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Museum of Trade, Finance, and the Fed

Exhibit 1: Where Cultures Come Together, They Trade

Photo of Exhibit 1 - Where Cultures Come Together, They TradeThe essential institutions of trade

For centuries, people of different cultures have come together in New Orleans to trade. Look carefully at any vibrant port of trade, including New Orleans, and you'll see it's built on a financial infrastructure, the essential pieces of which have been in development for more than a millennium.

To the Greeks, Hermes was both the god of borders and the god of trade. Hermes is a reminder to us that where cultures come together, they trade. But of course, trade just doesn't happen. A number of practical problems must first be solved.

There is a story told by the Greek historian Herodotus about the "silent trade" that occurred along the coast of Africa. Trade between two different cultures who were probably wary of one another and who were unlikely to have shared a common language was said to have occurred in a somewhat curious and certainly laborious way.

[B]eyond the Pillars of Hercules, which the Carthaginians are wont to visit, where they no sooner arrive but forthwith they unlade their wares, and, having disposed them after an orderly fashion along the beach, leave them, and, returning aboard their ships, raise a great smoke. The natives, when they see the smoke, come down to the shore, and, laying out to view so much gold as they think the worth of the wares, withdraw to a distance. The Carthaginians upon this come ashore and look. If they think the gold enough, they take it and go their way; but if it does not seem to them sufficient, they go aboard ship once more, and wait patiently. Then the others approach and add to their gold, till the Carthaginians are content. Neither party deals unfairly by the other: for they themselves never touch the gold till it comes up to the worth of their goods, nor do the natives ever carry off the goods till the gold is taken away.

While the story Herodotus tells may be apocryphal, it has been told of other traders in other times. The story speaks to all the conventions required to make a trade—a location, a medium of exchange, a negotiation, and verification of goods. But the way trade was conducted then is, by our modern perspective, a very costly way to go about it. By studying the various institutions that helped to facilitate trade in the past, we understand more clearly the essential role these institutions play in our economy today.

At the most basic level of trade, participants have to find a common language to negotiate the terms. In time, media of exchange—money—develop, replacing the more cumbersome barter trade. Then come banks to help finance, insure, and authenticate transactions. In time, other institutions, like exchanges and clearinghouses, arise to help coordinate robust trading activity.

The essential function of the Federal Reserve is to help assure that the financial infrastructure remains strong and that the many channels of credit and money remain fluid, so that the vital activity carried on at this port and all other U.S. ports thrives.

The role of money

Even in the time of Herodotus—the fifth century BCE—a medium of exchange had been determined: gold. But it hadn't always been gold. The earliest medium of exchange was livestock, cows in all likelihood. They could be easily valued, transported, and maintained. In time, the forms of our money have evolved to improve upon these basic characteristics.

Coinage is thought to have arisen in the Kingdom of Lydia, a few centuries before the writings of Herodotus. There, in Asia Minor, the cultures of Africa, Asia, and Europe crossed paths and the Lydians came upon the idea of making units of gold and silver into objects that were easily verified, counted, and stored.

Eventually, the role of coinage became displaced by paper money and, ultimately, fiat money issued by central banks. Fiat money, which is what we use today, is money backed only by the willingness of others to accept it in trade.

The role of banks

In the millennia since the emergence of coinage, a complex architecture of financial institutions has emerged to further facilitate trade. Among the first institutions to arise in support of trade were banks. Mesopotamian, Egyptian, and Greek merchants occasionally made loans and exchanged money. But it wasn't until around the year 1000 that banks appeared along the trade routes of ancient China. These institutions existed for the purpose of accepting deposits, verifying payments, and making loans.

Banks grew to great prominence in Italy between the 14th and 17th centuries. During the Italian Renaissance, the Medici, prosperous wool traders from north of Florence, opened banks across Europe that greatly enhanced international commerce. The Medici, in effect, introduced modern international banking.

To the northeast of Florence was another major banking center—Venice. Like New Orleans, the port city of Venice was strategically located at the intersection of major trade routes. The Venetians developed sophisticated financial and legal systems to facilitate the exchange of goods, currency, and credit among European, Middle Eastern, and Asian traders. In 1587 Venice opened what some claim to be the first modern bank, the Banco della Piazza di Rialto, for safe deposits and credit transfers, another step forward in the development of a modern financial sector.