial effect of making all his electrum coins fungible. After all, since both a silver-rich electrum token and a gold-rich one could both be redeemed at the issuer for the same fixed price, neither coin was any better than the other.

Electrum could now circulate freely rather than being handicapped by non-uniformity. The decision to turn electrum into coinage had converted “stocks of what was otherwise a doubtful and uncertain substance into negotiable currency large and fixed value," says Wallace. In the process, our electrum owner had become a much wealthier man than might otherwise have been the case.

So what about circulation by tale?

Despite the fact that the weight of electrum coins was so precisely calibrated, numismatists believe that Lydians exchanged the coins by weight rather than by tale, much as they had with hacksilber. The main bit of evidence for this is that electrum coins were never clipped.

Clipping is when someone scrapes or snips a bit of metal off of a coin before passing it on. The clipper keeps the shavings for themselves. Coins that circulate by tale are easily attacked by clippers. Since sellers will accept coins with little more than a glance to the stamp on the coin’s face, a buyer who scrapes off a bit of metal before handing the coin can easily get away with it.

A lack of clipping is consistent with the practice of weighing coins and only accepting those that are up to snuff. If a coin was even a bit too light, then the seller would not take it. And so no one would bother clipping them in the first place.

But if electrum coins circulated by weight and not tale, this hardly seem like a technological improvement over hacksilber. Lydian trade was still as slow and awkward as before.

However, the necessity of weighing electrum coins may have served a purpose. It may have been a security feature designed to protect the issuer’s wealth. Imagine that our issuer of electrum tokens has spent some staters into circulation. Prior to being returned to him for redemption, these staters had all been clipped. Since he has less electrum than what he started out with,  our issuer’s wealth has deteriorated.

To protect himself from this sort of theft, Wallace (1989) suggests that the issuer wouldn’t redeem just any of his tokens. As a security measure, he would only take back those that were still of their original weight. Since no merchant would want to be stuck holding a coin that could not be redeemed, they would always weigh each coin that was offered to them in order to avoid accepting light ones.

They only circulated domestically

Wallace’s theory explains another odd feature of electrum coins. Given the distribution of electrum coin hoards, numismatists believe that they didn’t circulate outside of their area of production. This is unusual for ancient coinage. Roman coins have been found as far afield as Sumatra, while Sassanian coins (minted in modern day Iran) have been unearthed in England.

But if circulation of electrum coins was premised on the guarantee that their issuer would redeem them, then that explains why they wouldn’t have circulated very far. People in a distant city would not recognize or trust the redemption promise of an unknown issuer, and so they wouldn’t accept them in trade.

Electrum diluted with silver

Another oddity of electrum coins is that they often contain far more silver than the natural electrum out of which they were manufactured. Electrum found in naturally-occurring deposits usually contains no less than 70% gold, but the coins themselves often contain just 45-55% gold. For some reason, Lydians coin issuers chose to introduce a bit of pure silver into the electrum mix before coining it.

In the chart below, for instance, the vertical column that represents the 1/6 stater denomination contains around 14 different coins. The majority of these coins contain less than 65% gold.  Only two contain more than 80% gold.

Most electrum coins contained less than 70% gold. Source: Velde

Why would the Lydians have chosen to dilute electrum with silver? The intrinsic value of natural electrum was quite high. Given that gold was worth around ten times the value of silver, numismatists estimate that the most commonly available coin, the trite, was worth several sheep, or ten day’s wages (de Callatay, 2013). Converting into modern terms, the trite would be worth the equivalent of a $500 bill. This hardly seems a very convenient denomination. The smallest coin, the 1/96th stater, was worth about a day’s wages, and thus not useful as small change (Velde, 2012).

Wallace (1987) suggest that by mixing some silver into the natural electrum, the intrinsic value of the coin would have been reduced. The price at which the issuer promised to redeem the coin could now be lowered. This reduction would have permitted electrum coins to participate in a wider range of transactions, thus increasing their usefulness.

Still more questions

New data and theories about electrum coins have improved our knowledge. Unfortunately, it seems that we remain “confused but on a higher level!" remarks historian Francois de Callatay (2013). While Wallace’s theory is elegant, it leads to only to more questions.

Velde asks some of the more glaring ones. If electrum coins were redeemable, what did the issuer promise to redeem their coins with? Gold? Silver? Perhaps they be used to discharge taxes? If gold and silver were to be used to redeem electrum coins, why not use these materials as the basis of coinage instead?

And what did the issuer keep in reserve to “back" his guarantee, wonders Velde. If each coin had to be 100% backed by gold, then our issuer would have had to incur the costs of storing and vaulting the yellow metal. This would have meant that issuing coins wasn’t very profitable. One wonders why our electrum owner would have bothered producing them in the first place.

