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History of International Monetary SystemBanking was believed to have originated in Egypt but it is not clear that there was asophisticated system of accounting in place not to mention circulation.Banking actually originated in Mesopotamia today this is Iraq. They were believed tohave had a sophisticated accounting system whereby they recorded debts and depositson clay tablets which was they first evidence of double entry accounting.CoinageIn Lydia a mix of gold and silver called electrum was mined and became used for trading. Circulation of coinage is associated with the Kings of Lydia – known asMidas. They put a stamp on the electrum coin.The stamp meant the value of the coin will not decrease because it can be exchangedat the mint for full weight coins. This innovation enormously simplified commerceand introduced the state and the credibility of the state. Credibility came from believing in the stamp.The mints needed reserve of metal to create the stamp, the reserve came from taxes – This means the state must be capable of collecting tax. Historically, the number of stated that have the ability to collect taxes have been few. The French revolution waslargely born from the failure to agree on a system of tax – the French Monarchy werenot able the raise enough money through taxes.Coinage rests on credibility and credibility rests on the ability to tax.Coinage – greatly simplified by denominations of coins and that value is what themint will give you in exchange for the coin. However, value may not always be theweight – mint might out 80c of metal into 1 dollar therefore a problem arises.This issue emerged in the Roman Empire.Therefore a market judgement is required on the reliability of the state and theintrinsic value of the coins.Convertible Paper MoneyPaper money was introduced for a number of reasons;
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It was not as heavy as coins
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It was easier to conceal
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It was safer There was a printed promise of the paper. E.g. on the US Federal Reserve notes itused to say ‘I promise to pay the bearer 10 dollars’, this essentially meant the paper was backed by silver. This still exists on the Sterling notes.The Bank of Amsterdam issued notes into circulation which led to the distinction between Real Money V Nominal Money.Real money has an intrinsic value determined by supply and demand whereas Nominal money involves credibility, it is the promise written on the paper.
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