hough the crowns of gold that monarchs wear on state
occasions must weigh heavy on their heads, no monarch has ever
chosen zinc or plastic as an alternative. Rulers for centuries have
also been fond of stamping their likeness on gold coins, to
circulate throughout their kingdom and beyond. The tension between
gold as adornment and gold as money developed early in history and
has continued up to the present time. The everlasting radiance of
gold, together with its scarcity, suggested such exceptional value
that its route from the golden calf, the gilded phallus, and the
Golden Fleece to its use as money was probably inevitable. The
process works both ways: gold's massive purchasing power adds to
the lustre we see when we look at gold jewelry or the gilded dome
on a. state capitol.
This chapter is about the nature of money and how gold coinage came into being. We shall see that gold's association with power and magic linked it to the wide range of monetary functions that emerge when trade and business flourish. Money serves cultures and also reflects their basic values, and that may best explain gold's longevity as a form of money. Indeed, gold has played the most important role as money in those cultures that hold business and exchange in highest repute.
Value alone is insufficient for a substance to qualify as money. Lots of things have value that do not serve as money. In fact, the most effective forms of money have developed from objects that were otherwise quite useless, such as paper and computer blips.
In early Britain, cattle and slaves served as money. Their value was set by law-although the church, eager to discourage slavery, refused to accept slaves in payment of penances.' Pepper was popular in medieval times. In some areas, hoarding cattle to serve as wealth instead of as a food supply is a practice that has continued into modern times; this practice has led to serious ecological degradation in parts of Africa, where the sheep and goat population shrank by over 66 million from 1955 to 1976.2
That is a rare case. In modern times, nothing useful has ever functioned as money for very long. For example, the cigarettes accepted as currency in Germany in the early days after World War II ultimately went up in smoke. Gold, in contrast, has always been useless for most practical purposes that call for metal, because it is so soft. With only 125,000 tons of it in existence, gold is also too scarce to have many uses.
But gold has clear advantages as money compared to other kinds of useless substances that people have used for the purpose. Unlike cowrie shells, which were the main form of money for centuries in parts of Asia, gold is remarkably durable and does not easily fragment. Every single piece of gold, no matter how small or how large, is instantly recognizable everywhere as a receptacle of high value. Furthermore, every piece of gold is valued only by its weight and purity, attributes that are inconveniently applied to cattle.
Seen from the perspective of uselessness, the electronic blips on computer screens that comprise most of the money in the modern world are the best form of money-we have no other use for them, they are readily recognizable as money, they weigh a lot less than gold or even paper, they are easily transferable, they can be broken down into any amount we choose from a penny to trillions of dollars and even beyond, they are as durable as we wish them to be, and they have a kind of magic that commands our respect.
Yet gold endures as a standard of value. From the Golden Rule to Olympic gold, it has commanded far more respect than any other substance in history.
Furness points out, "In a land where food and drink and ready-made clothes grow on trees and may be had for the gathering, it is not easy to see how a man can run very deeply in debt for his living expenses." Nevertheless, people like some tangible representation of the labor they have expended that can be accumulated as wealth.
The medium of exchange, or, more properly, the store of value on Yap at that time was called fei. Fei consisted of thick stone wheels with diameters ranging from saucer-size pieces to twelve-foot millstones. The stones from which these fei had been fashioned came from limestone quarries found on the island of Babelthuap, one of the Pelao Islands about four hundred miles away, and brought to Yap long ago, piece by piece, in canoes and on rafts by some venturesome natives described by Furness "as persuasive as ... the most glib book-agent."
The smaller and more portable fei served as a medium of exchange and were handed around in payment for fish or pigs. The larger fei, however, received different treatment. The natives punched holes in the center of these fei to facilitate moving them about, but most of these big stones weighed so much that they remained permanently in one spot. On the rare occasions when a major transaction took place, the process went through with a simple acknowledgment of change of ownership while the "coin" continued to sit undisturbed wherever it happened to be.
In fact, the wealthiest family in the community owned an enormous fei that no one could see or had ever seen. According to this family, their fei lay on the bottom of the sea. Many generations past, while an ancestor was towing it on a raft attached to his canoe, a terrible storm came up. Unlike the protagonist of Ruskin's story, this man had decided that life came first and money second: he cut the raft adrift and watched the huge stone sink below the waves. But he survived to tell the tale and to describe to everyone the extraordinary size and quality of the stone he had lost. Nobody had ever doubted the veracity of his testimony. As Furness described it, "The purchasing power of that stone remains, therefore, as valid as if it were leaning visibly against the side of the owner's house."
