History of money
Encyclopedia
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 natural scarce precious metal
s, 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.
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.
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'. 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 Mesopotamia
n 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. Money was not only an emergence, it was a necessity.
The Code of 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 code of Ur-Nammu
, king of Ur
(ca. 2050 BC), the Code of Eshnunna (ca. 1930 BC) and the code 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
was an ancient unit of both weight and currency
. It was first used in Mesopotamia
around 3000 BC to define a specific weight of barley
and equivalent amounts of materials such as silver
, bronze
and copper
. The use of a single unit to define both mass and currency was a similar concept to the British pound
, which was originally defined as a one pound mass of silver.
Bartering has several problems, most notably that it requires a 'coincidence of wants
'. 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, Africa, and India used cowry shells. Trade in Japan's feudal system was based on the koku
– a unit of rice. 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.
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 BC when the Egyptians
used gold bars of a set weight as a medium of exchange, as had been done earlier in Mesopotamia with silver bars. 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 BC. Electrum coins were also introduced about 650 BC in Lydia
.
Coinage was widely adopted across Ionia
and mainland Greece during the 6th century BC, eventually leading to the Athenian Empire's 5th century BC, 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.
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. Coin
s 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 that the value of such money lay in its emblem and thus to subsequently reduce the value of 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
.
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.
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 girobanks 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.
Demand deposits are funds that are deposited in bank accounts and are available for withdrawal at the discretion of the depositor. The withdrawal of funds from the account does not require contacting or making any type of prior arrangements with the bank or credit union. As long as the account balance is sufficient to cover the amount of the withdrawal, and the withdrawal takes place in accordance with procedures set in place by the financial institution, the funds may be withdrawn on demand
s’ 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.
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.
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. At times in history (e.g. Rome
under Diocletian
, and post-revolutionary France
during the collapse of the assignat
s) 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 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 Kurd
ish 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 Iraq War.
Numismatics
Numismatics is the study or collection of currency, including coins, tokens, paper money, and related objects. While numismatists are often characterized as students or collectors of coins, the discipline also includes the broader study of money and other payment media used to resolve debts and the...
is the scientific study of money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
and its history in all its varied forms.
Many items have been used as commodity money
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....
such as natural scarce precious metal
Precious metal
A precious metal is a rare, naturally occurring metallic chemical element of high economic value.Chemically, the precious metals are less reactive than most elements, have high lustre, are softer or more ductile, and have higher melting points than other metals...
s, cowry
Cowry
Cowry, also sometimes spelled cowrie, plural cowries, is the common name for a group of small to large sea snails, marine gastropod molluscs in the family Cypraeidae, the cowries...
shells, barley
Barley
Barley is a major cereal grain, a member of the grass family. It serves as a major animal fodder, as a base malt for beer and certain distilled beverages, and as a component of various health foods...
, beads etc., as well as many other things that are thought of as having value
Value theory
Value theory encompasses a range of approaches to understanding how, why and to what degree people should value things; whether the thing is a person, idea, object, or anything else. This investigation began in ancient philosophy, where it is called axiology or ethics. Early philosophical...
.
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
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
or silver
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...
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
Barter
Barter is a method of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. It is usually bilateral, but may be multilateral, and usually exists parallel to monetary systems in most developed countries, though to a...
, 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
Coincidence of wants
The coincidence of wants problem is an important category of transaction costs that impose severe limitations on economies lacking money and thus dominated by barter or other in-kind transactions...
. 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
Gift economy
In the social sciences, a gift economy is a society where valuable goods and services are regularly given without any explicit agreement for immediate or future rewards . Ideally, simultaneous or recurring giving serves to circulate and redistribute valuables within the community...
, valuable goods and services
Goods and services
In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility. It is often used when referring to a Goods and Services Tax....
are regularly given without any explicit agreement for immediate or future rewards (i.e. there is no formal quid pro quo
Quid pro quo
Quid pro quo most often means a more-or-less equal exchange or substitution of goods or services. English speakers often use the term to mean "a favour for a favour" and the phrases with almost identical meaning include: "give and take", "tit for tat", "this for that", and "you scratch my back,...
