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)
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