Lecture 3: Money and Monetary Integration: The Growth of Cities and the Globalization of Trade

L E C T U R E3

Money and Monetary

Integration: The Growthof Cities and the

Globalization of Trade

I want to continue the story from yesterday about the division of labor. So far, I have presented more or less a historical tale, and now I want to add a few theoretical considerations about why there is division of labor, and then from there continue on to the development of money, which intensifi es the division of labor still further. We will also discuss the role of cities and city growth, and that will be continued in the lecture this afternoon on capital and capital accumulation.

I mentioned already yesterday that the fact of humans speaking to each other, arguing with each other, using language, indicates their social nature. Something else should be mentioned in this connection, and that is that at the beginning of mankind, it is diffi cult to imagine only two grown-up people being faced with the question, “Should we cooperate or not cooperate?,” when keeping in mind also that there are diff erent generations of people alive, which automatically makes it easier to understand why there is cooperation. Obviously, the older 35

generation pressures the younger one to adopt certain standards and fi nds some advantages in the division of labor, but be that as it may, I want now to develop the case of the division of labor as Ludwig von Mises presents it, that is, assuming that there are grown-up adults, and that there is no language in existence initially.

Can we still, somehow, explain why people do not remain in self-suffi cient isolation, but begin dividing their labor up and engage in exchanges based on the division of labor? In order to understand this, let’s fi rst assume that all individuals are perfectly identical to each other, perfect clones of each other, and that also land, that is, those things that we fi nd in front of us as nature-given resources, are perfectly identical for every individual. What would then occur? Th at is a relatively easy prediction that we can make. If we assume that all people have the same desires, the same knowledge, and the same external equipment, then the result would be that every person will produce the same sort of things in the same quantities and in the same qualities—and in such a situation, it is obvious that there’s simply no room for any type of exchange. What should I exchange if everybody has exactly the same things and uses up these things in exactly the same pattern as everybody else does, which simply follows from the assumptions that we have made, of perfect identity of labor and land. Th e fi rst recognition, then, is that if it were not for the fact of diff erences with regard to land and/or labor, not even the idea of division of labor (and, based on the division of labor, exchange) would ever enter any person’s mind.

Even if there are diff erences between labor, ourselves and man, it is not necessary that people divide their labor and exchange based on division of labor. Th ey could still decide that “I will produce everything on my own and remain self-suffi cient while in isolation.” Mises makes the point that psychologists and sociologists frequently explain the rise of the division of labor by assuming some sort of instinct to truck and barter. You’ll fi nd this, for instance, in Adam Smith. He explains it by an instinct: humans are instinctively drawn to each other and to truck and barter with each other. Mises, however, points out something very interesting, that is to say, we don’t need to make this assumption. We can make the assumption that actually every person hates everybody else and still explain how a division of labor can emerge. And obviously, explanations that require less in terms of assumptions are better Money and Monetary Integration:

The Growth of Cities and the Globalization of Trade 37 than explanations that require us to make all sorts of assumptions in order to come up with our conclusion.

Let’s assume everybody hates each other. Why would people nonetheless engage in the division of labor? Mises simply points out that the division of labor will arise as long as every person prefers more goods over fewer goods, as long as every person is perfectly selfi sh and wants to have more rather than less. Th is is entirely suffi cient in order to explain why they do not remain in self-suffi cient isolation. Th ere are, as you might have heard in your microeconomics classes, two reasons for this.

Th e fi rst one is called the absolute advantage of division of labor, which refers to a situation where one person is particularly good at doing one thing and another person is particularly good at doing something else. Th e reason for this can be internal, that he personally has talents that somebody else does not have and somebody else has talents that the other person does not have, or it can be due to the fact that one person lives on the mountainside and has certain opportunities that somebody who lives on the seaside does not have, or it can be a combination of these two factors, that is, diff erences of land and in labor. And given the fact that time is scarce, it is immediately clear that an advantage would result if each person specializes in those things in which he is particularly good, because then the total amount of goods that will be produced will be larger than it would be if both individuals were to decide to produce all goods, both goods, on our own and to not engage in the division of labor.

