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History of money

From Wikipedia, the free encyclopedia

Coins, Banknotes,
Circulating currencies
Community currencies
Company scrip, LETS,
Time dollars
Fictional currencies
Ancient currencies
Greek, Roman
Medieval currencies
Modern currencies
Africa, The Americas,
Europe, Asia, Oceania
Mint, Designers
Coining, Milling,
Hammering, Cast
Credit cards, Medals,
Tokens, Cheques
Stocks, Bonds
v • d • e
The history of money spans thousands of years. Numismatics is the scientific stu
dy of money and its history in all its varied forms.
Many items have been used as commodity money such as naturally scarce precious m
etals, cowry shells, barley, beads etc., as well as many other things that are t
hought 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 to
day. However, objects of gold or silver present many of money's essential proper
Contents [hide]
1 Non-monetary exchange: barter and gift
2 The emergence of money
3 Commodity Money
3.1 Standardized coinage
4 Trade Bills of Exchange
5 Tallies
6 Goldsmith bankers
7 Demand deposits
8 Banknotes
8.1 Gold-backed banknotes
9 Representative money
10 Fiat money
11 Notes
12 See also
13 References
14 External links
[edit]Non-monetary exchange: barter and gift
Contrary to popular conception, there is no evidence of a society or economy tha
t relied primarily on barter.[1] Instead, non-monetary societies operated largel
y along the principles of gift economics. When barter did in fact occur, it was
usually between either complete strangers or would-be enemies.[2]
With barter, an individual possessing a material object of value, such as a meas
ure of grain, could directly exchange that object for another object perceived t
o have equivalent value, such as a small animal, a clay pot or a tool. The capac
ity to carry out transactions is severely limited since it depends on a coincide
nce of wants. The seller of food grain has to find a buyer who wants to buy grai
n 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 the
ir 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 e
xplicit agreement for immediate or future rewards (i.e. there is no formal quid
pro quo).[3] Ideally, simultaneous or recurring giving serves to circulate and r
edistribute valuables within the community.
There are various social theories concerning gift economies. Some consider the g
ifts 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 sharin
g of food in some hunter-gatherer societies, where food-sharing is a safeguard a
gainst the failure of any individual's daily foraging. This custom may reflect a
ltruism, it may be a form of informal insurance, or may bring with it social sta
tus or other benefits.
[edit]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 co
ntracts and law codes relating to business practices and private property.[5][6]
The Code of Hammurabi (Codex Hammurabi), the best preserved ancient law code, wa
s created ca. 1760 BC (middle chronology) in ancient Babylon. It was enacted by
the sixth Babylonian king, Hammurabi. Earlier collections of laws include the co
dex of Ur-Nammu, king of Ur (ca. 2050 BC), the Codex of Eshnunna (ca. 1930 BC) a
nd the codex of Lipit-Ishtar of Isin (ca. 1870 BC).[7] These law codes formalize
d the role of money in civil society. They set amounts of interest on debt... fi
nes for 'wrong doing'... and compensation in money for various infractions of fo
rmalized law.
The Shekel referred to an ancient unit of weight and currency. The first usage o
f 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 the absence of a medium of exchange, non-monetary societies operated largely
along the principles of gift economics.[1] When barter did in fact occur, it was
usually between either complete strangers or would-be enemies.[2]
[edit]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. F
or 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", commodi
ty: the fruit is exchanged for the intermediate commodity when the fruit ripens.
If this intermediate commodity doesn't perish and is reliably in demand through
out the year (e.g. copper, gold, or wine) then it can be exchanged for wheat aft
er the harvest. The function of the intermediate commodity as a store-of-value c
an be standardized into a widespread commodity money, reducing the coincidence o
f wants problem. By overcoming the limitations of simple barter, a commodity mon
ey 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 w
eight 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.[8]
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 o
f goods. When a nation is without a currency it commonly adopts a foreign curren
cy. In prisons where conventional money is prohibited, it is quite common for ci
garettes to take on a monetary quality, and throughout history, gold has taken o
n this unofficial monetary function.
[edit]Standardized coinage

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

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[citation needed]. The use o
f gold as proto-money has been traced back to the fourth millennium B.C. when th
e Egyptians used gold bars of a set weight as a medium of exchange[citation need
ed], as the Sumerians earlier had done with silver bars[citation needed]. The fi
rst known ruler who officially set standards of weight and money was Pheidon [9]
. The first stamped money (having the mark of some authority in the form of a pi
cture or words) can be seen in the Bibliothèque
 Nationale of Paris. t is an elect
rum stater of a turtle coin, coined at egina island. This remarkable coin [3] d
ates about 700 B.C.[10]. Electrum coins were also introduced about 650 B.C. in L
Coinage was widely adopted across onia and mainland reece during the 6th centu
ry B.C., eventually leading to the thenian Empire's 5th century B.C., dominance

of the region through their
 export of silver coinage, mined in southern ttica
at Laurium and Thorikos. major
 silver vein discovery at Laurium in 483 BC led
to the huge expansion of the thenian military fleet. Competing coinage standard 
s at the time were maintained by Mytilene and Phokaia using coins of Electrum;
egina used silver.
t was the discovery of
 the touchstone which led the way for metal-based commodi
ty money and coinage. ny soft metal can be tested for purity on a touchstone, a
 one to quickly calculate the total content of a particular metal in a lu
mp. old is a soft metal, which is also hard to come
 by, dense, and storable. s
a result, monetary gold spread very quickly from sia Minor, where it first gai
ned wide usage, to the entire world.