). Ideally, simultaneous or recurring giving serves to circulate and redistribute valuables within the community.
There are various social theories
Social theory
Social theories are theoretical frameworks which are used to study and interpret social phenomena within a particular school of thought. An essential tool used by social scientists, theories relate to historical debates over the most valid and reliable methodologies , as well as the primacy of...
concerning gift economies. Some consider the gifts to be a form of reciprocal altruism
Reciprocal altruism
In evolutionary biology, reciprocal altruism is a behaviour whereby an organism acts in a manner that temporarily reduces its fitness while increasing another organism's fitness, with the expectation that the other organism will act in a similar manner at a later time...
. Another interpretation is that social status is awarded in return for the 'gifts'. Consider for example, the sharing
Sharing
Sharing the joint use of a resource or space. In its narrow sense, it refers to joint or alternating use of an inherently finite good, such as a common pasture or a shared residence. It is also the process of dividing and distributing. Apart from obvious instances, which we can observe in human...
of food in some hunter-gatherer
Hunter-gatherer
A hunter-gatherer or forage society is one in which most or all food is obtained from wild plants and animals, in contrast to agricultural societies which rely mainly on domesticated species. Hunting and gathering was the ancestral subsistence mode of Homo, and all modern humans were...
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
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
, or may bring with it social status or other benefits.
The emergence of money
In the absence of a medium of exchange, non-monetary societies operated largely along the principles of gift economics.The Mesopotamia
Mesopotamia
Mesopotamia is a toponym for the area of the Tigris–Euphrates river system, largely corresponding to modern-day Iraq, northeastern Syria, southeastern Turkey and southwestern Iran.Widely considered to be the cradle of civilization, Bronze Age Mesopotamia included Sumer and the...
n civilization developed a large scale economy
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
based on commodity money
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....
. The Babylonians and their neighboring city states later developed the earliest system of economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
as we think of it today, in terms of rules on debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
, legal contracts and law codes relating to business practices and private property. Money was not only an emergence, it was a necessity.
The Code of Hammurabi
Code of Hammurabi
The Code of Hammurabi is a well-preserved Babylonian law code, dating to ca. 1780 BC . It is one of the oldest deciphered writings of significant length in the world. The sixth Babylonian king, Hammurabi, enacted the code, and partial copies exist on a human-sized stone stele and various clay...
, the best preserved ancient law code, was created ca. 1760 BC (middle chronology) in ancient Babylon
Babylon
Babylon was an Akkadian city-state of ancient Mesopotamia, the remains of which are found in present-day Al Hillah, Babil Province, Iraq, about 85 kilometers south of Baghdad...
. It was enacted by the sixth Babylonian king, Hammurabi
Hammurabi
Hammurabi Hammurabi Hammurabi (Akkadian from Amorite ʻAmmurāpi, "the kinsman is a healer", from ʻAmmu, "paternal kinsman", and Rāpi, "healer"; (died c...
. Earlier collections of laws include the code of Ur-Nammu
Code of Ur-Nammu
The Code of Ur-Nammu is the oldest known tablet containing a law code surviving today. It was written in the Sumerian language circa 2100 BC-2050 BC...
, king of Ur
Ur
Ur was an important city-state in ancient Sumer located at the site of modern Tell el-Muqayyar in Iraq's Dhi Qar Governorate...
(ca. 2050 BC), the Code of Eshnunna (ca. 1930 BC) and the code of Lipit-Ishtar
Lipit-Ishtar
Lipit-Ishtar , was the fifth ruler of the first dynasty of Isin, and ruled from around 1934 BCE to 1924 BCE. Some documents and royal inscriptions from his time have survived, but he is mostly known because Sumerian language hymns written in his honor, as well as a legal code written in his name ,...
of Isin
Isin
Isin was an ancient city-state of lower Mesopotamia about 20 miles south of Nippur at the site of modern Ishan al-Bahriyat in Iraq's Al-Qādisiyyah Governorate.-History:...