Furness goes on to tell what happened when the German government bought Yap from Spain in 1898 and wanted to transform the island's rocky coral paths into proper roads for modern transports. The natives had no interest in spending their time doing that kind of work, despite repeated commands from the Germans to get busy. The Germans finally decided to levy a fine that would be lifted only when the task was completed. A German official went through the island, marking the most valuable fei with a black cross that confirmed the government's claim to that stone. According to Furness, "This instantly worked like a charm: the people, thus dolefully impoverished, turned to and repaired the highways ... that they are now like park drives." Then the government erased the crosses, and "Presto! the fine was paid, the happy failus resumed possession of their capital stock, and rolled in wealth." In other times and other places, we call this sequence of events taxation and government spending.
This story reminds me of an experience of my own early in my career in 1940 when I went to work in the research department of the Federal Reserve Bank of New York in the heart of the city's financial district. One day, as a treat, my boss took me down to see the gold stored in the antiseptic vaults of the bank, five stories undergroundsunk below bedrock to discourage thieves from tunneling through the outside walls. We entered the area through a ponderous airtight and watertight cylindrical door of stainless steel that unlocked automatically at nine in the morning and locked automatically at five in the afternoon. Just inside was a lunchbox, replenished daily with fresh sandwiches, to provide for any hapless member of the staff who got stuck inside when the automatic locks slammed shut at the end of the day. A little further on, there was a scale for weighing the gold, a scale so sensitive that a pea would send it rocking. With gold, even dust matters.
The gold was stored in oversized closets, about ten feet wide, ten feet high, and eighteen feet deep. The closets were filled to the ceiling with towering piles of gold bricks, each brick the size of three large candy bars. The bricks weighed about thirty pounds apiece-four hundred troy ounces-and were worth $14,000 in those days, when gold was officially priced at $35 an ounce. At those prices, $2 billion was stacked up there, a sum of money that was sufficient to buy four days' worth of the total production of goods and services in the United States at that time but was crowded into just one small space five stories below the busy New York City streets. Seeing over one hundred thousand gold bars, stacked to the ceiling and ablaze under the electric lights, is an unforgettable and chilling sight.
That gold did not belong to the United States. It belonged to France, England, and Switzerland, and to many other countries as well. Those countries had for a long time stored their official gold holdings at the New York Federal Reserve for both safekeeping and convenience. Each bar consigned in this manner was impressed with its owner's seal or a similar mark for identification. This process was known as earmarking gold, an expression that may date back to a method of indicating ownership of domesticated beasts. Earmarking enabled each nation to avoid all the care and expense of moving gold cross-country or across the seas when one country had cause to transfer gold to another. For example, if England lost gold to France, a guard at the Federal Reserve had merely to bring a dolly to England's closet, trundle the gold to the French closet, change the earmark, and note the change on the bookkeeping records.
These movements of just a few feet from one closet to another often reflected a major change in wealth between countries, with broad ramifications on economic well-being. Yet the citizens of each country never saw the gold to which their government held a claim.* If the gold had sunk into the Hudson River but the bookkeeping had progressed just the same, the economic and financial consequences to each nation would have been just as far-reaching as when the gold was shifted from one closet to another.
This procedure bears a striking resemblance to what went on at the island of Yap, with its transfers of ownership of assets that never moved and with the agitated economic activity that resulted when the Germans marked a black cross on the fei. As we shall see, the resemblance between so-called primitive and so-called modern uses of money did not stop at the shores of Yap and the cellars of the Federal Reserve.
The fei of Yap were stores of wealth. Stores of wealth sit. Money moves. It travels from one pocket to another. A store of wealth is mass; money is measurement of wealth.
Gold's durability, density, and glow made it a natural choice as a store of wealth long before people thought about using it as money. Like everything that has served as a store of wealth, gold in ancient times was a passion, a blatant expression of power, a means to provoke envy among enemies or people of lower status, or a vehicle for currying favor-as when the queen of Sheba showered gold on King Solomon.
Gold deployed as money becomes something different. People who go out to spend or lend money have to be cool-headed, calculating, precise, strategic in their vision. Before gold could be used as money instead of as a store of wealth, people had to become sufficiently productive to have something to trade, travel had to become more routine, and measurement had to be defined for the purpose.