Persian 309-379 D silver drachm from the Sasanian Dynasty.
Using such a system still required several steps and mathematical calculation. T
he touchstone allows one to estimate the amount of gold in an alloy, which is th
en 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 ori
gin of the coin, no use of the touchstone was required. Coins were typically min
ted by governments in a carefully protected process, and then stamped with an em
blem that guaranteed the weight and value of the metal. t was, however, extreme
ly common for governments to assert that the value of such money lay in its embl
em and thus to subsequently reduce the value of the currency by lowering the con
tent of valuable metal.
lthough gold and silver
 were commonly used to mint coins, other metals could be
used. For instance, ncient Sparta minted coins from iron to discourage its cit
izens from engaging in foreign trade. n the early seventeenth century Sweden la
cked more precious metal and so produced "plate money", which were large slabs o
f 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 the
mselves — on the other hand, they induced manipulations:
 the clipping of coins in
the attempt to get and recycle the precious metal. greater problem was the sim
ultaneous co-existence of gold, silver and copper coins in Europe. English and S
panish traders valued gold coins more than silver coins, as many of their neighb
ors did, with the effect that the English gold-based guinea coin began to rise a
gainst the English silver based crown in the 1670s and 1680s. Consequently, silv
er 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 worse
ned with sian traders not sharing the European appreciation of gold altogether —
gold left sia and silver left Europe in quantities European observers like saa
c Newton, Master of the Royal Mint observed with unease.[12]
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 Engl
and 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 mer
chants saved the bank and the nation with financial guarantees.
nother step in the evolution of money was the change from a coin being a unit o
f weight to being a unit of value. a distinction could be made between its commo
dity value and its specie value. The difference is these values is seigniorage.[
[edit]Trade Bills of Exchange
Bills of exchange became
 with the expansion of European trade toward t
he end of the Middle ges. flourishing talian wholesale trade in cloth, woole
n clothing, wine, tinand other commodities was heavily dependent on credit for
its rapid expansion. oods were supplied to a buyer against a bill of exchange,
which constituted the buyer's promise to make payment at some specified future d
ate. Provided that the buyer was reputable or the bill was endorsed by a credibl
e guarantor, the seller could then present the bill to a merchant banker and red
eem 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 additi
onal purchases from his own suppliers. Thus, the bills – an early form of credit – b
ecame both a medium of exchange and a medium for storage of value. Like the loan
s made by the Egyptian grain banks, this trade credit became a significant sourc
e for the creation of new money. n England, bills of exchange became an importa
nt form of credit and money during last quarter of the 18th century and the firs
t quarter of the 19th century before banknotes, checks and cash credit lines wer
e widely available.[14]
The acceptance
 of symbolic forms of money opened up vast new realms for human cr
eativity. symbol could be used to represent something of value that was availa
ble in physical storage somewhere else in space, such as grain in the warehouse.
t could also be used to represent something of value that would be available l
ater 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 cer
tain conditions have been fulfilled.
n the 12th Century, the English monarchy introduced an early version of the bil
l of exchange in the form of a notched piece of wood known as a tally stick. Tal
lies originally came into use at a time when paper was rare and costly, but thei
r use persisted until the early 19th Century, even after paper forms of money ha
d become prevalent. The notches were used to denote various amounts of taxes pay
able to the crown. nitially tallies were simply used as a form of receipt to th
e tax payer at the time of rendering his dues. s the revenue department became
more efficient, they began issuing tallies to denote a promise of the tax assess
ee to make future tax payments at specified times during the year. Each tally co
nsisted of a matching pair – one stick was given to the assessee at the time of as
sessment 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. W
hen the crown had exhausted its current resources, it could use the tally receip
ts 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 t
hose assessed or use the same tally to pay their own taxes to the government. Th
e tallies could also be sold to other parties in exchange for gold or silver coi
n 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 ty
pes of transactions and an accepted medium for store of value. Like the girobank
s before it, the Treasury soon realized that it could also issue tallies that we
re not backed by any specific assessment of taxes. By doing so, the Treasury cre
ated new money that was backed by public trust and confidence in the monarchy ra
ther than
 by specific revenue receipts.[15]
[edit] oldsmith bankers
The highly successful ancient grain bank also served as a model for the emergenc
e 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 s
hips began plying the coastal seas laden with silks and spices from the orient a
nd shrewd traders amassed huge hoards of gold in the bargain. Since no banks exi
sted in England at the time, these entrepreneurs entrusted their wealth with the
leading goldsmith of London, who already possessed stores of gold and private v
aults within which to store it safely, and paid a fee for that service. n excha
nge for each deposit of precious metal, the goldsmiths issued paper receipts cer
tifying the quantity and purity of the metal they held on deposit. Like the grai
n 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 th
e goldsmiths’ vaults.
Knowing that goldsmiths were laden with gold, it was only natural that other tra
ders 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 go
ld receipts that were generally accepted in trade and were indistinguishable fro
m 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 o
ther 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 gre
ater value than the gold he held. Gold deposits were relatively stable, often re
maining 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 wa
s maintained. Thus, the goldsmiths of London became the forerunners of British b
anking and prominent creators of new money. They created money based on public t
[edit]Demand deposits
The primary business of the grain and goldsmith bankers was safe storage of savi
ngs. The primary business of the early merchant banks was promotion of trade. Th
e new class of commercial banks made accepting deposits and issuing loans their
principal activity. They lend the money they received on deposit. They created a
dditional money in the form of new bank notes. They also created additional mone
y in the form of demand deposits simply by making numerical entries in the ledge
rs 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 instit
utions that created it.
The history of money and banking are inseparably interlinked. The issuance of pa
per money was initiated by commercial banks. Inspired by the success of the Lond
on goldsmiths, some of which became the forerunners of great English banks, bank
s began issuing paper notes quite properly termed ‘banknotes’ which circulated in th
e same way that government issued currency circulates today. In England this pra
ctice continued up to 1694. Scottish banks continued issuing notes until 1850. I
n 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 circulate
d locally. Farther from home it was only accepted at a discounted rate, if it wa
s 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 int
o gold or silver by application at the bank. Since banks issued notes far in exc
ess of the gold and silver they kept on deposit, sudden loss of public confidenc
e in a bank could precipitate mass redemption of banknotes and result in ‘’bankruptc
The use of bank notes issued by private commercial banks as legal tender has gra
dually been replaced by the issuance of bank notes authorized and controlled by
national governments. The Bank of England was granted sole rights to issue bankn
otes in England after 1694. In the USA, the Federal Reserve Bank was granted sim
ilar rights after its establishment in 1913. Until recently, these government-au
thorized currencies were forms of representative money, since they were partiall
y backed by gold or silver and were theoretically convertible into gold or silve
[edit]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 of
ten considered the closest equivalent to pure gold, yet at the height of the gol
d standard there was only sufficient gold in the British treasury to redeem a sm
all fraction of the currency then in circulation. In 1880, US government gold st
ock was equivalent in value to only 16% of currency and demand deposits in comme
rcial 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 188
0 and 1913 when a core of leading trading nations agreed to adhere to a fixed go
ld price and continuous convertibility for their currencies. Gold was used to se
ttle accounts between these nations. With the outbreak of World War I, Britain w
as 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. Othe
r denominations carried similar pledges proportionate to the face value of each
note. The currencies of other nations bore similar promises too. In earlier time
s this promise signified that a bearer could redeem currency notes for their equ
ivalent value in gold or silver. The US adopted a silver standard in 1785, meani
ng that the value of the US dollar represented a certain equivalent weight in si
lver and could be redeemed in silver coins. But even at its inception, the US Go
vernment was not required to maintain silver reserves sufficient to redeem all t
he notes that it issued. Through much of the 20th Century until 1971, the US dol
lar was ‘backed’ by gold, but from 1934 only foreign holders of the notes could exch
ange them for metal.
[edit]Representative money

