Monetary systems are catalysts for economic, social and political progress. The interdependence between monetary, economic and political order is illustrated by currency competition between the Byzantine and Muslim empires in the seventh century. The evolution of an Islamic gold standard demonstrates that Byzantine and Muslim ruling circles were conversant with the dynamics of currency competition. In keeping with the theory of currency competition, the creation of the Muslim gold standard marked the beginning of a rapid economic outperformance by the Islamic empire.
Currency competition in the late Roman Empire
The Roman emperor Constantine adopted Christianity as Rome’s state religion and founded a second Roman capital on the shores of the Bosphorus. A third Constantinian reform was as decisive for setting the course of economic history as the other two reforms were for the history of religion and of politics. This third reform was the minting of a new gold coin, the bezant.
The Byzantine Empire from the fourth until the tenth century alternately thrived and faced destruction, yet throughout this period Byzantine rulers protected the purity of their coinage. Byzantine emperors sacrificed troops and territories during centuries of relentless attack, but never allowed the standing of their currency to slip. Such was the reputation of Byzantine coinage that bezants were called hyperpers: ‘more than pure’.
The Byzantine ruling elite was conscious of the advantage conferred by circulating a currency accepted as a store of value within the empire’s borders and beyond. The sixth-century Byzantine historian Prokopius points out how a currency’s standing depends on its intrinsic value, its gold content, and on its issuer’s political power. Markets will only accept a currency satisfying both requirements. Prokopius also points out how the bezant manifests the pre-eminence of Byzantium over rival empires:
‘And yet, while the Persian king is accustomed to make silver coinage as he likes, still it is not considered right either for him or for any other sovereign in the whole barbarian world to imprint his own likeness on a gold stater, and that, too, though he has gold in his own kingdom; for they are unable to tender such a coin to those with whom they transact business, even though the parties concerned in the transactions happen to be barbarians.’ (Prokopius, 1924, p. 439).
The practical implications and benefits of currency competition were understood already in Antiquity.
Muslim fiscal and monetary reforms
Muslim armies in the seventh century conquered Persia and Byzantium’s colonies in Syria and Egypt. Arab rulers faced the task of integrating new regions that were as different from each other as they were from Muslim Arabia. Persian and Byzantine provinces had distinct religions, tax systems and currencies. Within the newly constituted Islamic empire, subjects paid taxes in Persian silver coins and in Byzantine gold coins.
The new rulers faced the challenge of running a unitary state that straddled Byzantine and Persian currencies. Muslim fiscal and monetary reforms show how institutional knowledge spread across political and religious divides. Muslim authorities retained the existing fiscal infrastructure. Byzantine tax officials changed their masters, but continued work as before.
The caliphate’s administrative and commercial elites included many Christians. An example of Islam’s multicultural elite is Yuhanna al Dimashqi, as he is styled in Arabic, better known in the West as St John of Damascus (676–749). His grandfather had headed the Byzantine tax authorities, his father had served the caliph in the same capacity, and John followed the family tradition as a senior civil servant before retiring to a monastic life.
Muslim rulers put to use the Byzantine fisc’s institutional expertise. A key Muslim innovation was the introduction of the land tax, karaj. This was the first Muslim tax that is not sanctioned by the Koran, and plausibly a continuation of Byzantine practice. The term karaj may derive from chrysargion, a Byzantine land tax payable either in gold or silver (the term chrysargion combines the Greek words for gold and silver).
Byzantine gold coins circulated in Syria long after the last Byzantine soldier had left the country. Muslim rulers understandably wished to supplant coinage that bore the image of the Byzantine emperor Heraclius and depicted the cross. During the 660s the caliph Muawiya endeavoured but failed to issue an Islamic gold coin. According to a chronicle, ‘the populace did not accept it as there was no cross on it’ (Grierson, 1960, p. 243). Muslim authorities continued experimenting with new designs until in 696 the caliph Abd al-Malik minted a distinctly Islamic gold coin, the dinar, featuring inscriptions in Arabic and without a figurative image.
The Islamic gold dinar
The launch of a gold coin by an authority other than the Byzantine emperor was unprecedented. Accounts by near-contemporary Byzantine and Muslim historians demonstrate they realised the launch of an Islamic gold standard marked the dawn of a new era.
From a Muslim point of view, the historian Baladhuri relates the sequence of events leading up to issuance of the dinar. Accordingly, Byzantines would import papyrus from Egypt and were angered when Muslim exporters inscribed the motto ‘Allah is one!’ on the edge of papyrus sheets. The Byzantine emperor retaliated by threatening to mint coins with mottos denigrating the Prophet. According to Baladhuri, Abd al-Malik thereupon escalated the controversy by minting his own coins and crowding out Byzantine coins from circulation altogether (Baladhuri, 1916, p. 383).
The Greek historian Theophanes, on the other hand, suggests that Muslims provoked the Byzantine emperor by minting gold coins. In his version, the Byzantine emperor ‘refused to accept minted coins that had been sent by Abd al-Malik because it was of a new kind that had not been made before’. Abd al-Malik then argued that ‘the Arabs could not suffer the Roman imprint on their own currency; and inasmuch as gold was paid by weight, the Romans need not be bothered if Arabs were minting new coins’ (Theophanes, 1997, pp. 509–510).