Th e second reason was fi rst discussed by David Ricardo. Ricardo, however, applied this argument to diff erent nations, and the advantage of Mises’s presentation of this argument is to show that it applies, strictly speaking, also, to the individual level. Th at is the so-called comparative advantage of the division of labor, which refers to the conceivably worst-case scenario where one person is all-around superior. At every production process, he is more effi cient than the other person, and the other person is all-around inferior as far as his productive capabilities are concerned. And the question is then, “Does it make sense for those types of individuals, one all-around superior, one all-around inferior, to engage in a division of labor?” And without going into great detail and trying to prove this sort of thing, it is entirely suffi cient to make 38 Economy, Society, and History

an intuitive case for the answer: yes, even under those circumstances, division of labor is benefi cial, provided that these two individuals divide their labor up in the following way. Th e person who is all-around superior chooses to specialize in those things in which he has a particularly great advantage, and the person who is all-around inferior specializes in that area in which his disadvantage is comparatively small. Let’s take an example: a surgeon and a gardener. Among the two, the surgeon is the superior surgeon and he is also a superior gardener—and because his time is scarce, it is advantageous for him to specialize in that activity where his advantage is particularly great, namely in the area of surgery, leaving the activity of gardening to the other person, despite the fact that the surgeon would also be a better gardener than the gardener is. But given the fact that his advantage is greater in one area than in the other and that time spent on one activity can no longer be spent on another activity, dividing their labor in this way and then, based on this division of labor, engaging in exchanges, the standard of living of both individuals will be higher.

Let me quote Mises to this eff ect, that is, explaining why it is that we don’t fi nd people who remain in self-suffi cient isolation. Th ere might be a few people who try it, but even they do not completely do it. In the old days of the hippie movement, there were, of course, some people who tried to live off the earth, as you might remember, but even they did not live directly off the earth. Th ey drove their campers up the mountain and led the primitive life there, but as soon as they ran out of gas, they didn’t drill for oil on the top of the mountain, but went on down to the next Shell station and got a refi ll. If they would not have done that, we never would have heard anything from these people again. So, Mises says, If and as far as labor under the division of labor is more productive than isolated labor, and if and as far as man is able to realize this fact, human action itself tends toward cooperation and association; man becomes a social being, not in sacrifi cing his own concerns for the sake of a mythical Moloch, society, but in aiming at an improvement in his own welfare. Experience teaches that this condition—higher productivity achieved under division of labor—is present because its cause— Money and Monetary Integration:

The Growth of Cities and the Globalization of Trade 39 the inborn inequality of men and the inequality in the geographical distribution of the natural forces of production—is real. Th us we are in a position to compre-hend the course of social evolution.¹

And now to a very important insight that Mises derives from this—again, recall, I pointed out that contrary to people like Adam Smith, for instance, who stipulated some inborn sympathy among mankind as the ultimate cause of division of labor, Mises reverses this argument and says, “It is precisely the higher productivity of the division of labor which makes us dependent on each other, based on our recognition that we all benefi t from this dependency on others that we then develop sympathetic feelings toward others.” So, it is not the sympathy that explains division of labor; it is the selfi sh motivation to begin the division of labor, that then, as a result of the division of labor, lets feelings of sympathy among mankind develop. So, sympathy results from, but is not the cause of, the division of labor. And again, a very interesting quote to this eff ect. Mises says, [T]here can emerge between members of society feelings of sympathy and friendship and a sense of belong-ing together. Th ese feelings are the source of man’s most delightful and most sublime experiences. Th ey are the most precious adornment of life; they lift the animal species man to the heights of a really human existence. However, they are not, as some have asserted, the agents that have brought about social relationships. Th ey are the fruits of social cooperation, they thrive only within its frame; they did not precede the establishment of social relations and are not the seed from which they spring.2

And then he elaborates a little bit more on this. He says,

1Ludwig von Mises, Human Action: A Treatise on Economics, scholar’s ed. (1949; Auburn, Ala.: Ludwig von Mises Institute, 1998), p. 160.2Ibid., p. 144.