In short, money comes into being when people are doing business. Not much business was transacted at Yap, where economic life was communal rather than commercial. We need money when we want to hire someone or because we want to offer the money to someone else in exchange for something we do not own. We use money when we want something today rather than tomorrow. Then we borrow from someone willing to wait until later to spend their money. Money moves from buyer to seller, from lender to borrower, and from borrower to lender. It seldom sits still very long and someone else is always involved.
When gold was only a store of wealth, payments from one party to another were infrequent. The process was cumbersome and timeconsuming. Like cattle and the stones of Yap, no two gold bars or rings in ancient times were ever precisely the same size and fineness. As a result, every transaction involved testing for purity and putting the gold on a scale to determine its exact weight.
Coins were an ingenious innovation designed to get around the tedious business of weighing and checking purity, but they did not come upon the scene until around 700 BC, a good two thousand years or more after gold was first launched on its monetary career. Although coins enabled people to skip the measurement process and get right down to business, coins could serve this purpose only if they were genuine-they had to be worth precisely what their inscriptions represented them to be worth for this purpose.
Even at the very beginning, therefore, a widely accepted method for gauging the purity of gold and determining its weight was essential before gold could be used as money. Gold has acquired its own measuring system for these purposes, although versions of this system are now used on other precious metals and the most valuable jewels.
We define the purity of a piece of gold in terms of its carats. For example, 24-carat gold is 100 percent pure. Carat-the word derives from the Greek word keration, qirat in Arabic, and carato in Italian-was originally a measure of weight rather than purity, however, and for a delightful reason. Carats are the fruit of the leguminous carob tree, every single pod of which weighs one-fifth of a gram.
Today the carat has been replaced by the grain as the conventional unit of weight. Grains of barley or wheat in the middle of the ear have the same remarkable attributes as the carat-a standard weight regardless of the size of the ear. The troy ounce, which comes from the French town of Troyes where the measure was first put into use, weighs 480 grains, and twelve troy ounces equal one pound, which is the same as one sixteen ounce pound avoirdupois. Thus, troy ounces are heavier than the ounces we are used to employing. The modern convention is to express the weight of gold in grains, but the price is expressed in troy ounces.
The Egyptians were casting gold bars as money as early as 4000 BC, each bar stamped with the name of the pharaoh Menes. The Egyptians even had a defined ratio between gold and silver. Throughout most of history, silver has been valued at only 5 percent to 8 percent of gold's value-ratios of 12 to 20 parts of silver to 1 part of gold-but the Egyptians set silver equal to 10 percent as much as gold because they had no indigenous silver supply.4 It is also possible that the arithmetic was easier at that ratio, but we have no evidence of that. In any case, this step was the beginning of a complex, incestuous, and occasionally violent cohabitation of gold with silver in the money stock, a battle that haunts most of the history of gold as money.
The awkward process of weighing gold and checking its purity in every transaction sounds like more of a nuisance than it was in reality. These ancient civilizations bore a greater resemblance to the island of Yap than to an industrialized society like ours. When most property belonged to the monarch, when economic activity was primarily agricultural, and when transportation was so difficult that most communities were self-sufficient, long-range trade and commercial transactions were either rare or of minor importance.
As the need for money grows, it rapidly inspires innovation to make it function more efficiently and conveniently. The Assyrians and Babylonians were more active traders than the Egyptians, and they developed more elaborate and uniform gold bars. They stamped lions on the heavier bars, about thirty pounds in weight, and put ducks on the smaller bars that weighed about half as much. The lions and the ducks were a help in signifying value, but until about 600 BC people still wanted to weigh each piece of gold rather than accept the stamped indications at face value. The Mesopotamian peoples also broke their gold monies into smaller denominations known as talents, minas, and shekels; these denominations soon became common throughout Asia Minor and the Greek cities and settlements throughout the Mediterranean basin. The shekel has survived to this day in Israel.
The prosaic sequence of events that led from crude gold bars to a full-fledged system of coinage developed from a romantic and dramatic sequence of events that took place in the eastern part of Asia Minor, now Turkey. This story, which is admittedly part legend, begins in Phrygia, a kingdom whose capital city by that name was located on the banks of a small mountain torrent called the Pactolus. The first king of Phrygia, about 750 BC, was Gordius, a poor man with nothing to his name but a pair of oxen. Gordius was succeeded by his son Midas, thereby initiating a curious tradition for the Phrygian dynasty, who named themselves alternately Gordius and Midas.
