Charles R. Geisst—
Since antiquity, the idea of basic fairness and equity in society has been hotly debated. In many cases, the ideas remained general and very fuzzy, content with stating principle over more mundane details. Man had natural rights, and was subject to natural law but how were they actually defined? Were these ideas transcendent or only applied to specific societies when the topic was actually raised?
Every political and economic thinker from Plato to Karl Marx tackled the question. In antiquity, the discussion centered around the nature of the good life and how political bodies could achieve justice for their populations. In the Middle Ages, the discussion became imbued with theology, attributing social justice and the good life with divine law and eternal salvation. After the Enlightenment, economic ideas also became more widely discussed, and formed the basis of social justice. To Marx and Ricardo, justice required recognizing workers’ rights through the labor theory of value that formed the basis for prices in society.
But economics was not part of the discussion until recently. In antiquity, stretching through the Enlightenment, economic discussions were nothing more than examples of the basic injustices that men committed against each other, not statements of principle about how society functioned and created wealth. Aristotle wrote about basic business dealings not to discuss economic laws but simply to discuss how each party in a business transaction should benefit from a transaction. This was not economics as currently known but simply an example of the basic injustice in a society: if one party in a transaction gains unduly from the other, it is an example of a perversion of justice on an individual level. In short, the aggrieved had his natural right violated.
A fundamental change began in the Counter Reformation when churchmen, including the Jesuits, discovered that making money was not so bad after all and began advising businessmen on their dealings, including such new practices as short selling shares of stock and repurchase agreements on debt. Previously, the church raised funds for building projects by soliciting money from bankers and merchants suspected of making money through lending or financial advising. The donations helped insure that the business men would not be charged with usury after their deaths, thereby protecting their family wealth from confiscation. As time marched on, the onus of sin and eternal damnation faded, and the everyday phenomenon of making money became begrudgingly accepted by the intellectual and religious classes.
One of the oldest admonitions in Mosaic law became the crux of later practices that would help define the idea of justice. As societies adopted money, stealing became an obviously proscribed practice. Stealing was extended to include usury (charging of excessive interest). It then found its way into other money-centered practices that helped define politics, and direct later ideas concerning tyranny, kingship, and democracy.
Confusing modern readers, the idea of theft became associated with the idea of value. Not giving proper value to an item in a business transaction was tantamount to theft because one party gained a decided advantage over the other. While the idea was common sense, it was also very evasive. Who decided the value of a good or service? But ancient and medieval societies had an answer—value was determined by coin; that is, the price of gold or silver.
Equally important was the value of debt in coin value as well. The price of an item was settled between buyer and seller, and protected by law unless there was deceit involved. But debt was another matter entirely, and has a modern ring that has traveled over the centuries almost intact. Today, the old argument sounds like quibbling but its ramifications have shaken governments to their foundations on occasion, and still ring in the financial markets.
The question raised was simple: if a person borrows money at interest, to be repaid in five years, how much should be repaid at the end of the time? Assuming the interest was paid periodically, the answer is the amount originally borrowed. No one would argue. But the value of the original principal was often questioned, especially in the Middle Ages. Originally, the amount paid back had to contain the same amount of precious metal in coin as the amount borrowed. If one hundred pounds was borrowed containing one hundred percent silver, then the redemption required the coins to contain one hundred percent silver. Anything less was unjust and cheated the lender.
The argument is still valid today but phrased differently. Homeowners who hold long-term mortgages at a fixed rate of interest realize that inflation will help reduce their debt burden in real terms since the amount of debt they pay back is fixed but diminishes with inflation. And some countries regularly borrow bonds on the international markets with the intent of renegotiating their debt at a discount in order to reduce their potential overall debt burdens.
Many past practices were also less transparent to the modern eye. Counterfeiting and shaving bits from silver and gold coins were the obvious examples since the value of the coins was diminished considerably. But the official process of minting coins, by proclamation of a sovereign, fell under the same umbrella. If a monarch wanted to add new coins to his money supply, he would direct his mint to add an amount to the supply of coins in existence. But in doing so, he would order the mint to alloy the existing coins with copper by five percent, giving his mint an immediate profit, while still proclaiming that the coins were to be accepted at face value. This process was widely practiced in the ancient and medieval worlds.
Kings often disagreed with the papacy about the practice since some popes ruled that the original amount had to be repaid with the same vale as the original loan principle. This created conflicts between the secular and church rulers. Often kings who blatantly profited from coin issue were accused of tyranny—stealing from their people. Since the process was more common than actually adding to the money supply with coin of equal content, claims of tyranny were often heard.
These sorts of questions of value became a central theme in political thought and religion that lasted until the Enlightenment. From the fall of Rome, through the Middle Ages, they developed into the idea of just price. The argument revolved around Aristotle’s original idea—a price for a good or service that benefitted both parties in a transaction. The arguments centering around the metallic value of coins continued as the best expression of the idea until paper money was introduced.
Once paper money and interest rates on government bonds became the standard for pricing goods and services, the idea of just price faded but was not forgotten. As technology improved, beginning in the nineteenth century, trading currencies, securities and currencies became much more efficient. As a result, large quantities could be traded without materially moving the price. The markets began to move closer to the idea of one price; the single standard for a financial instrument. As technology improved relentlessly, so too did confidence in prices in the markets.
Technology made the idea of just price a reality by removing the moral implications, and eventually becoming a reality as one price. Technology and the general improvement in wealth provided the conditions that earlier ages did not envision. Price has always been price, but recently there is more confidence in the markets than it reflects true value at any point in time.
Charles R. Geisst is the Ambassador Charles A. Gargano Emeritus Professor of Global Economics and Finance at Manhattan College. He is the author of many books, including Wall Street: A History, Loan Sharks: The Birth of Predatory Lending, and Beggar Thy Neighbor: A History of Usury and Debt. He lives in Oradell, NJ.