(ca. 1870 BC). These law codes formalized the role of money in civil society
Civil society
Civil society is composed of the totality of many voluntary social relationships, civic and social organizations, and institutions that form the basis of a functioning society, as distinct from the force-backed structures of a state , the commercial institutions of the market, and private criminal...
. They set amounts of interest on debt... fines for 'wrong doing'... and compensation in money for various infractions of formalized law.
The shekel
Shekel
Shekel , is any of several ancient units of weight or of currency. The first usage is from Mesopotamia around 3000 BC. Initially, it may have referred to a weight of barley...
was an ancient unit of both weight and currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
. It was first used in Mesopotamia
Mesopotamia
Mesopotamia is a toponym for the area of the Tigris–Euphrates river system, largely corresponding to modern-day Iraq, northeastern Syria, southeastern Turkey and southwestern Iran.Widely considered to be the cradle of civilization, Bronze Age Mesopotamia included Sumer and the...
around 3000 BC to define a specific weight of barley
Barley
Barley is a major cereal grain, a member of the grass family. It serves as a major animal fodder, as a base malt for beer and certain distilled beverages, and as a component of various health foods...
and equivalent amounts of materials such as silver
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...
, bronze
Bronze
Bronze is a metal alloy consisting primarily of copper, usually with tin as the main additive. It is hard and brittle, and it was particularly significant in antiquity, so much so that the Bronze Age was named after the metal...
and copper
Copper
Copper is a chemical element with the symbol Cu and atomic number 29. It is a ductile metal with very high thermal and electrical conductivity. Pure copper is soft and malleable; an exposed surface has a reddish-orange tarnish...
. The use of a single unit to define both mass and currency was a similar concept to the British pound
Pound (currency)
The pound is a unit of currency in some nations. The term originated in England as the value of a pound of silver.The word pound is the English translation of the Latin word libra, which was the unit of account of the Roman Empire...
, which was originally defined as a one pound mass of silver.
Commodity money
Bartering has several problems, most notably that it requires a 'coincidence of wants
Coincidence of wants
The coincidence of wants problem is an important category of transaction costs that impose severe limitations on economies lacking money and thus dominated by barter or other in-kind transactions...
'. For example, if a wheat
Wheat
Wheat is a cereal grain, originally from the Levant region of the Near East, but now cultivated worldwide. In 2007 world production of wheat was 607 million tons, making it the third most-produced cereal after maize and rice...
farmer needs what a fruit
Fruit
In broad terms, a fruit is a structure of a plant that contains its seeds.The term has different meanings dependent on context. In non-technical usage, such as food preparation, fruit normally means the fleshy seed-associated structures of certain plants that are sweet and edible in the raw state,...
farmer produces
Supply (economics)
In economics, supply is the amount of some product producers are willing and able to sell at a given price all other factors being held constant. Usually, supply is plotted as a supply curve showing the relationship of price to the amount of product businesses are willing to sell.In economics the...
, a direct swap
Barter
Barter is a method of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. It is usually bilateral, but may be multilateral, and usually exists parallel to monetary systems in most developed countries, though to a...
is impossible as seasonal fruit would spoil before the grain harvest. A solution is to trade
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
fruit for wheat indirectly through a third, "intermediate", commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
: the fruit is exchanged for the intermediate commodity when the fruit ripens
Ripening
Ripening is a process in fruits that causes them to become more palatable. In general, a fruit becomes sweeter, less green, and softer as it ripens. Even though the acidity of fruit increases as it ripens, the higher acidity level does not make the fruit seem tarter, which can lead to the...