This first King Midas was poor like his father, but we are told that he was a good man who wanted to be generous to others despite his poverty. One stranger whom Midas invited into his home turned out to be the foster father of Bacchus. Bacchus was so impressed with Midas's hospitality to his foster father that he granted the king any wish of his own choosing.
That irresistible offer was what got poor Midas into trouble. Midas's wish to have everything he touched turn to gold is usually held up as illustrating the dire consequences that stem from being overly greedy. Money isn't everything, as the saying goes. We should hesitate, however, before assuming that money was an obsession with Midas. If, according to the story, Midas inherited from his father Gordius nothing more than two oxen, he must have been a poor man, especially for a king. If he was a good man, why then should we assume that he was greedy? Perhaps his wish simply reflected a desperate desire to find a shortcut out of his dire poverty, a choice made without regard to the consequences.
Midas discovered his error in short order. When his food turned to gold as he tried to eat it, and even his beloved daughter became a golden statue when he embraced her, Midas begged Bacchus to throw the damned wish into reverse. Bacchus must still have held a high opinion of Midas, for he immediately obliged by instructing Midas to bathe in the Pactolus River. Midas thereby transferred his golden touch to the Pactolus, the legend continues, which is why that river turned out to be such a rich source of gold for the Phrygians and their close neighbors the Lydians. Midas thereby ended up with the best of both possible worlds-the gold in the Pactolus made him rich, but he was once more able to eat and touch his loved ones without turning everything and everybody into solid gold. The actual location of the Pactolus is no longer visible, but geographers believe that it was a stream carrying alluvial gold from the slopes of Mount Tmolus in Anatolia. By the time the Romans took over this area, perhaps half a millennium later, the mountain had been eroded by rushing water and had no more gold to yield.
Midas did not live happily ever after. The Cimmerian, a powerful nomadic tribe from southern Russia, invaded Phrygia and overthrew Midas, who committed suicide by taking poison to escape the savage hordes at his gates. Midas was not forgotten, however, for his chariot remained tied to a post by a complex knot in the main temple of Gordium for three hundred years. An oracle predicted that whoever could untie the knot would become king of Asia; this was none other than the Gordian knot that young Alexander of Macedon would cut through with his sword in 334 BC, on his way to conquer the lands all the way from Egypt to India.'
Most of the reliable history about this area of Asia Minor, as opposed to blends of fact and fiction, comes down to us from Herodotus, the Greek historian who lived around 500 BC. Herodotus's Histories comprised the first extended narrative in prose in Western civilization and set a tough act for later historians to follow. He emerges from these accounts as consistently perceptive, wise, and entertaining, with a sharp eye for gossip as well as the foibles of the characters whose chronicles he chose to record.
Herodotus's history begins in about 700 BC in Lydia, an area to the northwest of Phrygia; Lydia occupied most of the center of Asia Minor from the Aegean Sea inland approximately two hundred miles.' Sardis, the capital city, had the good fortune of sitting on great supplies of alluvial gold, most of which streamed down from the mountains into the Pactolus River-thanks presumably to Midas. Lydia also mined a metal called electrum, often referred to as "white gold," which was about twothirds gold and one-third silver. The word derives from the ancient Greek word H) icicop (elector), which means "he who shines" (the Greek word for sun is Helio, as in heliotrope) and is the root from which we derive the modern word electric. With all that wealth bestowed upon them, the Lydians frequently engaged in wild orgiastic dances in honor of Cybele, the goddess of the mountains and guardian of ores and metals.'
According to Herodotus, the kings of Lydia traced their ancestry from Hercules and had ruled for 22 generations, or 550 years, at which time their king was named Candaules. Candaules was madly in love with his beautiful wife. He was also a show-off. One day he hid with his favorite bodyguard Gyges to give Gyges the opportunity of observing the lady undress and display her lovely body. Unknown to the two men, the queen noticed what had happened. She called Gyges to her the next day and told him that either the man who had planned this violation must die or the man who had illegally seen her nakedness must perish. She let Gyges choose between making the event legal by killing his king and then marrying her and leading the kingdom, or being killed immediately by her instead. That choice is what is known today as a no-brainer.s And so began the dynasty known by the tongue-twisting title of Mermnadae.
