History Of Money

                                             

The history of money                                        
 

The history of money spans thousands of years. Numismatics is the scientific study of money and its history in all its varied forms.

Many items have been used as commodity money such as naturally scarce precious metals, cowry shells, barley, beads etc., as well as many other things that are thought of as having value.

Modern money (and most ancient money) is essentially a token — in other words, an abstraction. Paper currency is perhaps the most common type of physical money today. However, objects of gold or silver present many of money's essential properties.

Non-monetary exchange: barter and gift.

Contrary to popular conception, there is no evidence of a society or economy that relied primarily on barter. Instead, non-monetary societies operated largely along the principles of gift economics. When barter did in fact occur, it was usually between either complete strangers or would-be enemies.

With barter, an individual possessing a material object of value, such as a measure of grain, could directly exchange that object for another object perceived to have equivalent value, such as a small animal, a clay pot or a tool. The capacity to carry out transactions is severely limited since it depends on a coincidence of wants. The seller of food grain has to find a buyer who wants to buy grain and who also could offer in return something the seller wants to buy. There is no common medium of exchange into which both seller and buyer could convert their tradable commodities. There is no standard which could be applied to measure the relative value of various goods and services.

In a gift economy, valuable goods and services are regularly given without any explicit agreement for immediate or future rewards (i.e. there is no formal quid pro quo). Ideally, simultaneous or recurring giving serves to circulate and redistribute valuables within the community.

(Source : Wikipedia.org).

There are various social theories concerning gift economies. Some consider the gifts to be a form of reciprocal altruism. Another interpretation is that social status is awarded in return for the 'gifts'.[4] Consider for example, the sharing of food in some hunter-gatherer societies, where food-sharing is a safeguard against the failure of any individual's daily foraging. This custom may reflect altruism, it may be a form of informal insurance, or may bring with it social status or other benefits.

The emergence of money

The Sumer civilization developed a large scale economy based on commodity money. The Babylonians and their neighboring city states later developed the earliest system of economics as we think of it today, in terms of rules on debt, legal contracts and law codes relating to business practices and private property.

The Code of Hammurabi (Codex Hammurabi), the best preserved ancient law code, was created ca. 1760 BC (middle chronology) in ancient Babylon. It was enacted by the sixth Babylonian king, Hammurabi. Earlier collections of laws include the codex of Ur-Nammu, king of Ur (ca. 2050 BC), the Codex of Eshnunna (ca. 1930 BC) and the codex of Lipit-Ishtar of Isin (ca. 1870 BC). These law codes formalized the role of money in civil society. They set amounts of interest on debt... fines for 'wrong doing'... and compensation in money for various infractions of formalized law.

The Shekel referred to an ancient unit of weight and currency. The first usage of the term came from Mesopotamia circa 3000 BC. and referred to a specific mass of barley which related other values in a metric such as silver, bronze, copper etc. A barley/shekel was originally both a unit of currency and a unit of weight, just as the British Pound was originally a unit denominating a one pound mass of silver.

In cultures where metal working was unknown, shell or ivory jewelry were the most divisible, easily storable and transportable, scarce, and hard to counterfeit objects that could be made. It is highly unlikely that there were formal markets in 100,000 BCE (any more than there are in recently observed hunter-gatherer cultures). Nevertheless, proto-money would have been useful in reducing the costs of less frequent transactions that were crucial to hunter-gatherer cultures, especially bride purchase, splitting property upon death, tribute, and inter-tribal trade in hunting ground rights ("starvation insurance") and implements.

In the absence of a medium of exchange, non-monetary societies operated largely along the principles of gift economics. When barter did in fact occur, it was usually between either complete strangers or would-be enemies.