Th e mutual sexual attraction of male and female is inherent in man’s animal nature and independent of any thinking and theorizing. It is permissible to call it original, vegetative, instinctive, or mysterious....However, neither cohabitation, nor what precedes it and what follows, generates social cooperation and societal modes of life. Th e animals too join together in mating, but they have not developed social relations. Family life is not merely a product of sexual intercourse. It is by no means natural and necessary that parents and children live together in the way in which they do in the family.

Th e mating relation need not result in family organization. Th e human family is an outcome of thinking, planning, and acting. It is this very fact which distinguishes it radically from those animal groups which we call 3per analogiam animal families.

So again, it is the recognition of the advantages of division of labor that makes stable family relationships, rather than people breaking up and going their own way.

Now, the division of labor then, because it is more productive, allows also, as I already indicated yesterday in my lecture, for population growth that otherwise would not be possible. Th e easiest way to convince ourselves of this is to engage in a thought experiment, what would happen to the world population if we were to decide from now on to withdraw from all social interaction and become self-suffi cient producers. As I already intimated with that hippie example, it can be easily seen that if we were to do something like this, most of mankind would be wiped out within a few days because we would not be able to provide ourselves with all the amenities that we have gotten used to. As soon as our truck wears out, we wouldn’t be able to fi x it; as soon as our milk runs out, well, in my case, more importantly, as soon as my beer runs out, I would be in deep trouble.

Note that the division of labor also allows the so-called unfi t to survive. But it is precisely these people, who under very primitive conditions,

3Ibid., p. 167.

The Growth of Cities and the Globalization of Trade 41 due to some defi ciencies of their bodily functions or sensory functions, would be condemned to starve and die, who can survive and lead productive lives and even become rich and wealthy individuals as a result of the division of labor. As a result of all this, as I explained, we fi rst have agricultural societies developing. Th ese agricultural societies have a minimal amount of division of labor; they are still, to a large extent, self-suffi cient. But then, as Mises described in the quote that I gave you yesterday, problems arise if the population increases: the plots become smaller and smaller; land becomes more and more valuable, and we have to fi nd a solution to this growing mass of population. And the solution is a deepening and intensifying of the division of labor, which leads to the formation, out of small villages, of cities, where we have specialized professions developing that provide the countryside with specialized tools and receive from the countryside the foodstuff necessary to lead their city life.

With city life also comes for the fi rst time (due to the fact that city life already indicates a larger amount of capital accumulation, and leads to a situation where people reach a certain level of wealth, have a certain amount of leisure time) the development of science or the fi rst attempts toward science, which requires leisure time to refl ect about natural laws, and so forth, and also very importantly, the development of a written language, which again constitutes a great advance in human development above and beyond the development of a language itself— because in this way, we are no longer dependent on oral tradition, one generation telling the following generation what to do, what they have learned and so forth, but we now have the ability to just freeze and make permanent experiences that were collected by previous generations. It also becomes far easier to transport this information to far and distant places, far more easy than would be possible if we had to rely on oral traditions. Written languages developed fi rst around 5,000 years ago, and we do know that some regions on the globe never reached this stage of development of having a written language. Some places only received written languages once they were rediscovered by Europeans. Th ere existed no written language on the African continent, and only very small attempts in some small regions on the American continent, of written languages.

I mentioned Carroll Quigley yesterday in connection with his claim that one of the marks of civilizations is that, civilizations no lon-ger live the parasitic life, but are societies that add something to the existing resources. Quigley gives, apart from this, a few other characteristics that he considers to be constitutive of civilization, and those are societies that have cities that have progressed beyond the village level and that possess a written language. Th e fi rst civilization or fi rst society that fulfi lls this requirement of a civilization, in Quigley’s sense, would be those societies that developed in the Fertile Crescent, today’s Iraq and Syria.