Although the Lydians were outraged at the murder of their king, Gyges persuaded them to wait to hear what the oracle at Delphi had to say on the matter. The oracle declared in favor of Gyges, perhaps not coincidentally because of the generous gifts of gold and silver that he subsequently lavished upon her, including six golden bowls that weighed about eighteen hundred pounds (over $6 million at today's prices). Nevertheless, the oracle also predicted that Gyges's dynasty would perish in the fifth generation, when Candaules's descendants would finally claim their revenge on the Mermnadae. Gyges and the Lydians took little notice of her prophecy-at that moment.
The first three descendants of Gyges-Ardys, Sadyattes, and Alyattes-ruled for a total of 118 years, of which 57 were accounted for by Alyattes alone.* These three kings of Lydia spent most of their time making war on their southern and western neighbors in an effort to extend their domain to all of western Asia Minor out to the Ionian coast of the Aegean, although Ardys (660-637 BC), like Midas, had his hands full holding off the invading Cimmerians. Unlike most empire-builders through history, however, the Mermnadae refrained for the most part from destroying the homes and holy places of the defeated peoples, who were also left to enjoy loyal autonomy. The Lydian kings simply wanted monetary tribute and assured supplies of food and other materials, reasoning that they would be better off with a peaceful empire than one filled with people eager to take revenge against them.
Croesus, son of Alyattes and the great-great grandson of Gyges, ascended the throne in 568 Bc at the age of 35.9 This Croesus was the man who most people wished they were as rich as, which was a good thing, but he was also the fifth generation of the Mermnadae, which was an unfortunate thing. Regardless of the double-talk usually offered by the oracle at Delphi, the prediction the oracle gave to Gyges about the fifth generation being the last would turn out to be correct. Nevertheless, during his reign, Croesus completed most of the conquests that his predecessors had begun. He succeeded in occupying nearly all of western Turkey, including Phrygia, and even made an alliance with the Spartans on the Peleponnesus."'
Herodotus tells some entertaining stories about Croesus. The most revealing involved a visit by Solon, who had just written a code of laws for the Athenians, who promised to obey them for ten years. Solon took those ten years off to go sightseeing. When he arrived at Sardis, Croesus was impatient to show him the treasury with its immense wealth in gold. Then he turned to Solon, asking whether Solon had so far seen anybody, in all his far-flung travels, whom he considered to be "more fortunate than all men." Solon mentioned a great war hero of Athens and a couple of prizewinning athletes and their devoted mother. Dumbfounded, Croesus exclaimed, "As far as you are concerned, our prosperity amounts to nothing, and you do not even consider us on a par with private citizens!"
Solon agreed. "When you ask me about human affairs," he replied, you ask someone who knows how jealous and provocative god is.... My dear Croesus, humans are the creatures of pure chance." He admitted that rich men can gratify their desires and have the resources to absorb misfortune, but he then pointed out that the lucky man does not have to concern himself with misfortune: "He suffers no bodily harm, he doesn't get sick ... he has good children, and he is handsome.""
Herodotus tells us that the Lydians "are the first people we know of to mint and use gold coins and silver coins, and they were the first retail tradesmen."12 Sardis had a marketplace with a cluster of small shops offering a wide variety of goods ranging from meat and grain to jewelry and musical instruments. Herodotus had a word for this: i(Wt11Xot (kapeloi), which translated literally means "merchant" or "seller"; in Greek slang, it means "man with a big hat" and could be read in more modern terms as "huckster."* The Lydians were so busy converting almost everything into salable merchandise that, as Herodotus reports, "Except for prostituting their female children, the Lydians observe the same customs as the Greeks." 3 As the women accumulated coinage, however, they created their own dowries and as a result had unusual freedom in choosing their husbands.
These Lydian innovations in the development of money and trade were no coincidence. In addition to its location on the banks of the Pactolus, streaming with alluvial gold, the Lydian capital of Sardis sat astride the great east-west highway that linked the Aegean Sea to the Euphrates and more distant Asia, a span of nearly seventeen hundred miles.14 Trade and commercial activities were a natural development, and they brought with them the need for weights and measures and, most important of all, money in a convenient form for doing business. Money, in turn, created a demand for goldsmiths, money changers, and ultimately bankers. Sardis grew into a major urban center filled with wealthy families living in the highest luxury.