Electrum coins, what happened to them?

Whereas the Brits still seem to be quite fond of their 1p and 2p coins, the Lydians quickly discontinued their electrum coinage. About a hundred years after electrum coins were first issued, they disappear from the numismatic record.

Around 550 BC, King Croesus decided to issue individual silver and gold coins. This switch from electrum to pure gold and silver coincides with the discovery of the process of cementation, the ability to separate gold from silver. Presumably decomposing electrum into its constituent parts in order to create a uniform currency was deemed superior to issuing electrum discs.

Except for a few smaller city-states that continued to issue electrum coins for another century or two, never again would a mixed silver-gold coin be issued. All that remains is a mystery for modern numismatists to puzzle over.

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Sources:

de Callatay, Francois. White Gold: An Enigmatic Start to Greek Coinage. 2013. [link]
Velde, Francois. On the Origin of Specie. 2012. [link]
Velde, Francois. A Quantitative Approach to the Beginnings of Coinage. [link]
Wallace, Robert. The Origin of Electrum Coinage. 1987. [link]
Wallace, Robert. On the Production and Exchange of Early Anatolian Electrum Coinage. 1989. [link]

A sound debasement

An imitation English half noble issued by Philip the Bold, Duke of Burgundy, 1384-1404 [source]

[This is a republication of an article I originally wrote for the Sound Money Project. When we look back at old coinage systems, our knee-jerk reaction to the periodic debasements that these systems experienced is "ew, that's gross." But things were considerably more complex than that. This article tells the story of a healthy, or wise, coin debasement — Henry IV's debasement of the gold noble during the so-called "war of the gold nobles" between England and Burgundy in the late 1300s and early 1400s.]

A Sound Debasement

In his excellent article on medieval coinage, Eric Tymoigne makes the seemingly paradoxical claim that “debasements helped preserve a healthy monetary system.” A debasement of the coinage was the intentional reduction in the gold or silver content of a coin by the monarch by diminishing either the coin’s weight or its fineness. I’m going to second Tymoigne’s paradoxical statement and provide a specific example of how a debasement might have been a sound monetary decision.

First, we need to review the basics of medieval coinage. In medieval times, any member of the public could bring raw silver or gold to the monarch’s mint to be coined. If a merchant brought a pound of silver bullion to the mint, this silver would be combined with base metals like copper to provide strength and from this mix a fixed quantity of fresh pennies — say 40 — would be produced. These 40 pennies would contain a little less than a pound of silver since the monarch extracted a fee for the mint’s efforts.

The merchant could then spend these 40 new pennies into circulation. Coins were generally accepted by tale, or at their face value, rather than by weight. Shopkeepers simply looked at the markings on the face of the coin to verify its authenticity rather than laboriously weighing and assaying it. This was the whole point of having a system of coinage, after all: to speed up the process of transacting.

As long as the monarch of the realm continued to mint the same fixed quantity of coins from a given weight of silver or gold, the standard would remain undebased. Sometimes, however, “coin wars” erupted between monarchs of different realms, the aggressors minting inferior copies of their victims’ coins. Since these wars hurt the domestic monetary system of the victim, some sort of response was necessary. One of the best lines of defense against an aggressive counterfeiter was a debasement.

John Munro, an expert in medieval coinage, recounts the story of the “war of the gold nobles,” a coin war that broke out in 1388 when the Flemish Duke Philip the Bold began to mint decent imitations of the English gold noble. Flanders, comprising parts of modern-day Belgium and northern France, was a major center of trade and commerce on the Continent. Both the weight and fineness of Philip’s imitations were less than those of the original English noble. According to Munro’s calculations, by bringing a marc de Troyes of gold (1 marc de Troyes = 244.753 grams) to Philip’s mint in Bruges, a member of the public could get 31.163 counterfeit nobles. But if that same amount of gold were brought to the London mint, it would be coined into just 30.951 English nobles. Given that more Flemish nobles were cut from the same marc of gold than English nobles, each Flemish noble contained a little bit less of the yellow metal.

Philip’s “bad” nobles soon began pushing out “good” English nobles, an instance of Gresham’s law. Given Philip’s offer to produce more nobles from a given amount of raw gold, it made a lot of sense for merchants to ship fine gold across the English Channel to Philip’s mints in Bruges and Ghent rather than bringing it to the London mint. After all, any merchant who did so got an extra 0.212 nobles for 244.753 grams of the gold they owned. By bringing the fakes back to England, merchants could buy around 1 percent more goods and services than they otherwise could. After all, Philip the Bold’s fake nobles were indistinguishable from real ones, so English shopkeepers accepted them at the same rate as legitimate coins. English nobles steadily disappeared as they were hoarded, melted down, or exported. Why spend a “good” coin — one that has more gold in it — when you can buy the exact same amount of goods with a lookalike that has less gold in it?

