Tales of Soft Money — Fractional Reserve Banking in Medieval Russia?


Paul Einzig, in his work "Primitive Money", details the evolution of fur money in medieval Russia  -  a land where the inhabitants from a very early period had intertwined the concept of money with their cattle.

Some of the evidence of this lie in the language; the oldest known Russian word for both 'treasure' and 'cattle' is skot, which very likely is related to the old Germanic word for 'treasure' and 'cattle', skatta (its local variations are still commonly used in Scandinavia today, like skatt). The same relationship can be observed in the old Russian word for 'cattle yard' or 'stable', as well as for 'treasury': skotniza. Where did this linguistic, cross-cultural merge of cattle and money come from? Although likely in place before Viking traders and warriors penetrated deep in to Russia where they established trade networks and even states, the earliest etymological evidence of Russian cattle money stems from this period. The Scandinavians and Russians, in other words, all valued their animals extremely high.

Certain properties of furs and skins made that commodity suitable enough as money to in time emerge and partially overtake cattle in that regard: it was of course relatively scarce, somewhat divisible and naturally standardized, easier to transport, was not alive, and did not deteriorate quickly. The existence of such fur money is independently corroborated by various medieval travelers and authors, but as with the case of cattle money, further evidence is also found in etymology, according to Einzig:

In addition to contemporary written evidence there is also etymological evidence in support of the claim that furs and skins were the currency of medieval Russia. The word kuna, which was used to express money in general, originated from the skin of the marten (kunitza). In fact, marten skins were the monetary unit in Russia till the late Middle Ages. It was not until 1409 that the kuna standard was abolished in Pskow, and it existed till 1411 in Novgorod. [1]

The word kuna, although as mentioned stemming from the wild martens, was used for silver money as well. Having very little silver production themselves, the Russians initially imported Arab silver dirhams from the south and referred to them not as dirhams but as kuna. Later, with the influx of Western European silver coins, the European denarius became known as kuna. There appears to have existed a somewhat lasting fixed exchange rate between the silver coins and the actual marten skins (5 kuna coins to 2 kunitza skins), but silver coins were often lacking in enough supply to facilitate trade efficiently.

For a long time, the furs had to be complete; claws, paws or snots missing would often result in the fur not being accepted as payment. These standards were relaxed as the central or local governments managing fur storage facilities introduced what seems to be some sort of fractional reserve banking; a much smaller, circular-shaped, Government stamped piece of fur money started to circulate and could allegedly be redeemed for a complete fur at a later time. Einzig complains about the lack of solid evidence of the actual redemption process, but it seems likely it should have been in place or traders would not have deposited furs. Writing his book before the world again adopted a fractional reserve system, Einzig also purely attributes this systemic shift to the supply of complete skins not managing to keep up with the pace of expanding monetary requirements. Be that as it may, it is quite possible that the practice instead was introduced in order to have the storage facilities lend out more fur money than they actually had backing for - in other words, the fur storage administrators, like their gold storage counterparts, had financial incentives to move away from a full reserves system.

It is possible that Russian bankers and traders profited for a time under this easy money regiment, but Einzig is also quick to add one of the alleged conclusions of that experiment  -  a loss of faith in this new fur money spread over Russia, especially in the east where extensive trade was conducted with various Mongol states. The Mongols, wanting little to do with this new kind of money, refused commerce:

A crisis is said to have occurred, however, when the Mongol invaders of Russia refused to recognize the small bits of fur serving as money. There was general bankruptcy among the merchants. Therefore north-eastern Russia reverted to the use of whole skins with full intrinsic value, in the place of pieces. [2]

The Russian states, especially after Muscovite centralization efforts, later moved to a mainly gold- and silver based monetary system, and the remains of their fur money concept lived on in memory, and in the names of smaller coin denominations. Einzig:

Hare skins are also believed to have served as a currency. This is deduced from the name of the smallest of early Russian coins, the polushka (quarter copeck). Ushka means 'hare skin', pol signifies 'half', therefore polushka must have been equated to two coins per hare's skin; the latter is said to have been one of the lowest units of exchange before the use of metallic money. [3]

Polushkas were minted on and off until 1916, just before the Romanov dynasty ended.

[1] Paul Einzig, Primitive Money (1949). London: Pergamon Press Ltd, p.269.

[2] Ibid., p. 270.

[3] Ibid., p. 270.