The invention of fiat money

The invention of fiat money was necessary for capitalism to emerge. Of course, money as such appeared much earlier; everybody has seen Roman coins or something similar. But, those were not money as we know it (even though there may be some similarity in appearance) and were closer to other forms of exchange than to what we nowadays consider to be money.

Throughout history, people have attempted to trade goods or services directly, but this is rarely convenient: you may not need a plumber when they need that pair of shoes you can make (online bartering was tried recently in the UK, without much success). So quite early on, some goods, such as shells, fur, rugs or rice, were used as intermediaries. Their value was derived from the effort that was put into finding, hunting, making or growing them. Precious metals eventually took over in most parts of the world because they were convenient: they were small (in comparison to rugs, for example) and they were durable (compared with, say, bread). However, this was still within the realm of exchanging goods. When shells or fur were traded for something else, both parties considered that those items had not just symbolic but real value. Likewise, ancient coins were minted by using precious metals that had an actual value: for example, one denarius (a Roman coin) contained the amount of silver that was worth one denarius (in contrast, the value of a £1 coin is much less than £1). The heads of emperors and kings were engraved on ancient coins as a guarantee that they were made of real silver (or some other metal) rather than being fake. That sort of money, with an intrinsic value, is today called commodity money.

In contrast, the real value of today’s money is usually negligible in comparison to its nominal value (with electronic money, even less so). We are so used to this that it doesn’t seem to be a big deal. However, historically speaking, it required a monumental psychological shift in order for fiat money to become accepted and widespread. This type of money appeared more than once in medieval China, but for various reasons (the Mongolian invasion being one) did not take hold. In Europe, the first money of that kind (and first banks) appeared in Renaissance Italy. The money in their system was in the form of paper documents for deposits. It was simply too dangerous to carry around gold or other items of real value. Robberies were common, as the perpetrators could easily escape from one city state to the sanctuary of another. To deal with this, increasing numbers of merchants and other travellers would deposit their valuables and receive a piece of paper that could be exchanged for an equivalent sum at their destination. This was an ingenious system – not even those first bankers needed to move the real stuff around. However, the system was abused from the very beginning and few people were ready to take a piece of essentially worthless paper in return for something that had a real value. It is hard to imagine nowadays how difficult it was to accept paper money that is, in fact, an abstraction based on trust. And not just any trust – trusting institutions (banks, the state), which meant effectively trusting people one did not know.

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This really needed new thinking from ‘new’ people: perhaps not surprisingly, it took hold in the Netherlands, the home of Erasmus and Northern Renaissance, which emphasized the value of human agency. By the 17th century, the Netherlands organised its economy around trade and manufacturing, and banking was thriving. Although the first banks that we would recognise as such were founded in Germany and Sweden, banking and large-scale circulation of money commenced in the Netherlands. Borrowing and lending – which is essentially what a banking system is about – were institutionalised, leading to unprecedented prosperity for the country. England and some other states soon caught up, starting with state bonds to finance wars. Once established, fiat money was phenomenally successful and was crucial in the rise of capitalism. It enabled investment and the development of financial markets, as well as mass production and consumption that we will discuss shortly.

We can see that money had been going through several degrees of separation from the notion of real value. In the beginning, there was no distinction between ‘money’ and goods – money was goods and goods were money (the zero degree). Early coins were used only as a means of exchange, but they still had real value (the first degree). The first fiat money no longer had real value, but its value was linked to something that did, such as gold (the second degree). This separation will continue, but for now let’s turn to another precursor of capitalism: individualism.


The appearance of fiat money was necessary but not sufficient for capitalism to develop. After all, as already mentioned, money had previously appeared in other parts of the world, but this did not last and did not give rise to anything resembling capitalism. For this to happen, another ingredient was needed. We have seen that establishing fiat money as the main component of an economic system required a change of mindset. The other precursor of capitalism, individualism, is socio-psychological in its very nature (although its rise was, in turn, heavily influenced by a number of tangible factors). This is an example of the hard and the soft, the matter and the mind, in interplay – one cannot be understood without the other. Individualism is a complex topic, though, which cannot be addressed in its entirety here. We will focus only on its aspects that are relevant to the emergence of the new system such as greater autonomy; self-determination and self-reliance; prioritising one’s own interests, goals and desires; and placing a value on personal uniqueness.

Why individualism was important

There are several reasons why this feature was essential for capitalism to not only emerge but take hold:

  • Individualism helped dismantle the old, feudal system, based on firmly established hierarchies, and paved the way for more meritocratic societies. Without at least a rudimentary meritocracy, there could be no competition and no capitalism.
  • It enabled individuals to develop a new mindset in which they, rather than destiny or their birth, were responsible for their life situation. This in turn encouraged entrepreneurship.
  • It led to emphasising the value of ownership (private property, private business). The philosopher John Locke (1632–1704) made this explicit, influencing the US constitution.
  • It encouraged creativity, innovation and exploration, a trend that heralded the scientific revolution in the 17th Science and technology became the leading economic forces. Of course, science and technology had previously flourished in other parts of the world (notably in India, China and the Muslim world), but individualism added a crucial element by contributing to making science and technology practical and life changing (individuals were motivated to become inventors and create inventions for individual use).
  • It encouraged consumerism beyond necessity – based on personal preferences and taste.
  • It was more future oriented than the social outlooks of previous societies, which looked to the past for guidance. This institutionalised change – another factor conducive to capitalism.

