Economic Technology

Most people are familiar with the history of technological progress in physical goods.  Even those who are quite ignorant of history are aware that people did not have computers 50 years ago and that there were no cars in the 1800's.  People know the story of how scientists and engineers invent new technology that lets us build fun and useful things.  All you have to do to get a feel for these changes is to watch a few movies set in the past.

People are also aware of the social changes that have taken place in our history.  There is more ignorance in this area than there is in physical goods, but people generally understand that there is more personal freedom for everybody in a modern society.  They know that kings and royalty are less powerful, that people have a better chance in life, and especially that women and minorities have gained a lot of civil rights in the last century.

But very few people understand that many of the features of our economy are relatively recent inventions.  People do know that credit cards are only a few decades old, probably because they require relatively advanced technology to function.  People may be aware that their parents and grandparents did not have access to the same banking and investment services, but they may assume that this was because their ancestors were too poor to afford them.

This is true for a few things, like checking accounts and bank accounts and stock portfolios.  These are hundreds of years old, but only the very rich used them.  Most people did not bother.  All of their (meager) wealth was in the form of cash.  But for many features of our economy, the truth is that they did not exist at all. 

For example, mutual funds were invented about a hundred years ago and popularized about fifty years ago.  It seems so obvious that you can make a good, diversified portfolio and share it with all comers, but in the past all people either owned individual stocks or paid a specialist to custom-make a portfolio just for them.

A much bigger, and possibly more surprising, example is that the idea of consumer credit, of any kind, is about a hundred years old.  In the 1800's, there was no such thing as a house mortgage.  There was no such thing as buying on credit, from anybody.  Your ancestors simply could not borrow money to buy a house.  They had to rent, or pay cash up front.  The overall philosophy of banking was that it was irresponsible and stupid to make long-term loans.  Banks collected savings and made short-term loans to businesses to smooth out their cash flows.  If you wanted to raise money for something, you had to issue stocks or bonds.  Banks would not help you.  The idea that you can lend to consumers to help them smooth their consumption over their lifetimes is a recent invention. 

Note that I am not talking about a tab at a local store.  It was very common for merchants to put things on your tab and ask you to settle up at the end of the month.  They did this because there was no reliable money, and handling any transaction was very tedious.  Let me say that again.  There was no such thing as money, the way we understand it today.  Modern money, by which I mean a uniform currency issued and backed by the government, has only been a feature of our country since 1935.

There were two things that were used as money.  First, there was specie: gold and silver coins.  Humans have been using these for millennia.   But paying for something with a gold coin was not like sticking a quarter in a vending machine.  The value of the coin was the value of the precious metal it contained, no more and no less.  The markings of the coin were a claim by the government that the coin was of a certain weight and purity.  Governments sometimes tried to gain money by lying about this, which was the ancient equivalent of printing money and causing inflation. 

But even when the government was honest, as they usually were in the past few centuries, you had to be careful.  Coins would wear out over time.  They were softer and less durable than they were today.  An old quarter might only have 22 cents worth of silver instead of 25.  Also, people would sometimes shave the metal off the outside of the coin, lowering its value to gain precious metals for themselves.  As a result of this, all coins were valued based on their weight.  When you paid for something with coins, the merchant had to carefully weigh the stack of coins to figure out how much money you were really paying.

This problem was compounded by the fact that, in the early 1800's at least, the USA never managed to produce enough coins to keep up with the growing economy and the demand for money.  People would use all kinds of coins, from Mexican dollars to French, German, and English coins.  The merchants had to keep lists of exactly how much all of these coins were worth.  Simply paying for something in coins was a tedious process.

In order to deal with this and make life easier, they had bank notes.  A bank note was paper money issued by a private bank.  All paper money in the economy was printed by private banks.  Except during wartime, there was no government-issued paper money.  And the paper money was only as good as the bank.  If the bank went down, the currency became worthless.  Think about that for a moment.  Think about what it must have been like to live in that world.

Imagine that someone pays your wage by giving you a stack of paper notes saying "Citigroup will pay the bearer 20 dollars in silver on demand."  Now imagine that there are rumors of Citi going under.  Merchants will no longer accept the notes at face value.  There is a probability that they will not actually get their silver from the bank.  So they might only give you $15 worth of stuff for your money.

There were hundreds of banks in the country.  Merchants had to keep track of all of them, to make sure that nobody could rip them off by paying for something with the notes of a dead or dying bank.  There were entire newspapers devoted just to telling merchants how much the notes of all the different banks were actually worth.

If you were staying in your hometown, it was not a big problem, because everyone knew how the local bank was doing.  You could pay off your tab with your salary, and the merchant was fine with that because he or she could go right back to the bank to deposit it.  But if you traveled, especially across state lines, it was a nightmare.  They might not even take your cash, because someone would have to go back to your hometown bank in order to redeem it for specie.  You had to use coins, with all the hassle that involved.

So every time you pay for something with cash, remember how easy your life is compared to that of your ancestors.  We have a universally recognized medium of exchange that nobody has to weigh and everyone will accept without looking up a value in a newspaper.  That is a really impressive technology, just as important to our world as a car.  But unlike a car, it is very easy to forget that things were no so easy in the past.