Philip’s motivation for starting the war of the gold nobles was profit. By creating a decent knock-off of the English noble that had less gold in it, though not noticeably so, Philip provided a financial incentive for merchants to bring gold to his mints rather than competing English mints. Like all monarchs, Philip charged a toll on the amount of physical precious metals passing through his mints. So as throughput increased, so did his revenues.

The health of the English monetary system deteriorated thanks to the coin war. With a mixture of similar but non-fungible coins in circulation, there would have been an erosion in the degree of trust the public had in the ability of a given noble to serve as a faithful representation of the official unit of account. Nor was the system fair, given that one part of the population (people who had enough resources to access fake coins) profited off the other part (people who did not have access). Finally, when Gresham’s law hits, crippling coin shortages can appear as the good coin is rapidly removed but bad coins can’t fill the vacuum fast enough.

The English king’s efforts to ban Philip’s nobles had little effect. After all, gold coins have high value-to-weight ratios and are easy to smuggle. One line of defense remained: a debasement. In 1411, some 20 years after Philip the Bold had launched his first counterfeit, King Henry IV of England announced a reduction in the weight — and thus the gold content — of the English noble. This finally resolved the war of the nobles, says Munro. By reducing the noble’s gold content so that it was more in line with the gold content of the Flemish fakes, the English noble lost its “good” status. Merchants no longer had an incentive to visit Philip’s mints to get counterfeits, and English nobles once again circulated. The health of the English coinage system improved.

We shouldn’t assume that all medieval debasements constituted good monetary policy. There were many coin debasements that were purely selfish efforts designed to provide the monarch with profits, often to fight petty wars with other monarchs. These selfish debasements hurt the coinage system since they reduced the capacity of coins to serve as trustworthy measuring sticks. As Munro points out, each medieval debasement needs to be analyzed separately to determine whether it was an attempt to salvage the monetary system or an attempt to profit.

Christians minting Muslim coinage (and vice versa)

An Islamic gold dinar minted by Offa, a Christian king of Mercia [source]

If you follow me on Twitter, you may have noticed that I've been more excited about ancient coins than I usually am. The gold coin pictured above, for instance, was minted by Offa, an Anglo-Saxon king of Mercia, in the late 700s. Offa was a Christian, but his coin contains the words "there is no God but Allah alone." In this blog post I'm going to bring together a bunch of my tweets and explore why rulers sometimes produced coins that contained icons and text dramatically at odds with the culture to which they belonged.

Money is like language. Both are characterized by network effects, or lock-in. People living in a geographical location grow up speaking a certain language, and since all their friends, family, neighbours, and colleagues also speak it, it's almost impossible for a new language to get any sort of traction.

That's why the artificial language Esperanto has never taken off. Designed in the 1800s by L.L. Zamenhof to be easy to learn, only 2 million or so people speak Esperanto. Why bother learning a new language, even an easy one, if everyone you know is already speaking English, or Chinese, or Swahili?

The same goes for money. People grow up 'speaking' a certain monetary language: dollars, yen, pounds, hryvnia, whatever. Every Canadian, for instance, internalizes a full array of Canadian dollar prices in their minds: it costs $50 to fill up with a tank of gas, $1 to buy a chocolate bar, $150 to renew a driver's license, etc. And that's why it's difficult for new monetary units to intrude where an old one already dominates. Why adopt a monetary version of Esperanto when speaking in Canadian dollars comes so naturally?

Ancient coins are a good way to illustrate the idea of money as a locked-in language.

Islam emerged in the 7th century A.D., quickly moving from the Arabian peninsula into Africa and Spain. The heretofore dominant Byzantine Empire, with its base in Constantinople, lost Syria and Egypt to the emerging Islamic caliphate.

The Byzantines and the Romans before them had a long history of issuing the solidus, a high-quality gold coin. The solidus was a bit like the U.S. dollar of its day, circulating widely across Europe and the Middle East. Below is a Byzantine solidus from 638 AD, issued by Heraclius, who is pictured with his two sons. Their crowns and staffs have crosses on them, and the reverse side displays a large cross on top of a set of steps.

