Author: Bahira Berliani dan Zepri R.
1. Introduction
Background
A distinguished economist named Milton Friedman once said, “Inflation is always and everywhere a monetary phenomenon”. In other words, where there is money, there is inflation. It is common knowledge that money or currency has evolved tremendously since a long time ago. From merely sea shells more than 3,000 years ago to 136 different currencies used in this modern era (Galeza & Chan, 2018). But, what about inflation? Has it started a long time ago as well? In this writing, one of the first cases of inflation in the world is analysed through a monetary lens. The case that occurred in the 14th century involved an African king called Mansa Musa, gold, and–surprisingly–an excessive behavior of generosity.
Figure 1. Map of 14th Century Mali Empire (Touré, 2021)
Who is Mansa Musa and his Mali Empire?
The name Mansa Musa may seem unfamiliar to the general public, but historians believe he is the wealthiest man alive. Habashi (2009) described the West African emperor’s wealth as incomprehensible and is given the title king of the gold mines. There are two factors that contribute to the incredible wealth possessed by the kingdom of Mali especially during Mansa Musa’s reign. The two factors, among others, are the geography-political aspect and economic system of the kingdom.
The geopolitical system of Mali Empire
Mali was a strong and wealthy kingdom with control of the territory along the Niger river valley. The kings who ruled there were Sundiata and Mansa Musa. Sundiata was a king who first conquered the kingdom of Ghana and became the founder of the kingdom of Mali. Mali reached its golden age during the time of Mansa Musa, at the time when gold was a very important resource. During Mansa Musa’s reign, there was also an expansion or spread of influence that reached the center of Timbuctu (KawKaw) and Djenne (see Figure 1). These two areas were influential trade centers for West Africa as well as centers of cultural wealth and knowledge. The military system was also influential for the Kingdom of Ancient Mali for it functions as security and protection to the kingdom.
The economic system of Mali Empire
Seen from the geographical location, the ancient Mali kingdom is located around the Niger river which provides major sources of life, such as fishing, drinking water and water for agriculture. Thus, the kingdom of Mali had started to develop an irrigation system at that time. In addition to making a living as farmers, residents of the ancient kingdom of Mali also produced salt. This is because they live around the Sahara. Its territory also includes three huge gold mines (Bambuk, Bure, and Bourén) which makes Mali a supplier of gold to Europe, Middle East, and North Africa. Given the strategic location and openness to trade, many local and foreign traders pass the empire’s border bringing goods for trans-saharan trade. The kingdom also benefits from this trade by levying tax and custom fees which contribute significantly as a source of income (Harris, 2020).
2. The Case of Mansa Musa Pilgrimage
Mansa Musa gave so much gold for free, took it back as loan, and returned it.
According to The Medieval Empire of Ghana (1957), Mansa Musa carried out a grand pilgrimage or in Islam “Hajj” to Mecca in 1324. As one of the wealthiest kings at the time, his royal journey was accompanied with a grandiose convoy which consisted of more than 60,000 people, animals, and gold. Five hundred slaves lead the caravan with each holding a golden staff weighing 500 mithkal (an islamic unit of weight equivalent to 4.25 gram). Along the journey, Mansa Musa gave 20,000 ounce gold for free– as if it’s a small fraction of his wealth– to the people in Mecca, Cairo, and Medina. The overly generous gifts and trading caused inflation. Goodwin (1957) said, “..price rocketed as everyone tried to pay in depreciated gold.” Gonnay (2019) also said there was so much gold, it devalued the price of gold for over a decade.
Figure 2. Illustration of Mansa Musa (IDX Channel, 2021)
Knowing the situation, Mansa Musa tried to fix the inflated economy by borrowing back the gold he had given (Harris, 2020; Goodwin, 1957). The people of Cairo who act as the gold lender were overjoyed and used the opportunity to charge a high interest. As a result, the value of gold rose to unprecedented heights and prices fell accordingly. Some time later, Mansa Musa paid back all the gold borrowings plus the interest in one big payment which caused the price of gold to fall again. In one pilgrimage trip, Mansa Musa had ruined, repaired, and once again ruined the world price of gold. The effect was not only felt in the three cities, but spreads across Africa, Middle East, and Europe.
3. Discussion
The case of Mansa Musa can be explained by monetary theories:
1) Monetarist Theory of Inflation
In this discussion, we analyzed well-known literature related to the phenomenal act of giving massive 20,000 ounces of gold – 1,250 pounds – each at Cairo, Mecca, and Medina by Mansa Musa. Referring to Milton Friedman’s Theory of Inflation (1956), we can see that from the actions of Mansa Musa, inflation is purely a monetary phenomenon that can only be produced by expanding the money supply at a faster rate than the growth of capacity output. The correlation is illustrated in the graph below.