Commodity Money

1742 drawing of shells of the money cowry, Cypraea moneta

Main article: Commodity money

Bartering has several problems, most notably the coincidence of wants problem. For example, if a wheat farmer needs what a fruit farmer produces, a direct swap is impossible as seasonal fruit would spoil before the grain harvest. A solution is to trade fruit for wheat indirectly through a third, "intermediate", commodity: the fruit is exchanged for the intermediate commodity when the fruit ripens. If this intermediate commodity doesn't perish and is reliably in demand throughout the year (e.g. copper, gold, or wine) then it can be exchanged for wheat after the harvest. The function of the intermediate commodity as a store-of-value can be standardized into a widespread commodity money, reducing the coincidence of wants problem. By overcoming the limitations of simple barter, a commodity money makes the market in all other commodities more liquid.

Many cultures around the world eventually developed the use of commodity money. Ancient China and Africa used cowrie shells. Trade in Japan's feudal system was based on the koku - a unit of rice per year. The shekel was an ancient unit of weight and currency. The first usage of the term came from Mesopotamia circa 3000 BC and referred to a specific weight of barley, which related other values in a metric such as silver, bronze, copper etc. A barley/shekel was originally both a unit of currency and a unit of weight.

Where ever trade is common, barter systems usually lead quite rapidly to several key goods being imbued with monetary properties. In the early British colony of New South Wales, rum emerged quite soon after settlement as the most monetary of goods. When a nation is without a currency it commonly adopts a foreign currency. In prisons where conventional money is prohibited, it is quite common for cigarettes to take on a monetary quality, and throughout history, gold has taken on this unofficial monetary function.

Standardized coinage

Greek drachm of Aegina. Obverse: Land turtle / Reverse: ΑΙΓ(INA) and dolphin. The oldest turtle coin dates 700 BC

A 640 BC one-third stater coin from Lydia, shown larger.

From early times, metals, where available, have usually been favored for use as proto-money over such commodities as cattle, cowry shells, or salt, because they are at once durable, portable, and easily divisible. The use of gold as proto-money has been traced back to the fourth millennium B.C. when the Egyptians used gold bars of a set weight as a medium of exchange[citation needed], as the Sumerians earlier had done with silver bars[citation needed]. The first known ruler who officially set standards of weight and money was Pheidon. The first stamped money (having the mark of some authority in the form of a picture or words) can be seen in the Bibliothèque Nationale of Paris. It is an electrum stater of a turtle coin, coined at Aegina island. This remarkable coin dates about 700 B.C.. Electrum coins were also introduced about 650 B.C. in Lydia.

Coinage was widely adopted across Ionia and mainland Greece during the 6th century B.C., eventually leading to the Athenian Empire's 5th century B.C., dominance of the region through their export of silver coinage, mined in southern Attica at Laurium and Thorikos. A major silver vein discovery at Laurium in 483 BC led to the huge expansion of the Athenian military fleet. Competing coinage standards at the time were maintained by Mytilene and Phokaia using coins of Electrum; Aegina used silver.

It was the discovery of the touchstone which led the way for metal-based commodity money and coinage. Any soft metal can be tested for purity on a touchstone, allowing one to quickly calculate the total content of a particular metal in a lump. Gold is a soft metal, which is also hard to come by, dense, and storable. As a result, monetary gold spread very quickly from Asia Minor, where it first gained wide usage, to the entire world.

A Persian 309-379 AD silver drachm from the Sasanian Dynasty.

Using such a system still required several steps and mathematical calculation. The touchstone allows one to estimate the amount of gold in an alloy, which is then multiplied by the weight to find the amount of gold alone in a lump. To make this process easier, the concept of standard coinage was introduced. Coins were pre-weighed and pre-alloyed, so as long as the manufacturer was aware of the origin of the coin, no use of the touchstone was required. Coins were typically minted by governments in a carefully protected process, and then stamped with an emblem that guaranteed the weight and value of the metal. It was, however, extremely common for governments to assert the value of such money lay in its emblem and thus to subsequently debase the currency by lowering the content of valuable metal.