Byzantine solidus issued by Heraclius, 638 AD [link]

Having conquered such a huge territory in just a few years, the Muslims may have tinkered with the idea of issuing their own entirely new coins replete with Arab text and imagery. But they chose not to, at least not at first. Bowing to pragmatism, their first gold coins (below) were replicas of Heraclius' solidus dated to around 680 AD. That is, a Muslim ruler took the strange step of minting coins that portrayed three Christian emperors. The major difference between the 638 AD Byzantine solidus and the 680 AD Islamic imitation is that it has been "de-christianized" – the crosses had been removed.

Islamic imitation solidi, est 680 AD [link]

You can imagine the tradeoffs that the Muslim invaders may have been making when they designed the coin. By creating a near replica of the Byzantine solidus, they were probably trying to harness its network effects and get the first Islamic gold coin into circulation; and by making only a few small changes – removing the crosses – they wouldn't be compromising too much on their religious values. According to numismatist Clive Foss, these changes may have been too much. Opposition to the crossless coins among the local population was strong enough that the authorities stopped minting them soon after. Foss speculates that's why archaeologists have only found a handful of crossless dinars.

It wasn't until 697 AD that the first fully Islamized gold coins were finally issued, pictured below:

Umayyad gold dinar minted in  Syria in 697 AD [source]

Like the Byzantine solidus that preceded it, the gold dinar circulated outside the Islamic world. Examples have been found as far as Scandinavia, Russia, and England. And like the Byzantine coinage before it, Islamic coinage was copied. Caitlin Green has a very good blog post showing how Anglo-Saxon Mercia (see image at top) and the Carolingian Empire issued their own imitation gold dinars.

The caliphate's silver dirhams were copied, too. According to Green, the first coins issued by Kievan Rus (below) were probably imitation silver dirhams to which a cross and bird were added. "The fact that the first Rus' coinage imitated an Islamic dirham is interesting, although perhaps unsurprising, given that many millions of dirhams appear to have been imported into northern and eastern Europe by the Vikings/Rus' as a result of their trade with the Islamic world (perhaps primarily involving slaves)," writes Green. 

Put differently, don't fool around with a good thing. Copy it with just a few modifications.

A 'Christian falcon' imitation dirham issued by the Kievan Rus' in c. 950 [source 1][source 2]

One reason that European kings may have been particularly eager to copy Islamic gold coins is that while silver coins were common the continent didn't have a long history of minting their own gold coinage. By imitating already-dominant gold dinars, Europeans could coast on the network effect of those coins. In the case of Offa's gold dinar, pictured at top, it may have been designed as a trade coin, similar enough to the original that it would be accepted in southern Europe.

Another example comes from Spain. By the 13th century the Almohads – the last Muslim empire to rule Spain – had been driven back to North Africa. The monetary influence of Islamic coins was such that the Christian conquerors continued to issue dinar-style gold coins, or maravedis. Around 1180 AD, Alfonso VIII of Castile, a Christian, minted maravedis with Arabic script rather than Latin, "Christianizing" them by inserting a small cross and changing the Arabic message to a Christian one:

Spanish maravedi, 1180-1214 AD: https://t.co/cCyQ91Unw5

Alfonso VIII of Castile, a Christian, issued gold coins with Arabic script rather than Latin. Probably a wise compromise given the Islamic dinar's dominance in Spain up till then. pic.twitter.com/Ijp2GttnEs

— John Paul Koning (@jp_koning) February 2, 2022

Notice that in the previous examples, the new coin issuer used the incumbent coin's style while dropping its religious motifs. But the desire to latch on to the strong network effects of existing coinage sometimes trumped even the demands of religion.

As an example of this, when the Crusaders took over Jerusalem they issued dinar-style gold coins without even bothering to add Christian embellishments (see below). Initially minted in the late 1100s, the Crusader dinars only gained crosses in 1250 when an angry pope pressured the local princes to eliminate coinage which was "not well-formed enough to conceal the scandalous fact that its inscriptions praised Mohammed and bore dates of the Muslim era." Against the pope’s objections, the text on the new Christian design was still written in Arabic.

Coin of the day: a Crusader imitation dinar from 1187 AD.

When the Crusaders took over Jerusalem, they very pragmatically minted imitation Islamic gold dinars rather than Christian-themed coins. Until the pope heard and threatened excommunication.https://t.co/klocGcCMmx pic.twitter.com/CvOk2BROwL

— John Paul Koning (@jp_koning) January 27, 2022

So the idea that money is sticky and locked-in like language may explain some of the strange coins pictured above. It may also explain some of the phenomenon around us today, like:

1) why stablecoins have come to dominate the cryptocurrency space, and why the dominant stablecoins are U.S. dollar stablecoins and not, say, Turkish lira stablecoins. (Bitcoin and other volcoins are awful candidates as unit of account, whereas stablecoins are not only stable, but also benefit from the network effect of existing currencies, none of which is stronger than the U.S. dollar.)