Figure 3. Graph of Shifts in the Price Equilibrium due to an Increase in the Money Supply (Author illustration and Mankiw)
Figure 3 shows that there is a strong correlation between the existing money supply and inflation. The horizontal axis represents the money supply, the vertical axis represents the value of money 1/p, and the right vertical axis represents the price level. When the value of money is high, the price level is low and vice versa. The two curves describe the demand for money and the money supply. The supply curve is vertical because it describes the amount of money in circulation and the price level that can be determined.
In this analysis, the massive distribution of Mansa Musa’s gold is described as an increase in the money supply. This is because gold became the currency at that time. Therefore the topic of this discussion describes gold as the amount of money in circulation. It can be seen from the graph that equilibrium A represents the status of one of these countries, namely Egypt (Cairo), as one of the influential countries before Mansa Musa distributed large amounts of gold during the pilgrimage to Mecca. Equilibrium A describes the balance between the supply and demand for money between the value of money and the price level of goods at that time. If the change in the money supply at equilibrium B is represented as a multiplier effect after Mansa Musa’s large gold distribution, it changes MS1 to MS2. As a result, the value of money fell from 1⁄2 to ¼ and the price level rose from 2 to 4.
In other words, the assumption that Mansa Musa was distributing gold into the modern economy on a large scale offered the potential for then-Egyptian (Cairo) traders to increase 4-5 times the prices of normal goods. At that time, it caused the price of normal goods to rise. Because it supports an increase in the amount of money circulating for society, the increase in prices that we now think of as inflation, results in a decrease in the value of money.
To support this theory, Friedman (1956) explained that purely monetary inflation in this case was caused by excessive growth in the money supply which could not be matched by real growth in goods and services. At the same time, other factors, such as supply and demand in this case are other factors, and so have little effect compared to pure money. This is also reinforced by the results of Dede Hijriani’s research (2016) which shows that there is a direct relationship and a positive correlation between the money supply and increased inflation. Where this states that the money supply and inflation have a very strong correlation in the long run. As can be seen from the literature example of this case, Mansa Musa’s act of giving large amounts of gold, one of which was to Egypt (Cairo) , affected the Egyptian (Cairo) fall in the value of gold in the economy for 12 years (Harris & Charlie,2020).
2) Quantity theory of money
From the study case, it can be inferred there is a relationship between money and the price level of goods. The theory that explains such relationship is the quantity theory of money–also popularized by Milton Friedman and Irving Fisher. The theory states that the change in price level of goods is proportional to the change in money supply. This causal relationship is examined by Alimi (2012) using the Granger-causality test and found a unidirectional causal relationship from money supply to inflation. This means the causality comes from a change in money supply which affects inflation and not the other way round. To visualize this theory, Irving Fisher developed the quantity equation:
If the velocity of money in an economy (V) and the volume of transactions for goods and services (T) remain constant, and the amount of money (M) doubles, price levels will likewise double.
4. Lessons Learned
The stories of Mansa Musa’s journey to Mecca, during which he bestowed money on the nations he passed through, mention Egypt. The action caused a loss of $1.5 billion in current currency. The Quantity Theory of Money and Monetary Inflation Theory are both relevant in this scenario. These two hypotheses have something in common in terms of how the amount of money in circulation will impact the increase in prices in the eyes of the public at present time. This is intended so that producers of products and services can communicate price increases as a result of an increase in the money supply. According to Milton Friedman, this will eventually produce a contemporary economic phenomenon, namely Inflation. This is shown by the effect of Mansa Musa which caused Egypt to experience an economic shock for 12 years.
The main lesson from this case study that applies to contemporary economies is that expanding the money supply is not always linked to successful long-term outcomes.This is demonstrated by the behavior of Mansa Musa, who gave away gold in large quantities with the best of intentions but inadvertently depreciated the value of the currency over time, thus driving up the overall price. Modern thinking holds that the problem can be solved by a tight monetary policy. One strategy is to increase interest rates to encourage individuals to reduce unnecessary consumption, which reduces the money supply. A decrease in the money supply correlates to general price improvements.
Bibliography
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Harris, Charlie. (2020). Mansa Musa I of Mali: Gold, Salt, and Storytelling in Medieval West Africa. Oxford Centre for Global History. Retrieved from https://globalcapitalism.history.ox.ac.uk/files/ghocmansamusainmalipdf
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