Although gold and silver were commonly used to mint coins, other metals could be used. For instance, Ancient Sparta minted coins from iron to discourage its citizens from engaging in foreign trade. In the early seventeenth century Sweden lacked more precious metal and so produced "plate money", which were large slabs of copper approximately 50 cm or more in length and width, appropriately stamped with indications of their value.

Metal based coins had the advantage of carrying their value within the coins themselves — on the other hand, they induced manipulations: the clipping of coins in the attempt to get and recycle the precious metal. A greater problem was the simultaneous co-existence of gold, silver and copper coins in Europe. English and Spanish traders valued gold coins more than silver coins, as many of their neighbors did, with the effect that the English gold-based guinea coin began to rise against the English silver based crown in the 1670s and 1680s. Consequently, silver was ultimately pulled out of England for dubious amounts of gold coming into the country at a rate no other European nation would share. The effect was worsened with Asian traders not sharing the European appreciation of gold altogether — gold left Asia and silver left Europe in quantities European observers like Isaac Newton, Master of the Royal Mint observed with unease.

Stability came into the system with national Banks guaranteeing to change money into gold at a promised rate; it did, however, not come easily. The Bank of England risked a national financial catastrophe in the 1730s when customers demanded their money be changed into gold in a moment of crisis. Eventually London's merchants saved the bank and the nation with financial guarantees.

Another step in the evolution of money was the change from a coin being a unit of weight to being a unit of value. a distinction could be made between its commodity value and its specie value. The difference is these values is seigniorage.

Trade Bills of Exchange

Bills of exchange became prevalent with the expansion of European trade toward the end of the Middle Ages. A flourishing Italian wholesale trade in cloth, woolen clothing, wine, tin and other commodities was heavily dependent on credit for its rapid expansion. Goods were supplied to a buyer against a bill of exchange, which constituted the buyer's promise to make payment at some specified future date. Provided that the buyer was reputable or the bill was endorsed by a credible guarantor, the seller could then present the bill to a merchant banker and redeem it in money at a discounted value before it actually became due.

These bills could also be used as a form of payment by the seller to make additional purchases from his own suppliers. Thus, the bills – an early form of credit – became both a medium of exchange and a medium for storage of value. Like the loans made by the Egyptian grain banks, this trade credit became a significant source for the creation of new money. In England, bills of exchange became an important form of credit and money during last quarter of the 18th century and the first quarter of the 19th century before banknotes, checks and cash credit lines were widely available.

Tallies

The acceptance of symbolic forms of money opened up vast new realms for human creativity. A symbol could be used to represent something of value that was available in physical storage somewhere else in space, such as grain in the warehouse. It could also be used to represent something of value that would be available later in time, such as a promissory note or bill of exchange, a document ordering someone to pay a certain sum of money to another on a specific date or when certain conditions have been fulfilled.

In the 12th Century, the English monarchy introduced an early version of the bill of exchange in the form of a notched piece of wood known as a tally stick. Tallies originally came into use at a time when paper was rare and costly, but their use persisted until the early 19th Century, even after paper forms of money had become prevalent. The notches were used to denote various amounts of taxes payable to the crown. Initially tallies were simply used as a form of receipt to the tax payer at the time of rendering his dues. As the revenue department became more efficient, they began issuing tallies to denote a promise of the tax assessee to make future tax payments at specified times during the year. Each tally consisted of a matching pair – one stick was given to the assessee at the time of assessment representing the amount of taxes to be paid later and the other held by the Treasury representing the amount of taxes be collected at a future date.

The Treasury discovered that these tallies could also be used to create money. When the crown had exhausted its current resources, it could use the tally receipts representing future tax payments due to the crown as a form of payment to its own creditors, who in turn could either collect the tax revenue directly from those assessed or use the same tally to pay their own taxes to the government. The tallies could also be sold to other parties in exchange for gold or silver coin at a discount reflecting the length of time remaining until the taxes was due for payment. Thus, the tallies became an accepted medium of exchange for some types of transactions and an accepted medium for store of value. Like the giro banks before it, the Treasury soon realized that it could also issue tallies that were not backed by any specific assessment of taxes. By doing so, the Treasury created new money that was backed by public trust and confidence in the monarchy rather than by specific revenue receipts.