One ingenious Lydian innovation was the use of a local black stone, similar to jasper, for testing the purity of the lumps of gold received in payment for commercial transactions. This stone came to be known as the touchstone, because goldsmiths rubbed gold objects against it and then compared the mark against a set of 24 needles containing varying proportions of gold and silver, gold and copper, and all three metals. The 24th needle was pure gold, just as 24 carats measure pure gold.* All of this contributed to the development of a well-functioning coinage system, but we cannot appreciate what the Lydians accomplished and what Croesus in particular achieved without a brief step backward about 150'.years.
At the beginning of the seventh century BC, Lydian money consisted of bean-shaped lumps of electrum, called dumps. These dumps were too heavy for easy exchanges, as they had no uniformity in size or weight and bore no stamp to indicate their value.15
Gyges, the first of the Mermnadae, made a revolutionary reform in Lydia when he suppressed private issuance of metallic money (primarily electrum) and established a state monopoly over the issuance of dumps. The official monopoly of the state over the creation of money has persisted throughout history. Article I, Section 8 of the Constitution of the United States, for example, declares that "The Congress shall have power to coin money, regulate the value thereof, and of foreign coin." These concepts dominated the control of money supplies-note the U.S. reference to "coin"-as long as money was hard, but they began to diminish in importance as we progressed to modern times.i6 The development of negotiable credit instruments during the late Middle Ages and the increasing use of commercial bank liabilities as moneythe modern checking account-bypassed the state's monopoly over the creation of money and diluted the importance of gold as a means of payment for daily transactions. The role assigned to gold gradually changed into a kind of governor of the monetary system, a backing that was intended to set linuts on the issuance of all other forms of money.
When Ardys succeeded Gyges on the throne in 660 BC, he too was interested in creating a more efficient monetary system. He began stamping the electruin ingots with marks to guarantee their weight and value, providing different ingots for different folks: Lydia had one set, the Babylonian towns to the east had a different set, and the Ionian coast towns to the west still another." In time, however, the dumps became more uniform in size, and less than fifty years passed before the lumps and dumps became recognizable coins: round, uniform, and clearly stamped. A lion's head-the logo for the dynasty launched by Gyges-appeared on every one of them. The innovation spread rapidly in a western direction toward Greece, where coinage soon became an integral part of a system of rapidly developing trade all around the Mediterranean basin. If the Lydians were the first people to invent and use coins, the Greeks were the first to make coinage an art form; for the Greeks, beauty was an aim in designing money as much as it was in virtually everything else they touched.
The story is probably only a rough approximation of what actually happened, for nothing that took place that long ago is ever beyond controversy. Some modern experts had believed that full-fledged Lydian coinage originated before 700 BC, perhaps fifty years earlier than that, even though Herodotus had set 687 BC as his estimate of the date. But in 1951, a group of archeologists working in the great Ionian city of Ephesus came upon a huge hoard of Lydian money buried under the ruins of the temple of Artemis, which had been built about 600 BC. Over three thousand items came into view, including unstamped dumps, stamped dumps, and a mass of coins with the lion's head struck upon them, in addition to a substantial pile of jewelry and statuettes fashioned of gold and silver. Careful examination confirmed that the first true coins dated from around 635 BC, which in turn confirmed that Herodotus was right in the first place and should not have been doubted.', This dating would place the beginning of coinage around the end of the reign of Ardys, the son of Gyges, or at the beginning of the reign of his son, Sadyattes.
Croesus played the climactic role in this process. Although we shall see that he turned out to be a disaster as a military strategist, thereby fulfilling the oracle's prophecy about the fifth member of the Mermnadae, he was a master innovator when it came to monetary affairs and in his appreciation of the economic and political power packed into the precious metals. He was not kidding with Solon: he was convinced that money and happiness were inseparable.
