In the modern geopolitical world, money and payments are integrated in war (and trade wars) and politics. We see that intrigue in the daily news flow. Some 2400 years after the Peloponnesian War, we can still glean from antiquity lessons to guide us. The Thucydides Trap includes money as a tool of war or as a tool to avert war. History demonstrates that it takes a sound economic program and a well-managed finance model to fight a war or to deter the other side from launching a war against you. Again, we draw upon Graham Allision’s excellent work, Destined For War: Can America and China Escape Thucydides’s Trap?
Today, monetary tools for economic warfare include foreign exchange rates, deployed in currency wars. Fiat money – whether dollars, yen, euros, rubles, or yuan – is the prime payment mechanism that is manipulated. Economic and payment sanctions are also tools of war. Blocking banking system access and freezing individuals’ and countries’ finances are weapons as well.
Nowadays, cryptocurrencies provide the alternative vehicle used to transfer payments between sanctioned parties. Iran needs a missile part. It cannot pay North Korea through any banking-system transfer, and North Korea has no way to safely receive the payment. Crypto solves this payments problem. It also solves the problem of those who wish to hoard wealth outside scrutiny. Of course, they must not lose their “key.”
In the time of Thucydides, money was rather simple, usually coins – gold, silver or copper or an alloy of metals. Money was necessary for war. Greek city states raised money through either taxes or trade tariffs. They also appropriated what they could during wars. To the victor went the spoils, as the saying goes. The losers got death or slavery, and poverty.
Then, as now, war cost money and a lot of it. Thucydides chronicles payments to mercenaries. He even notes how mercenaries hired by one side went to work for the other side if their first employer lost the battle and along with it the ability to pay. The mercenaries were in it for the money. Thucydides notes that certain soldier-mercenaries received a drachma a day. Those payments were probably in Athenian silver coins (owls), since Athens’ currency was widely accepted in the Mediterranean region.
Thucydides describes how the costs of war had negative effects. (Think of this as a defense-budget debate 2400 years ago.) Fiscal decisions could determine the outcome of battles. An example from Thucydides’ chronicle occurred in connection with Athens’ conflict with Sparta in Sicily when, in the summer of 413 BC, a contingent of 1300 Thracian mercenaries arrived in Athens. They were late due to weather delays. We must recall that ship travel in those days was perilous and often unpredictable.
Demosthenes had already sailed for Sicily with his forces. He might well need the Thracians; but since the Athenian leaders couldn’t communicate with Demosthenes and lacked information symmetry about battle conditions in Sicily, they had to make a fateful decision. Thucydides reports that they elected to send the mercenaries back to Thrace because “they thought it too expensive to retain them.” According to Thucydides, this decision turned out to be a mistake, as the battle over Sicily turned the war in Sparta’s favor and cost the Athenians dearly.
The chronicle describes what happened after the decision on the mercenaries was made. He details how murderous the Thracians became. He lists the cities they sacked. Thucydides writes, “These Thracians, when they have nothing to fear, are as bloodthirsty as any other barbarian race, even the worst, when pupils had just come in for their lessons: they butchered the entire school.” Thucydides details the Thracian carnage in gory detail. He also chronicles the outcome in Sicily and lists the final losses of the Athenians in citizens, slaves, and money (which meant fewer hired mercenaries in future).
Borrowing for war was not an option in Thucydides’ day. You either had the cash or you didn’t. Athens was wealthy and had an open form of government thus we can get information from Thucydides’ chronicle and from records.
Historians estimate that Athens’ defense reserve was between 6000 and 9700 talents. This was a huge sum. Consider the ratios. A drachma in weight was about 1/8 oz. The famous ten drachma coin (tetradrachm) is based on this weight. 100 drachmae equaled 1 mina or approximately a 1 pound weight. 60 minas equaled 1 talent in weight which is about 61 pounds. Thus we can estimate the Athenian coin reserve at about 18 to 28 tons. Most of this reserve was silver. Note that the ratio of gold to silver in those times was about 14 units of silver for each unit of gold. A worker with skills might earn about a drachma a day and an unskilled worker about a half drachma. Soldiers and sailors were paid about a half drachma a day during regular (peaceful) times. That pay doubled to about a drachma a day during battles and other military campaigns.
Sparta was a more closed form of government. Records are less clear and estimates of wealth are much less accurate. We do not know much about acceptance of Sparta’s money. Clearly Athens had a huge advantage with its monetary integrity. In the end and after the disastrous campaign in Sicily, the money alone was not enough to prevent a Sparta victory.
Most loans in ancient Greece were personal. There were a few loans to city states, but they came into being in the century after the Peloponnesian War period. Were they the first “municipal bonds”? Often such city-state loans required the guarantee of a prominent citizen. But debt financing came into being after the period chronicled by Thucydides.
Because there was little use of debt- or deficit-financed military appropriations, city states paid cash to fight wars. That meant they needed to keep the cash secure. So this history revolves around where the wealth hoard was kept, who knew about it and who guarded it, how much they had and how much the other side thought they had. They paid spies to find these things out, and they resorted to bribery when they could. All of these money issues went into assessing whether or not to do battle. Some estimates suggest that the cost of a siege or full battle could be 2000 talents. It is not clear how much was in gold or silver. Many scholars believe the references are to silver because it was the basic wealth metal in Athens.