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History of money II

The highly successful ancient grain bank also served as a model for the emergence of the goldsmith bankers in 17th Century England. These were the early days of the mercantile revolution before the rise of the British Empire when merchant ships began plying the coastal seas laden with silks and spices from the orient and shrewd traders amassed huge hoards of gold in the bargain. Since no banks existed in England at the time, these entrepreneurs entrusted their wealth with the leading goldsmith of London, who already possessed stores of gold and private vaults within which to store it safely, and paid a fee for that service. In exchange for each deposit of precious metal, the goldsmiths issued paper receipts certifying the quantity and purity of the metal they held on deposit. Like the grain receipts, tallies and bills of exchange, the goldsmith receipts soon began to circulate as a safe and convenient form of money backed by gold and silver in the goldsmiths’ vaults.

Knowing that goldsmiths were laden with gold, it was only natural that other traders in need of capital might approach them for loans, which the goldsmiths made to trustworthy parties out of their gold hoards in exchange for interest. Like the grain bankers, goldsmith began issuing loans by creating additional paper gold receipts that were generally accepted in trade and were indistinguishable from the receipts issued to parties that deposited gold. Both represented a promise to redeem the receipt in exchange for a certain amount of metal. Since no one other than the goldsmith knew how much gold he held in store and how much was the value of his receipts held by the public, he was able to issue receipts for greater value than the gold he held. Gold deposits were relatively stable, often remaining with the goldsmith for years on end, so there was little risk of default so long as public trust in the goldsmith's integrity and financial soundness was maintained. Thus, the goldsmiths of London became the forerunners of British banking and prominent creators of new money. They created money based on public trust.

Demand deposits

The primary business of the grain and goldsmith bankers was safe storage of savings. The primary business of the early merchant banks was promotion of trade. The new class of commercial banks made accepting deposits and issuing loans their principal activity. They lend the money they received on deposit. They created additional money in the form of new bank notes. They also created additional money in the form of demand deposits simply by making numerical entries in the ledgers of their account holders. The money they created was partially backed by gold, silver or other assets and partially backed only by public trust in the institutions that created it.

Banknotes

The history of money and banking are inseparably interlinked. The issuance of paper money was initiated by commercial banks. Inspired by the success of the London goldsmiths, some of which became the forerunners of great English banks, banks began issuing paper notes quite properly termed ‘banknotes’ which circulated in the same way that government issued currency circulates today. In England this practice continued up to 1694. Scottish banks continued issuing notes until 1850. In USA, this practice continued through the 19th Century, where at one time there were more than 5000 different types of bank notes issued by various commercial banks in America. Only the notes issued by the largest, most creditworthy banks were widely accepted. The script of smaller, lesser known institutions circulated locally. Farther from home it was only accepted at a discounted rate, if it was accepted at all. The proliferation of types of money went hand in hand with a multiplication in the number of financial institutions.

These banknotes were a form of representative money which could be converted into gold or silver by application at the bank. Since banks issued notes far in excess of the gold and silver they kept on deposit, sudden loss of public confidence in a bank could precipitate mass redemption of banknotes and result in ‘’bankruptcy’’.

The use of bank notes issued by private commercial banks as legal tender has gradually been replaced by the issuance of bank notes authorized and controlled by national governments. The Bank of England was granted sole rights to issue banknotes in England after 1694. In the USA, the Federal Reserve Bank was granted similar rights after its establishment in 1913. Until recently, these government-authorized currencies were forms of representative money, since they were partially backed by gold or silver and were theoretically convertible into gold or silver.