. If this intermediate commodity doesn't perish and is reliably in demand
Demand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
throughout the year (e.g. copper
Copper
Copper is a chemical element with the symbol Cu and atomic number 29. It is a ductile metal with very high thermal and electrical conductivity. Pure copper is soft and malleable; an exposed surface has a reddish-orange tarnish...
, gold, or wine
Wine
Wine is an alcoholic beverage, made of fermented fruit juice, usually from grapes. The natural chemical balance of grapes lets them ferment without the addition of sugars, acids, enzymes, or other nutrients. Grape wine is produced by fermenting crushed grapes using various types of yeast. Yeast...
) then it can be exchanged for wheat after the harvest
Harvest
Harvest is the process of gathering mature crops from the fields. Reaping is the cutting of grain or pulse for harvest, typically using a scythe, sickle, or reaper...
. The function of the intermediate commodity as a store-of-value can be standardized into a widespread commodity money
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....
, reducing the coincidence of wants problem. By overcoming the limitations of simple barter, a commodity money makes the market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
in all other commodities more liquid.
Many cultures around the world eventually developed the use of commodity money. Ancient China, Africa, and India used cowry shells. Trade in Japan's feudal system was based on the koku
Koku
The is a Japanese unit of volume, equal to ten cubic shaku. In this definition, 3.5937 koku equal one cubic metre, i.e. 1 koku is approximately 278.3 litres. The koku was originally defined as a quantity of rice, historically defined as enough rice to feed one person for one year...
– a unit of rice. The shekel
Shekel
Shekel , is any of several ancient units of weight or of currency. The first usage is from Mesopotamia around 3000 BC. Initially, it may have referred to a weight of barley...
was an ancient unit of weight and currency. The first usage of the term came from Mesopotamia
Mesopotamia
Mesopotamia is a toponym for the area of the Tigris–Euphrates river system, largely corresponding to modern-day Iraq, northeastern Syria, southeastern Turkey and southwestern Iran.Widely considered to be the cradle of civilization, Bronze Age Mesopotamia included Sumer and the...
circa 3000 BC and referred to a specific weight of barley
Barley
Barley is a major cereal grain, a member of the grass family. It serves as a major animal fodder, as a base malt for beer and certain distilled beverages, and as a component of various health foods...
, which related other values in a metric such as silver, bronze, copper etc. A barley/shekel was originally both a unit of currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
and a unit of weight.
Where ever trade is common, barter systems
Barter
Barter is a method of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. It is usually bilateral, but may be multilateral, and usually exists parallel to monetary systems in most developed countries, though to a...
usually lead quite rapidly to several key goods being imbued with monetary properties. In the early British colony of New South Wales
New South Wales
New South Wales is a state of :Australia, located in the east of the country. It is bordered by Queensland, Victoria and South Australia to the north, south and west respectively. To the east, the state is bordered by the Tasman Sea, which forms part of the Pacific Ocean. New South Wales...
, rum
Rum
Rum is a distilled alcoholic beverage made from sugarcane by-products such as molasses, or directly from sugarcane juice, by a process of fermentation and distillation. The distillate, a clear liquid, is then usually aged in oak barrels...
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
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
has taken on this unofficial monetary function.
Standardized coinage
Ancient Egypt
Ancient Egypt was an ancient civilization of Northeastern Africa, concentrated along the lower reaches of the Nile River in what is now the modern country of Egypt. Egyptian civilization coalesced around 3150 BC with the political unification of Upper and Lower Egypt under the first pharaoh...
used gold bars of a set weight as a medium of exchange, as had been done earlier in Mesopotamia with silver bars. The first known ruler who officially set standards of weight and money was Pheidon
Pheidon
Pheidon was a king of Argos, Greece in the 7th century BC. At that time, the monarch was purely a traditional figurehead with almost no genuine power. Pheidon seized the throne from the reigning aristocracy...