Let me just give you some ballpark fi gures about the size of the cities that came into being during this period 4,000–6,000 years ago. Th e biggest city for many centuries was Uruk, the remnants of which are in Iraq. Around 3700 BC, Uruk as the fi rst city had a population of about 14,000 people. So, by our standards, it was merely a large village but at that time, obviously, a major breakthrough as compared to village sizes. And this city, Uruk, in the next 1,000 years or so, by 2800 BC, grew to a population size of 80,000 people. Th is is already a signifi cant size, in which one can imagine that such a size city must display quite a signifi cant amount of division of labor within the nonagricultural fi eld. So, that was 80,000 people in 2800 BC. After that, the city of Uruk declines. Other cities take its place as the dominant city.

Th e next one is Akkad, which is also in the same region, which reaches the size of 60,000 inhabitants. Th en the biggest cities appear in Egypt: Memphis and Th ebes and Avaris. Th e biggest size of towns dur-ing this period of the Babylonian and Egyptian civilizations, was about 100,000. If we go to more recent periods, there is a time, let’s say, dur-ing the Roman Empire, when we fi nd cities already of a signifi cantly larger size. Rome itself, at its peak, had a population of about a million people, and we will see later on that there is also economic disintegration: a city that had a million inhabitants at one time shrinks, a few hundred years later, to a size of 20,000.

Th ere are periods—and I’ll come back to that in more detail—in which you can see there is faster population growth, more intensive division of labor, greater population growth, wider specialization and so forth, but there are also periods in which this sort of thing gets destroyed and populations shrink, the division of labor shrinks, population size in Money and Monetary Integration:

The Growth of Cities and the Globalization of Trade 43 cities goes down and so forth. Athens, at the peak of its development, had about 250,000 inhabitants, and one of the premier harbors and trading centers during this time, Alexandria, had a population of about 400,000 people.

Now, with cities also come merchants and money. I would like to add that to Quigley’s defi nition of developed civilizations, as places that have cities and written language, as an additional criterion of developed civilizations, to point out that they must have a specialized merchant class, people who are engaged in small-distance and in particular, also long-distance trade and, of course, with long-distance trade, the development of money.

I will interrupt my historical considerations and give a brief explanation for the development of money. Just as we can rationally reconstruct why it is that people engage in the division of labor and why there is a tendency for the division of labor to become more extensive and more intensive, so we can also provide a rational reconstruction of the development of money as a solution to a problem that arises out of trade in a premonetary economy. If we have a barter economy, in which people trade consumer goods for other consumer goods or consumer goods for producer goods, and production takes place for exchange purposes, or at least partially for exchange purposes, rather than for self-suffi cient supplies, then the problem automatically arises that sometimes I might have produced something for the purpose of exchanging it for something else, but the person who has what I want is not interested in my products, but wants something else.

Trade, in this situation, is only possible if we have what is called a double coincidence of wants, that is to say, I must have what you want and you must have what I want. If only one of these accidents occurs, I have what you want, but you don’t have what I want, then, clearly, trading comes to a standstill, and in such a situation, people are obviously looking for some sort of solution to this halting of trade, given the fact that they produced for exchange purposes, and not for the purpose of using things themselves. And again, Mises, drawing on the writings of Carl Menger, has a very beautiful explanation for what the solution looks like to this problem. If you cannot trade directly, what will happen is—and we don’t have to assume that this happens instantaneously or that every group of people makes the same discovery at 44 Economy, Society, and History

the same time—we only have to assume that there are some brighter people in society who make the simple discovery that not all goods that are traded in barter are equally marketable. Th at is to say, not all goods traded in barter are equally frequently used by people. Some goods are used by more people on more occasions and other goods are used by fewer people on fewer occasions.

And in such a situation, where I cannot receive for my goods what I directly want, I can still gain an advantage, make myself better off , following only selfi sh instincts, if I succeed in surrendering my goods for something that is more marketable than my own goods are. If I receive something that is more marketable, even if I have no interest in using that as a consumer good or a producer good, the advantage that I gain is the advantage that a more marketable good can, of course, more easily be resold for those things that I really want. Th at is, I have a more marketable good in my hands which is of no direct use to me as a consumer or as a producer, but I have demanded it as what is called a medium of exchange, as a facilitator of exchange. It facilitates exchange because there are more people on more occasions who are willing to accept these goods than the goods I had initially off ered for sale.