Croesus's father Alyattes had been the first of the line to issue gold coins, which developed into a lucrative source of exports for Lydia and paid for much of their imports; the Lydian standard of living thereby enjoyed the advantages of trading something useless for something useful. Recognizing the value of these gold coins to his country's prosperity, Croesus called in all the outstanding electrum coins, melted them down, and minted new coins in the new style of pure silver and gold. In 1964, modern archeologists succeeded in uncovering the fire-resistant pots where Croesus's men extracted the impurities from the gold and silver from electrum by heating the metals with a mixture of lead and salt-a method that has not been found in excavations elsewhere.19
The coins of Croesus were stamped on one side with the foreparts of a lion and a bull, the arms of the city of Sardis. The opposite side had oblong and square punch marks, or depressions-the technical numismatic expression is that the coins were "incused"-to show their value. Most important, Croesus made the denominations and weights of his new coins conform as closely as possible to the weights and denominations of the old currency. The basic denomination, already familiar to everyone in that area of the world, was called the stater, which was subdivided into smaller denominations of thirds, sixths, and twelfths. The coins were minted with great care in order to maintain the uniformity of their size and weight.20 As a result, they were immediately acceptable throughout his kingdom. The division of the staters into twelfths carried forward to the development of the troy ounce, composed of 24 carats of pure gold, and reappears again in the English shilling, whichuntil the relatively recent conversion into the decimal system-consisted of twelve pennies.
In the process of putting his reform into action, Croesus had launched the bimetallic currency system that would prevail in most countries over most of subsequent history. The silver coins were needed to serve as the denominations that were too small for the use of gold; most of the gold was used to finance foreign trade. Like the Egyptians, Croesus set the ratio, of gold to silver at 10:1 as a matter of convenience, although he made no legal ruling to that effect.2' This bimetallic system had its useful features, but, as we have seen, monetary systems based on two metals were seldom stable, because changing supplies of the two metals over time caused their relative values to fluctuate.
Nevertheless, when his reform was complete, Croesus had established the first imperial currency in the history of the world. His beautiful coins of gold and silver were immediately accepted-indeed, demanded-throughout Asia Minor and were circulated in Greece on the western side of the Aegean as well. This universally accepted currency played a critically important role in adding to the entire area's prosperity and economic development: it stimulated trade both within the Lydian Empire and with the nations to the east, west, and south, which in turn encouraged the free interchange of people and ideas .21 Croesus's accomplishment was equivalent to the establishment of the euro in western Europe in our time. If that revolutionary step of creating a common currency for communities that had always had their own money can succeed, the euro will have achieved precisely what Croesus had consummated: increased trade within Europe and with the rest of the world, with populations more mobile, and enjoying a robust rate of economic growth.
By the time he was done, Croesus had created a great innovation that has reverberated through history up to our own era. It was not just the establishment of a rational, systematic, and widely acceptable form of money, a step that was momentous in its own right. There were many other materials that he could have used as a base for his monetary system-copper, shells, or beads, for example. The focus on gold and silver, however, transformed those metals into the ultimate standards of wealth and money. In time, these attributes would prove to be more valuable than the reverence accorded them as objects of religious worship or as articles of beauty.
Fifteen years into his reign, Croesus began to worry about the growing power of the Persians, whose king Cyrus had already led his troops into the eastern parts of Asia Minor along the shores of the Black Sea. Croesus was well aware of Cyrus's expectation to gain great economic power as well as valuable territory by subduing the Lydians.
Croesus decided that he should take the offensive and cut down the Persian power before it became invincible. Under similar circumstances, most leaders throughout history have sat down with their generals and other advisors and mapped out a strategy to confront the approaching enemy. Not Croesus. Rational and ingenious when it came to money and gold, Croesus worked out his military strategy by consulting oracles; he sent messengers to the oracle in Delphi, to six other Greek oracles, and even to one in Libya. He tested the forecasting accuracy of the oracles by instructing each messenger to count one hundred days from their departure, visit the oracle, and ask the oracle what Croesus was doing on that day. He then chose something to do that he was convinced no one would be able to guess: he chopped up a turtle and a lamb and boiled them together in a bronze pot.
When all the messengers had returned with the responses of the various oracles, he was astonished that one of them had actually guessed right: the oracle in Delphi. Croesus had always been partial to that oracle, because it had legitimized the reign of his great-great grandfather Gyges. The Delphic oracle prophesied that Croesus would be eating "strong-shelled tortoise seething in bronze with the flesh of lambs."23
Croesus lost no time in plying the oracle with gifts, including 117 ingots of pure gold, each weighing 150 pounds, to say nothing of a lion of pure gold that weighed six hundred pounds, plus a golden vat of 522 pounds that could hold five thousand gallons for mixing wine and water. He also ordered all Lydians to make a sacrifice for the oracle. The oracle, in return, conducted business with Croesus in thoroughly modern fashion. Croesus received "rights of first consultation without a fee, front-row seats at Pythian games and festivals, and the right, in perpetuity, for any Lydian who so desired to become a citizen of Delphi."24 That is a literal quote from Herodotus.