Gold-backed banknotes

The term gold standard is often erroneously thought to refer to a currency where notes were fully backed by and redeemable in an equivalent amount of gold. The British pound was the strongest, most stable currency of the 19th Century and often considered the closest equivalent to pure gold, yet at the height of the gold standard there was only sufficient gold in the British treasury to redeem a small fraction of the currency then in circulation. In 1880, US government gold stock was equivalent in value to only 16% of currency and demand deposits in commercial banks. By 1970, it was about 0.5%. The gold standard was only a system for exchange of value between national currencies, never an agreement to redeem all paper notes for gold. The classic gold standard prevailed during the period 1880 and 1913 when a core of leading trading nations agreed to adhere to a fixed gold price and continuous convertibility for their currencies. Gold was used to settle accounts between these nations. With the outbreak of World War I, Britain was forced to abandon the gold standard even for their international transactions. Other nations quickly followed suit. After a brief attempt to revive the gold standard during the 1920s, it was finally abandoned by Britain and other leading nations during the Great Depression.

Prior to the abolition of the gold standard, the following words were printed on the face of every US dollar: "I promise to pay the bearer on demand, the sum of one dollar" followed by the signature of the US Secretary of the Treasury. Other denominations carried similar pledges proportionate to the face value of each note. The currencies of other nations bore similar promises too. In earlier times this promise signified that a bearer could redeem currency notes for their equivalent value in gold or silver. The US adopted a silver standard in 1785, meaning that the value of the US dollar represented a certain equivalent weight in silver and could be redeemed in silver coins. But even at its inception, the US Government was not required to maintain silver reserves sufficient to redeem all the notes that it issued. Through much of the 20th Century until 1971, the US dollar was ‘backed’ by gold, but from 1934 only foreign holders of the notes could exchange them for metal.

Representative money

An example of representative money, this 1896 note could be exchanged for five US Dollars worth of silver.

Representative money refers to money that consists of a token or certificate made of paper. The use of the various types of money including representative money, tracks the course of money from the past to the present.[16] Token money may be called "representative money" in the sense that, say, a piece of paper might 'represent' or be a claim on a commodity also.[17] Gold certificates or Silver certificates are a type of representative money[17] which were used in the United States as currency until 1933.

The term 'representative money' has been used in the past "to signify that a certain amount of bullion was stored in a Treasury while the equivalent paper in circulation" represented the bullion.[18] Representative money differs from commodity money which is actually made of some physical commodity. In his Treatise on Money,(1930:7) Keynes distinguished between commodity money and representative money, dividing the latter into "fiat money" and "managed money."[19]

Fiat money

Fiat money refers to money that is not backed by reserves of another commodity. The money itself is given value by government fiat (Latin for "let it be done") or decree, enforcing legal tender laws, previously known as "forced tender", whereby debtors are legally relieved of the debt if they pay it in the government's money. By law, the refusal of a legal tender (offering) extinguishes the debt in the same way acceptance does.[20] At times in history (e.g. Rome under Diocletian, and post-revolutionary France during the collapse of the assignats) the refusal of legal tender money in favor of some other form of payment was punished with the death penalty.

Governments through history have often switched to forms of fiat money in times of need such as war, sometimes by suspending the service they provided of exchanging their money for gold, and other times by simply printing the money that they needed. When governments produce money more rapidly than economic growth, the money supply overtakes economic value. Therefore, the excess money eventually dilutes the market value of all money issued. This is called inflation. See open market operations.

In 1971 the United States finally switched to fiat money indefinitely. At this point in time many of the economically developed countries' currencies were fixed to the US dollar (see Bretton Woods Conference), and so this single step meant that much of the western world's currencies became fiat money based.

Following the first Gulf War the president of Iraq, Saddam Hussein, repealed the existing Iraqi fiat currency and replaced it with a new currency. Despite having no backing by a commodity and with no central authority mandating its use or defending its value, the old currency continued to circulate within the politically isolated Kurdish regions of Iraq. It became known as the "Swiss dinar". This currency remained relatively strong and stable for over a decade. It was formally replaced following the second Gulf War.(Source:Wikipedia.org)