Th en, the degree of marketability of this particular good increases even more so because now there are people who demand this good because they want to have it as a consumer good and a producer good as before and, in addition, there’s one person who demands this good for a diff erent motive, the motive being, I will use it as a medium of exchange, as a facilitator of exchange. And then it becomes easier for the next bright person in society to make the same discovery: whenever he gets into diffi culties trading his good directly against those things that he wants, he makes the same move. All I have to do is fi nd a good that is more marketable than my own and the likelihood that he picks the same has already increased, due to the fact that there was already one brighter guy before him.

And then we have, very quickly, a convergence toward one medium of exchange that is used in society all over the place, and we call this a common medium of exchange or money. Two advantages that arise as soon as we have a common medium of exchange in existence is that now, with a common medium of exchange in existence, we can sell and Money and Monetary Integration:

The Growth of Cities and the Globalization of Trade 45 buy instantly without having to wait for double coincidences of wants to come into existence.

Th e second advantage that arises with the existence of a common medium of exchange is that now we can engage in cost accounting. After all, recall that we produce for sale on the market; we do not produce for our own use. If we produce for the market, then we want to make sure that those things that go into the production of certain products are less valuable than those things that we produce with our inputs. Or to put it diff erently, we want to make sure that our output is more valuable than our input. But in a barter economy the outputs and the inputs are in diff erent units—they are incommensurable. However, as soon as all our inputs and our output sell against one common medium of exchange, we have a common denominator; we can now compare, or add up, all the inputs in terms of money and we can express our out-put in terms of money, and we can now determine whether we made profi ts or losses—profi ts indicating that we did indeed turn less valuable resources into more valuable resources, which is, after all, the purpose of production—or, if we made losses, this tells us that we wasted valuable resources in order to turn them into something that was less valuable than those things that were used in order to produce our product, which would give us a signal that we should discontinue this type of production process.

Now, as we imagine that the division of labor expands and ultimately reaches and encompasses the entire globe, as diff erent regions begin to trade with each other, we can see that there will be in the market also a tendency for one type of regional money to outcompete other regional types of money, with the ultimate result to be expected being that there will be only one or, at the most, two types of money left over, which are used universally. Th at is to say, such a money, a money that is more widely used, more widely accepted, is obviously advantageous over a money that is only used in certain small regions. If we have diff erent monies being used in certain small regions, then we are, strictly speaking, still in a system of partial barter. If I want to trade with a diff erent region, I fi rst have to fi nd somebody who wants my money and is willing to give me his money, and only then can I proceed to make my purchases. If you have, however, only one money used on a worldwide scale, then it is obviously possible that without 46 Economy, Society, and History

any necessity for double coincidences of wants, immediate trading can take place. Th ese two tendencies, division of labor expanding and the tendency of money to become one universally used money, obviously reinforce each other and deepen and intensify the division of labor.

At this point, to emphasize this tendency for the globalization of trade facilitated by the universality of one money having outcompeted the initial diff erent sorts of money—let me give an important quote from Mises, to which I will return at a later point again. Mises says, A social theory that was founded on Darwinism would either come to the point of declaring that war of all against all was the natural and necessary form of human intercourse, thus denying that any social bonds were possible; or, it would have, on the other hand, to show why peace does and must reign within certain groups and yet, on the other, to prove that the principle of peaceful union which leads to the formation of these associations is ineff ective beyond the circle of the group, so that the groups among themselves must struggle.4

You notice that the argument here is that most people have very little diffi culty accepting the thesis that yes, there are peaceful relationships between the inhabitants of village A and village B, or tribe A and tribe B, because everybody sees that that is, of course, taking place. If you accept the Darwinian explanation, this is already diffi cult to explain, but the next struggle, the next problem, the more decisive one, is that people who accept these Darwinian interpretations have to explain why there should be division of labor and peaceful relationships within a group but not between diff erent groups. After all, the same principles seem to be at work. Mises then says this: “peaceful union, which leads to the formation of these associations, is ineff ective beyond the circle of the group, so that the groups among themselves must struggle.” And Mises then says,

4Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane (1951; Auburn, Ala.: Ludwig von Mises Institute, 2009), p. 318.