The oracle also advised Croesus that if he made war on Cyrus, he would "destroy a great empire." Happy and confident, Croesus took off to do battle with the Persians, even though they outnumbered his forces. The first engagement was a fierce one but ended in a standoff. Croesus figured he had better withdraw to Sardis and wait until he could gather his allies before attacking Cyrus a second time. Cyrus, aware of Croesus's intentions, hurried toward Sardis, forcing Croesus to face him on the great plain that lies before the city. When Cyrus saw that Croesus had placed his powerful cavalry in the front ranks, he transferred his own horsemen to the camels usually employed in carrying food and equipment. Horses are afraid of camels and cannot stand the sight or the smell of them. The Lydian cavalry was thrown into confusion by the camel charge and the whole Lydian army had to retreat into the city, where they suffered a siege that lasted fourteen days before the Persians finally broke through and claimed victory. The Delphic oracle had got it right again: a mighty empire had been destroyed, but it was the empire of Croesus that fell, not the empire of the Persians.
Cyrus decided to celebrate his victory by burning Croesus at the stake as an offering to the Persian gods. As the flames were mounting, the soldiers heard Croesus call out the word Solon three times. When asked what he meant, Croesus told them that Solon was "a man I would give a great fortune to see talking with all the tyrants of the earth." Cyrus was so moved by what Croesus told him about Solon's visit that he ordered the fire put out and Croesus untied. As they sat together as friends, Cyrus pointed out to Croesus that the crowd they could see in the distance was "looting [his] city and carrying off [his] wealth." Croesus still had his wits about him, despite all he had been through. "It's not my city or my wealth they are looting," he pointed out. "None of it is mine anymore. What they are looting and leading away belongs to you.""
With those poignant words, Croesus fades from view.
The most challenging feature of the Croesus story is in its curious intermixture of luck and skill. Croesus was lucky enough to rule a domain on the banks of the Pactolus, blessed by Midas with an apparently endless supply of gold. As Solon reminded him, "Humans are the creatures of pure chance." Croesus was also helplessly superstitious in the critically important role of military commander-in-chief Yet he was a masterful ruler and a memorable innovator in finance who launched gold on its long career as money. He may not have earned the assets he deployed, but he used them to his greatest advantage.
There is a sour current observation about lucky people like the Lydians: that they were born on third base and thought they had hit a triple. J. Kenneth Galbraith has phrased the same thing more eloquently: "Men possessed of money, like men earlier favoured by noble birth and great title, have infallibly imagined that the awe and admiration that money inspires were really owing to their own wisdom or personality."26 Galbraith's characteristically acerbic wit contains much truth, but Croesus and the Lydians may be the exception that proves his rule. The political and financial innovations of the Lydians were remarkable enough in their own time. Viewed from the perspective of the 2500 years since the death of Croesus, however, their accomplishments were truly extraordinary. It was their wisdom and personality that inspired the awe and admiration for their money, not the other way around. Most important, they demonstrated that you don't have to be bad just because you are rich.
Other nations in the past had conquered their neighbors but never with the benign touch of the Lydian. Other nations in the past had developed monetary systems but never with the systematic structure and wide acceptability of the Lydian currency. The Greeks, the Persians, the Romans, and ultimately the nations of Europe and the New World all walked in the footsteps of the imperial Lydians, and most of them with a far heavier tread. Although the sun may never have set on Queen Victoria's global empire of the late nineteenth century, the Lydian model defined the character and even the shape of the political and economic relationships between the center and the colonies, including the colonial financial assets that were accumulated in deposits in the London banks and were both denominated and transacted in sterling.
Nevertheless, without the Midas touch, the Lydians might have been nobodies. As the economists like to say, the gold was probably a necessary even if not a sufficient condition for their ascendancy. The origins of Lydian power and dominance-indeed, their views of their earthly mission-were rooted in the golden fruits of the Pactolus River and the electrum ores that coursed through the mountains around them. Other nations in other times have set out on conquests to become rich; the Lydians achieved their empire in large part because they were rich-as rich as Croesus.