Was the Invention of Finance Responsible for Democracy?
The ancient city of Athens paid its citizens for various civic duties, priming them into a mindset that paved the way to participatory government.
Athens is most famous as the birthplace of democracy. Although the development of Athenian political institutions has long been the subject of study, the economic foundation of democracy has attracted less interest until recently.
Democracy is a system of shared governance by the people—a novel organizational structure that demands complex institutions for decision-making and a realignment of individual allegiance away from that of the traditional family, tribe, and monarch. The basic instrument of this realignment was a system of public finance that had a number of unprecedented elements. Without financial innovation, the experiment of democracy in ancient Athens may not have succeeded.
The historian Hans Van Wees, a professor at University College London, is an expert on the development of the archaic Greek state. His thesis is that the first great political reformer of Athens, Solon, created a fiscal structure for Athens based on a central fund, which was used to finance wars and to advance the other collective interests of the people. Solon established a mandatory and explicit tax system to support the fund, and, among other things, he reformed the system of weights and measures—presumably as a necessary step to have a uniform and fair financial system.
Solon also outlawed Athenian citizens from being held as slaves, establishing the principle of the natural right to freedom (at least insofar as it was selectively applied to Athenian citizens and not the people they enslaved). He did this through a comprehensive mortgage-loan forgiveness program that rebalanced the relationship between the haves and the have-nots, and presaged Athenian democracy.
An irony in the development of Athenian democracy is that after Solon, some of the most important financial innovations were made by monarchs. The tyrant Peisistratus ruled intermittently from 561 to 527 BCE, followed by his sons Hippias and Hyparchus, who ruled until 508 BCE. According to Van Wees, during this period Athens was transformed into a monetary economy.
Peisistratus introduced a silver coinage system that was used, among other things, to pay the salaries of a growing municipal workforce, the judiciary, and the military. For example, the courts and other institutions were staffed by citizens chosen by lot or appointed for limited spans of time; if one wondered why the court system required hundreds of jurors selected at random—and mandated a limited number of times any one of them could serve—the answer might lie in the perceived political benefits of salaried compensation by the state. Indeed, this was a means by which money was fairly dispensed through Athenian citizenry and allegiance to the state was developed. To pay for this, Athens exacted tribute from its protectorate states and levied a progressive tax on citizens to generate a steady flow of revenues. It was a fiscal system that increasingly engaged citizens in a direct, economic relationship with the state.
Financial literacy—the ability to calculate costs and benefits—was recognized by the Greeks as an important underpinning of Athens’s special political structure. According to the fourth-century Pythagorean philosopher Archytas,
The discovery of calculation (logismos) ended civil conflict and increased concord. For when there is calculation there is no unfair advantage, and there is equality, for it is by calculation that we come to agreement in our transactions.
Who might have guessed that the roots of democracy lay in financial literacy? The conceptual ability—the logismos—to follow Demosthenes as he valued his father’s estate was regarded by Archytas as the mental tool on which a political system could be built. The principles of quantitative valuation were the “software” that increased agreement and reduced civil conflict. Athenian numeracy was not simply a skill required for successful business. It was a trait on which the democratic process fundamentally relied. The challenge of democracy is to accommodate a wide diversity of opinion and resolve this cacophony into governance. Even when there is vast disagreement on principles, it is hard to argue with numbers.
Richard Seaford, an expert in Greek literature and the author of the insightful book Money and the Early Greek Mind, advances the proposition that money played an important role in the mental framework of ancient Athenian society. The monetization of Athens was not only important to the emergence of democracy, but was also a factor in the development of Greek philosophy. In Seaford’s view, monetization led to abstract thought. Money could be exchanged for an infinitude of different material things, but the coins themselves did not satisfy basic human needs.
Seaford goes so far as to suggest that the money economy influenced Platonic and Aristotelian notions of the individual. When economic interactions were defined by quantitative measures of potential value, people became more autonomous, less reliant on traditional institutions of social reciprocity, and more reliant on an incentive structure ultimately measured by profit.
Socrates recognized this and did not approve. He was particularly critical of Pericles—the famous fifth-century Athenian statesman who essentially completed the process of democratizing Athens. Pericles increased payment to jurors, further extending their reliance on the public dole and orienting their incentives toward money. In Socrates’s view, this monetization amounted to bribery of the soul. Salaried service corrupted incentives. In his words (or at least in Plato’s) “Pericles has made the Athenians idle, cowardly, talkative, and avaricious, by starting the system of public fees.” The democratic system did not promote personal virtue—at least as Socrates defined it.
A tourist visiting the Acropolis today looks up to the Parthenon, sees its magnificent pediment, and likely thinks of it as a temple. But ancient Athenians also saw the Parthenon as their treasury—their great monetary weapon against invasion. The front door of the Parthenon led to the room with a giant cult statue of Athena—itself gilded in gold that could be peeled off and minted if times got desperate. The back door of the Parthenon led to the treasury. Athena cast a protecting eye over her eponymous city below, but her protection was backed up with financial might. Coinage was not only a brilliant economic invention—it was also a great political one.
This article was adapted from William Goetzmann’s book, Money Changes Everything: How Finance Made Civilization Possible.