For guidance on coinage we turn to references by Neil Macgregor, written in his capacity as the director of the British Museum. He attributes the first standardized gold coinage to the Lydians. MacGregor cites others’ work on how the Lydians purified gold and how King Croesus became the ancient symbol of wealth. “As rich as Croesus” was the phrase for centuries. For history see: https://en.wikipedia.org/wiki/Croesus.
Lydia lost its wars with the Persians and was conquered by Cyrus the Great, who captured King Croesus. According to MacGregor, “Cyrus shrewdly appointed Croesus as an adviser – I like to think, as his financial adviser – and the victorious Persians quickly adopted the Lydian model, spreading Croesus’s coins along the routes of the Mediterranean.”
So what does this history have to do with the Thucydides Trap and the Peloponnesians War? A lot.
The Persians were eventually defeated by Athens. Athens then added huge amounts of wealth to its hoard, supplemented by production from the Athenian silver mines. Thus Athens became very rich as well as powerful. Sparta did not issue its own coinage to nearly the extent that Athens did – Athenian money was known and accepted throughout the Mediterranean region. The drachma was truly the regional reserve currency of its time. For a detailed discussion of ancient Greek coinage, see https://en.wikipedia.org/wiki/Ancient_Greek_coinage.
So we see Athens triumphing over the Persians and being defeated by Sparta in Sicily; and in both cases economic factors were key.
In this series about the Thucydides Trap we have cited the lessons offered by Graham Allison and others. In this part 4 we wanted to reach into the monetary realm. The words of caution are centuries old. They apply today.
Now to a real treat. At the end of this commentary we want to quote from the famous treatise A History of Interest Rates, 2000 BC to the Present by the late Sidney Homer. IMHO, anyone in the bond business who hasn’t read this book and doesn’t refer to it from time to time is missing a key component in the education required to manage debt instruments.
The marvelous work of Sidney Homer on interest rates includes tables and details on interest rates charged on loans in Ancient Greece. (My copy is the second edition, his own revision before his death.) See pages 40–43. Sydney Homer describes the period that preceded Athenian democracy, and there are lessons in it for the present day Washingtonians who think they know everything. Here are two paragraphs. We suggest reading them in the context of today’s debate over loan forgiveness and deficit financing.
“In 508 B.C. democracy was established in Athens. From this time on Athens so rapidly outdistanced other Greek cities in trade and finance that the history of Greek credit and interest rates is largely, but not entirely, a history of Athenian credit and Athenian interest rates.”
Homer sagely continues:
“Before the beginning of the fifth century B.C., the minting of money in Greece was hampered by a scarcity of metals. After 483 B.C. a series of marvelous finds occurred, and precious metals spread throughout Greece. Each city struck its own coinage. Every foreign transaction thus required a money-changing transaction. Many cities engaged in unscrupulous alloying, but such frauds could only work internally. A few cities by their integrity gained universal acceptance for their coinage. Athens had the advantage of the silver mines of Laureion. The Athenians took every precaution to maintain the integrity of their famous ‘owls’. Even in times of tragic national disaster, when the treasury was empty and Attica occupied by an enemy, Athens refused to debase this silver coinage. As a consequence, the Athenian ‘owl’ became current in all markets and an article for export. It remained a most acceptable currency throughout the Mediterranean for 600 years, long after the disastrous defeat of Athens in the Peloponnesian War, 431-404 B.C. This tragic event, immortalized by Thucydides and mourned to this day by lovers of human excellence, was not a turning point in the financial history of Greece.”
So Sydney Homer establishes that the Athenian drachma was world’s first true reserve currency, which dominated for 600 years. He makes clear, too, that Athens’ loss of the war was not the loss of the credibility of its coinage. He describes the how the cities accumulated treasure before the Peloponnesian War. And he recites how the temples (especially Delphi) acted as banks and as lenders. Homer details these loans and articulates the mechanism used for personal loans, real estate loans and, after the Peloponnesian War, for a few loans to governments.
Here is a quote regarding the latter.
“Loans to states were thus exceptional until the third and second centuries B. C. There were occasional early loans to states, but these were compulsory or of a political character. The famous loans of the Temple of Athena to the city of Athens during the fifth century B.C. were a religious fiction: the money was the war reserve of the people of Athens. Interest on these loans was nominal and was rarely paid, but an effort was made to return the principal to the Temple, that is to say, restore the war reserve.”
A century after Thucydides’ chronicle, the Greek system endured a series of muni defaults. We can think of this as an ancient version of Stockton, California, or Detroit or Puerto Rico. Here’s a final word from Sydney Homer:
“In 377–373 B.C. thirteen states borrowed from the Temple at Delos, and only two proved completely faithful; in all, four-fifths of the money was never repaid. Thereafter the temple preferred loans to individuals, secured by land.”
And there it is, an ancient lesson that we go on learning today.
Thucydides - series part 1: http://www.cumber.com/thucydides-part-1/.
Thucydides - series part 2: http://www.cumber.com/thucydides-part-2/.
Thucydides - series part 3: http://www.cumber.com/thucydides-part-3/.
Thucydides - series part 4: http://www.cumber.com/thucydides-part-4/
David R. Kotok
Chairman & Chief Investment Officer
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