2) why Facebook's original idea to create a new Libra unit of account was crazy overambitious.

3) why Canadians still use the Canadian dollar despite being right next door to the world's mightiest monetary power. We grow up speaking in loonies and toonies, and that's not something that is easily changed. It also explains why Quebecers sometimes refer to the dollar as a 'piasse,' which derives from the piastre or peso, and old coin that once dominated North American trade. The network effects of the long departed Spanish peso were so strong that shades of it still exist.

Is gold safe from sanctions?

As Russia is progressively cut off from U.S. and European payments systems thanks to an ever tightening wave of sanctions, the idea of using gold as a sanctions buster is being discussed. Russia has some $130 billion worth of the yellow metal. Might these gold bars be packed into planes and used to buy vital goods & services from other countries? To complete this monetary circuit, why doesn't Russia start accepting gold bars as payment for Russian oil and gas exports?

Gold seems like an ideal way to evade sanctions. Thanks to its high value-to-weight ratio, it is good at condensing value. This makes transport easier. Gold is also a bearer instrument. Unlike a dollar, it can't be frozen at the click of a button.

But that doesn't mean that gold can't be stopped by sanctions. Here's how a putative Russian gold payments rail gets shut down.

As of now, the only sanctions that have been announced by the U.S. are primary banking sanctions. That is, the U.S. government has decreed that U.S. financial institutions cannot provide banking services to named Russian banks (like Sberbank), certain individuals (like Putin), and Russia's central bank.

But there is harsher type of sanction that remains to be implemented: secondary sanctions. With secondary sanctions, the U.S. government announces that U.S. banks must cut off not just named Russian entities; they must also stop doing business with any foreign bank (Indian, Chinese, etc) that provides banking services to named Russian entities.

Think of secondary sanctions as a strategy of the friend of my enemy is my enemy. Foreign banks cannot afford to be enemies of the U.S. banking system. That would mean no more access to the massive U.S. economy. And so they will comply and cut off designated Russian entities. Where primary sanctions sever Russian entities from access to the U.S., secondary sanctions attempt to remove them from the global banking system.

To close Russia's gold window, a few additional steps must be taken.

The wording of secondary sanctions must extend to non-banks and into markets like gold. The U.S. might simply say something to the effect that "any foreign individual, corporation, or institution that facilitates gold transactions with designated Russian entities will be shut off from the U.S. banking system." If a foreign buyer of Russian crude oil, say an Indian refiner, had previously accepted Russian gold as payment, they may not be so willing anymore. Touching Russian gold could jeopardize their entire refining business, which will inevitably have a U.S. nexus (say a U.S. parts supplier or technical consultant.)

To enforce sanctions, the U.S. would have to rely on whistle-blowers, snitches, and intelligence gathering. The sanctions would not entirely close the gold window. There would be rule breakers. But the sanctions would do a sufficient job.

The best example of the yellow metal being shut down comes from Iran in the early half of the 2010s.

In 2010, a harsh round of U.S. secondary sanctions came into effect. As these were tightened over the ensuing years, Iranian trade plummeted, as did the Iranian rial. Iran's difficulties were compounded in March 2012 when a set of Iranian banks were banned from SWIFT, a global financial messaging network.

The sanctions did not make it illegal for foreign entities to deal with Iran using gold. And so a gold window emerged. This was most apparent in Turkey with the so-called "gold-for-gas" market. (I wrote about this market here and here). In brief, Turkey relies on Iranian natural gas. A quid pro quo was achieved between the two nations by sending gold bars back to Iran. No need for U.S. dollar correspondent banking accounts. No need for SWIFT.

In July 2012, the U.S. began to close the gold loophole. First it issued an executive order extending sanctions to sales of gold to Iranian Government entities (EO 13622). It was still possible for Turkish institutions to sell gold to Iranian individuals, however, so in January 2013 additional legislation was passed sanctioning the sale of gold to any Iranian entity. (See Benjamin Fraser Scott's Halkbank and OFAC: a sanctions evasion case study for an account of the closure of Iran's gold-for-gas trade.)

And thus Iran's gold loophole was cutoff. 

Russia's gold hasn't been sanctioned yet. But it is eminently sanctionable. 

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PS: Yes, this applies to bitcoin. (Bitcoin is traceable, which makes it arguably worse than gold.)
PPS: Sanctions could put an end to a nascent Russian gold payments rail. But just because sanctions can do damage doesn't mean that the target will change its course of action.