The Growth of Cities and the Globalization of Trade 47

Th is is precisely the rock on which all non-liberal social theories founder. If one recognizes a principle which results in the union of all Germans, of all Doli-chocephalians or all Proletarians and forms a special nation, race, or class out of these individuals, then this principle cannot be proved to be eff ective only within the collective groups. Th e anti-liberal social theories skim over the problem by confi ning themselves to the assumption that the solidarity of interests within the groups is so self-evident, as to be accepted without further discussion, and by taking pains only to prove the existence of the confl ict of interests between groups and the necessity of confl ict as the sole dynamic force of historical development. But if war is to be the father of all things, the fruitful source of historical progress, it is diffi cult to see why its fruitful activity should be restricted within states, nations, races and classes. If Nature needs war, why not the war of all against all, why merely the war of all groups against all groups?5

Th is is a very powerful description of, or explanation for, why the same principles that lead groups to cooperate peacefully are also operative at work when it comes to cooperation between diff erent groups. Th e same reasons apply there as they apply within each group. Th e division of labor is benefi cial, because it benefi ts all groups participat-ing in it, just as it benefi ts all individuals within a group. And a development of money toward a universal medium of exchange is benefi cial in the same way as the development of regional money is benefi cial for the inhabitants of just a small region.

Now, back to a few historical remarks, illustrating this tendency of globalizing the division of labor and the development of a universal money integrating all regions, all classes, all societies. From very early on, after the development of cities and a merchant class and regional monies, we have the development of long-distance trade. We already have something that is called the Silk Road, connecting Asia to Europe

5Ibid.

via the Middle East, which is still sort of the center of civilization, at that time, some 4,000 years ago. Th at is, 4,000 years ago there already existed trading routes of thousands of kilometers connecting Europe with Asia, trading routes that are protected by either the merchants themselves or by those people who live nearby and have an interest that the trade takes place through their areas. Th ere exists, during the Roman Empire—which at least in the ancient history provides examples for the deepest and widest economic integration—permanent contact around 200 BC between Rome and Han, China, where caravans of people move steadily and trade various goods back and forth. Very early on we also have regular sea travel; the Chinese regularly sent ships all the way to places such as India, for instance. And from the western part, there are regular sea trade routes from the Persian Gulf to India as well, especially after the discovery of the monsoon winds. Th at is, the monsoon winds, I forget exactly which direction, are such that for half a year they blow toward the east and for the other half of the year they blow to the west. So, once people discovered this regular pattern, relatively large-scale shipping operations could be conducted from the Persian Gulf to India and back.

Again, those sorts of things, just simply discovering how the wind blows, took quite some time; in some cases it was comparatively easy, as with the monsoon winds, where you have long periods blowing one way and long periods blowing the other way. It was far more diffi -cult, for instance, to fi nd the appropriate sea routes across the Atlantic, going in one direction and then coming back in the other direction, since you typically cannot take the same routes. And it was even more diffi cult for the Pacifi c, where the routes are very diff erent for going one way and for going the other. Again, hundreds of years of experience were necessary in order to develop detailed knowledge about the most appropriate routes to take, and this only became a nonproblem with the development of steamships, which is, of course, a comparatively recent development.

Th is intensive long-distance trade is refl ected in the fact that we can fi nd Roman coins in places like South India, but Roman coins were not the most popular coins, because Roman coins suff ered from frequent coin-clipping operations by various rulers. So, for some 800 years or so, from about 300 AD to the twelfth century, the most popular money Money and Monetary Integration:

The Growth of Cities and the Globalization of Trade 49 was produced by Constantinople and the name of it was solidus or bezant, (obviously named after Bezant, or Byzantium), and they gained a reputation of being the most reliable, most honest coins, subject to practically no coin clipping or adding of less valuable metals to it. Trading markets, of course, prefer good money over bad money.