When individualism appeared

The founder of sociology, Emile Durkheim (1858–1917), claimed that individuality was not prized and that the individual, in a certain sense, did not exist in traditional cultures; only with the emergence of modern societies and, more particularly, with the division of labour, did it become the focus of attention (Giddens, 1991). The reality may have been more nuanced and complex, but most scholars would acknowledge that in pre-modern times, individualism was not prominent and did not have high-ranking value as in modern-day Western societies. Some may even argue that capitalism begat individualism, rather than the other way around; indeed, individualism did find fertile ground in capitalism.

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However, the period in European history before capitalism already showed signs of individualism, in art, religion, philosophy and everyday life. In fact, a shift from action that is prescribed to action by choice can be traced at least as far back as the Renaissance. For example, great dramas in that period were dominated by personal conflicts and dilemmas (e.g. Shakespeare’s Hamlet and Milton’s epics), which were almost entirely absent in ancient dramas (Cassandra in Agamemnon being perhaps an exception). While beforehand events were predetermined by destiny or the Gods, by the end of the 16th century, Shakespeare (1599) was writing: “The fault… is not in our stars, but in ourselves that we are underlings”. Nearly a century later, in The Two Treatises of Government, the aforementioned John Locke included private property as one of the natural rights of individuals, which has had implications down the centuries to the present day. So, what happened? Why were that particular time and space conducive to individualism evolving into a game-changing social force?

Why individualism appeared

What we can be pretty certain about is that the Europeans do not have a greater natural propensity for individualism than other cultures (consider, for example, the current rapid rise of individualism among the India’s urban population). It could have emerged elsewhere, but there was no fertile ground for it: the environment was either too hostile or too hospitable, and/or the society was either too unstable or too stable. Being in a so-called Goldilocks zone, where conditions were neither too much one way nor too much the other way, was essential in this case. These conditions arose in Europe as the result of a unique combination of factors:

Expensive labour: the Black Death (1346-53) had wiped out 30-60% of Europe’s population, dramatically reducing the availability of cheap labour (in contrast to, for example, India of that period). This was one reason for the development of technological devices which, in turn, required skilled individuals and the division of labour (specialisation), as well as the creation of small enterprises and associations of craftsmen or guilds. Guilds were fairly democratic associations (for that time) of free individuals pursuing the same activities and professions. The large number of people who had not previously had a specific identity were now associating themselves with various activities inside these communities, thereby beginning to develop their own social identity. Craftsmen, also existed elsewhere though, so some other factors must have been at play too.

The emergence of the middle class: in Europe, there was uneasy tension between secular authorities (kings) and the religious authority (the Pope). This allowed the emergence of semi-autonomous city-states, especially in Italy. These city-states also had a geographic trade advantage that enabled some of their citizens to acquire prosperity, which led to the rise of the middle class. A sort of middle class had appeared previously and elsewhere. What was fairly new this time was that the proto-bourgeoisie were broadly speaking ‘self-made’ individuals who rose and confirmed themselves as an economically powerful social class, the engine of industrial and social development. They were fundamentally individualistic and promoted the protection of private as well as intellectual property (as in the case of patents – the first patents appeared in Florence in 1421 and in Venice in 1474, and the system rapidly spread throughout Europe).

The law: the individual at the end of the Middle Ages also had some physical protection, meaning that they could not be simply killed by noblemen without any retribution (e.g. writs in England, going as far back as the 12th century). This was important as it made expressing individualism somewhat less dangerous.

Political instability: stability is not necessarily conducive to change. Contented people do not want change. The political divide in Europe in that period encouraged competition between states and had some advantages: for example, those prosecuted for challenging authority could find refuge in another country.

Technology: individualism was also boosted in Europe by Gutenberg’s invention of the printing press (around 1440) that enabled the mass production of written materials. For the first time, publications could reach large numbers of people. As a result, people started forming their own opinions based not on what they were told (from the pulpit), but on what they could read for themselves.

Unique religious situation: as Protestantism in the 16th century was a revolution against the church’s central authority, it could not replicate the same hierarchical structure. Protestantism put the onus on individuals to read and interpret the Bible for themselves, rather than its words and other spiritual matters being mediated by the clergy. Hence, gradually, Christianity became less of a communal affair and more of a personal matter, particularly in northern Europe, where industrialisation and the rise of capitalism took place.

Philosophy and science: the rediscovery of ancient texts and the Church being proven wrong in some of its doctrines (as in the case of the Copernican revolution) encouraged reflection and self-reflection, initially among intellectuals. While the ancient Greeks practiced philosophy dialogically and outdoors in public, René Descartes (1596–1650) and subsequent thinkers did so, by and large, monologically and indoors, away from the public view. The first scientists, too, were often individuals working by and large in solitude.

Were all these factors necessary for the rise of individualism? Were some of them more important than others? It is hard to say. What matters is that they all contributed to creating fertile ground for individualism.

As with money, individualism has gone through several degrees of separation – in this case from the communal or shared. Of course, we cannot know for sure, but it seems that for a long while there had been little or no separation between individuality and communality. Some would go as far as to say that such a separation would not make sense to our ancestors[1] (zero degree of separation). With the advent of more complex social structures (the result of a greater number of people living together), individualism became more prominent as exemplified by those who tried to transcend some aspects of collective life (e.g. śramana in India, the shi in China, the desert fathers in the Middle East) or tried to reform it, such as Confucius, Buddha, Socrates, Jesus or Muhammad. Most of them (even the desert fathers or Socrates) did not see themselves as completely cut off from their society, but as contributing to it in their own ways (first degree of separation). Then, roughly since the Renaissance in Europe, individualism involved forming a whole new class of people who valued what distinguished them rather than what connected them to the rest of the society. This can be qualified as the second degree of separation. As in the previous case, the separation between individualism and communality will continue as capitalism progresses.

[1] See, for example, The Origins of European Individualism, by historian Aron Gurevich.

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