Emperor Justinian II was incensed and thereupon issued coins bearing an image of Christ and the inscription rex regnantium (‘king of rulers’). The subtext was plain: the Byzantine emperor asserted that in the final analysis, only Christ could legitimise a temporal ruler and by implication the right to issue coins.
The new gold coin weighed 4.25 grams, slightly less than the bezant (4.5 grams), thus creating an incentive to swap old coins for new ones. A further means to crowd out Byzantine coins was to require tax payments in the new currency.
Abd al-Malik followed Byzantine practice by attaching the mint to his residence, thus ensuring quality control and a government monopoly over issuance (Heidemann, 1998, p. 97). Authorities also permitted circulation of a silver coin, the dirham, once again emulating a Byzantine precedent, the silver drachma. Typically, the exchange rate between gold and silver was 1:15. Silver coins, unlike gold coins, were not subject to the caliph’s monopoly. As regards copper coins, used for small purchases, these remained outside government control.
Abd al-Malik concentrated his government, fiscal management and central bank in his capital Damascus. The long-term effect of his reforms – the first international gold currency created outside Europe – was to establish a rival to Byzantium’s monetary hegemony in the Mediterranean trade zone and facilitate trade within Islam’s single market.
Abd al-Malik’s reform succeeded in aligning the coinage of the Persian and Byzantine currency zones. The gold dinar supplanted the gold coin of ancient Rome, the denarius. The coin came to be used in international trade with Christian Europe and in due course accepted even by the Vatican. Islam’s gold standard became a magnet for gold flowing from Europe to the mints of the Orient, thus draining from Europe’s already impoverished economies the means for economic expansion.
Sound money is a catalyst for expanding trade and cities where business is transacted. Islam’s subsequent history provides an illustration. Wherever Islam expanded from the seventh century onwards, so did cities. Muslims invigorated urban life in existing cities, such as Damascus, Cordoba and Palermo, as well as founding new ones, such as Baghdad, Kairouan and Fez (Lombard, 1957, p. 22). Baghdad, founded in 762, within a century became the world’s largest city. In the tenth century, Baghdad had one million inhabitants, Cairo 300,000, Damascus and Cordoba 300,000 (ibid, p. 24). The establishment of a reliable currency helped spawn a thriving financial sector. For example, Ispahan’s bazaar by the early tenth century numbered some 200 money changers (Spuler, 1952, p. 410).
In Christian Europe, by comparison, the symbiosis of money, trade and cities did not come to fruition. Charlemagne aimed to establish a mint at his residence in Aachen, but these efforts came to nothing. Europe’s urban development was as anaemic as its monetary system.(1) Until the thirteenth century the largest European cities would number at most some 40,000 inhabitants (with the exception of Constantinople, which was as large as the main Muslim cities). Europe’s largest and richest communities were Italian merchant republics, such as Venice and Genoa. For example, Genoa’s tax revenues in 1293 were some four million Genoese pounds. To give a sense of scale, this figure was some ten times the tax revenue of all of France (Lopez, 1964, pp. 446–447). Genoa at the time had some 100,000 inhabitants, smaller than the largest Muslim cities, but substantially larger than Paris or London. It can be no coincidence that these cities, whose commerce was based on trade with the Levant, sparked the revival of European trade in the thirteenth century.
The theory of currency competition claims that markets prefer strong currencies and that these are catalysts for economic expansion. Competition between the Byzantine and Islamic empires for creating a currency of choice across political and denominational divides after several decades of institutional learning led to the creation of the first gold standard outside Europe. In keeping with assumptions that market forces aggregate disparate knowledge, Muslim authorities by combining monetary expertise of Byzantine and Persian fiscs succeeded in evolving a viable currency that propelled wealth creation for several centuries.
Author: Benedikt Koehler (Economic Affairs, 2010, vol. 30, issue 3, 72-74)
- Baladhuri (1916) The Origins of the Islamic State, trans. P. Hitti, Vol. 1, New York.
- Grierson, P. (1960) ‘The Monetary Reforms of Abd al-Malik: Their Metrological Basis and their Financial Repercussions’, Journal of the Economic and Social History of the Orient, 3, 3, 241–264.
- Heidemann, S. (1998) ‘The Merger of Two Currency Zones in Early Islam’, Iran, 36, 95–112.
- Lombard, M. (1957) ‘L’évolution urbaine pendant le haut moyen age’, Annales. Histoire, Sciences Sociales, 12e Année, No. 1, 7–28.
- Lopez, R. S. (1964) ‘Market Expansion: The Case of Genoa’, Journal of Economic History, 24, 4, 445–464.
- Prokopius (1924) History of the Wars, Vol. IV, London.
- Spuler, B. (1952) Iran in früh-islamischer Zeit, Wiesbaden.
- Theophanes (1997) The Chronicle of Theophanes the Confessor, Oxford.