An example of representative money, this 1896 note could be exchanged for five U
S Dollars worth of silver.
Representative money refers to money that consists of a token or certificate mad
e 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 b
e 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 ce
rtificates 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 cer
tain amount of bullion was stored in a Treasury while the equivalent paper in ci
rculation" represented the bullion.[18] Representative money differs from commod
ity money which is actually made of some physical commodity. In his Treatise on
Money,(1930:7) Keynes distinguished between commodity money and representative m
oney, dividing the latter into "fiat money" and "managed money."[19]
[edit]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", whe
reby 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 i
n the same way acceptance does.[20] At times in history (e.g. Rome under Dioclet
ian, and post-revolutionary France during the collapse of the assignats) the ref
usal of legal tender money in favor of some other form of payment was punished w
ith 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 exchan
ging their money for gold, and other times by simply printing the money that the
y needed. When governments produce money more rapidly than economic growth, the
money supply overtakes economic value. Therefore, the excess money eventually di
lutes the market value of all money issued. This is called inflation. See open m
arket operations.
In 1971 the United States finally switched to fiat money indefinitely. At this p
oint 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 Gulf War the president of Iraq, Saddam Hussein, repealed the exist
ing Iraqi fiat currency and replaced it with a new currency. Despite having no b
acking by a commodity and with no central authority mandating its use or defendi
ng its value, the old currency continued to circulate within the politically iso
lated Kurdish regions of Iraq. It became known as the "Swiss dinar". This curren
cy remained relatively strong and stable for over a decade. It was formally repl
aced following the Iraq War.