You might have heard about the so-called Gresham’s law, which states that bad money drives out good money, but this law only holds if there are price controls in eff ect, only if the exchange ratios of dif-ferent monies are fi xed and no longer refl ect the market forces. Is it the case that bad money drives out good money under normal circumstances without any interference? No, for money holds to exactly the same law that holds for every other good. Good goods drive out bad goods. Good money drives out bad money, so this bezant was for something like 800 years considered to be the best money available and was preferred by merchants from India to Rome to the Baltic Sea. In all of these regions, you can fi nd this type of coin being used, and diggings have produced evidence of the use of these coins at these far distant places.

To continue the story, we have the discovery of America taking place. Th ose areas had been completely unknown to the Western Eurasian world before—it actually takes until about 1850 for the fi nal explorations into the interior of Africa to take place, and we can say roughly that by the mid-nineteenth century the entire world had become known to mankind. And it is not an accident, then, that around this time what emerges is, for the fi rst time, a clear-cut tendency for one or two commodity monies to outcompete everything else. Th at is, at the end of the nineteenth century, we have an international gold standard developing. For a while, there was competition between gold and sil-ver. Th ere were certain areas that preferred silver. For instance, before 1908, China and Persia and a few South American countries still used silver, but by 1900, the rest of the world was on a gold standard. Th is is precisely what one would predict based on economic theory, a tendency toward a one world commodity money coming into existence. Of course, there is always some sort of interference and messing up by governments in this process, and we have not talked about this yet. So far, the entire reconstruction that I give is a reconstruction of what 50 Economy, Society, and History

would happen without any government interference. Th is problem of government interference will occupy us only in later lectures.

And then we can say that from 1914 on, while we have probably reached the most complete economic integration in human history, the most encompassing economic integration, most intensive division of labor, including the entire globe; from 1914 on, disintegration set in again. Most visibly, of course, documented by the fact that we currently no longer have an international commodity money; we have, instead, a large variety of national, freely fl uctuating paper currencies that is a regression to a situation that we might consider to be partial barter again. Th at is something that we had already overcome in history, and we have gone back to a situation that we had already successfully solved. And you see, of course, currently, under a paper money regime, which requires, of course, the existence of governments—I have to jump ahead here for a moment at least. Under a paper money regime, you can see, however, the same tendency at work that you saw as a natural tendency with the commodity money, that is, trying to create a paper currency used worldwide, to bring such a thing into existence. We see the attempts of monetary integration in Europe, for instance, so that we currently have only three major currency blocks: the euro on the one hand, the dollar on the other, and the yen as the third one. All the other ones don’t count for much, because very little trade is conducted in other currencies besides these. Th is might change one day, of course, with China opening up completely, but as you have certainly heard, there exist powerful international organizations that promote the idea of a one-world central bank, issuing a one-world paper currency. Th e argument that they use for this, the kernel of truth in their argument, is, of course, precisely the same one that I explained here. It is simply advantageous to have a single money, because trading becomes easier with just one money instead of a multitude of fl uctuating moneys. Th e drawback in the current situation is, of course, that this one world paper money will be a money that will be produced and managed by a monopoly institution such as a world bank, and can be infl ated at will. And we would likely see a larger amount of infl ation with such an institution in place than we ever saw in world history before.

The Growth of Cities and the Globalization of Trade 51

Allow me this little side remark. If you have paper money, then it is actually an advantage to have competing paper monies, because the infl ationary desires of each individual central bank are curtailed by the noncooperation of other governments. If country A infl ates their paper money more than country B, its currency will fall in the currency mar-ket and people will tend to drop this type of money and adopt monies that are more stable. If you have paper money, which is, in eff ect, as I said, sort of dysfunctional to the very purpose of money in the fi rst place, and represents a regression in human development—if you have paper money in existence, then competing paper monies fl uctuating against each other is an advantage over a worldwide produced paper money. But you can have a worldwide money also, one that is provided completely independent of governments, and that was precisely what we had at the end of the nineteenth century, namely an international gold standard, which could just as well be have been a silver standard. (Economic theory does not predict whether it will be gold or silver; economic theory only predicts that there will be a tendency toward one type of money being used on a worldwide scale because it is a function of money to be a facilitator of exchange, and, of course, we can recognize that a money that is used all over the place facilitates exchange more so than any other possible money that only exists in various smaller regions.)