. 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
Electrum
Electrum is a naturally occurring alloy of gold and silver, with trace amounts of copper and other metals. It has also been produced artificially. The ancient Greeks called it 'gold' or 'white gold', as opposed to 'refined gold'. Its color ranges from pale to bright yellow, depending on the...
stater
Stater
The stater was an ancient coin used in various regions of Greece.-History:The stater is mostly of Macedonian origin. Celtic tribes brought it in to Europe after using it as mercenaries in north Greece. It circulated from the 8th century BC to 50 AD...
of a turtle
Turtle
Turtles are reptiles of the order Testudines , characterised by a special bony or cartilaginous shell developed from their ribs that acts as a shield...
coin, coined at Aegina
Aegina
Aegina is one of the Saronic Islands of Greece in the Saronic Gulf, from Athens. Tradition derives the name from Aegina, the mother of Aeacus, who was born in and ruled the island. During ancient times, Aegina was a rival to Athens, the great sea power of the era.-Municipality:The municipality...
island. This remarkable coin dates about 700 BC. Electrum coins were also introduced about 650 BC in Lydia
Lydia
Lydia was an Iron Age kingdom of western Asia Minor located generally east of ancient Ionia in the modern Turkish provinces of Manisa and inland İzmir. Its population spoke an Anatolian language known as Lydian....
.
Coinage was widely adopted across Ionia
Ionia
Ionia is an ancient region of central coastal Anatolia in present-day Turkey, the region nearest İzmir, which was historically Smyrna. It consisted of the northernmost territories of the Ionian League of Greek settlements...
and mainland Greece during the 6th century BC, eventually leading to the Athenian Empire's 5th century BC, dominance of the region through their export of silver coinage, mined in southern Attica
Attica
Attica is a historical region of Greece, containing Athens, the current capital of Greece. The historical region is centered on the Attic peninsula, which projects into the Aegean Sea...
at Laurium
Laurium
Laurium or Lavrio is a town in southeastern part of Attica, Greece. It is the seat of the municipality of Lavreotiki...
and Thorikos. A major silver vein discovery at Laurium
Laurium
Laurium or Lavrio is a town in southeastern part of Attica, Greece. It is the seat of the municipality of Lavreotiki...
in 483 BC led to the huge expansion of the Athenian military fleet. Competing coinage standards at the time were maintained by Mytilene
Mytilene
Mytilene is a town and a former municipality on the island of Lesbos, North Aegean, Greece. Since the 2011 local government reform it is part of the municipality Lesbos, of which it is a municipal unit. It is the capital of the island of Lesbos. Mytilene, whose name is pre-Greek, is built on the...
and Phokaia using coins of Electrum
Electrum
Electrum is a naturally occurring alloy of gold and silver, with trace amounts of copper and other metals. It has also been produced artificially. The ancient Greeks called it 'gold' or 'white gold', as opposed to 'refined gold'. Its color ranges from pale to bright yellow, depending on the...
; Aegina
Aegina
Aegina is one of the Saronic Islands of Greece in the Saronic Gulf, from Athens. Tradition derives the name from Aegina, the mother of Aeacus, who was born in and ruled the island. During ancient times, Aegina was a rival to Athens, the great sea power of the era.-Municipality:The municipality...
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
Asia Minor
Asia Minor is a geographical location at the westernmost protrusion of Asia, also called Anatolia, and corresponds to the western two thirds of the Asian part of Turkey...
, where it first gained wide usage, to the entire world.
Alloy
An alloy is a mixture or metallic solid solution composed of two or more elements. Complete solid solution alloys give single solid phase microstructure, while partial solutions give two or more phases that may or may not be homogeneous in distribution, depending on thermal history...
, 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. Coin
Coin
A coin is a piece of hard material that is standardized in weight, is produced in large quantities in order to facilitate trade, and primarily can be used as a legal tender token for commerce in the designated country, region, or territory....
s 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
Mint (coin)
A mint is an industrial facility which manufactures coins for currency.The history of mints correlates closely with the history of coins. One difference is that the history of the mint is usually closely tied to the political situation of an era...
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 that the value of such money lay in its emblem and thus to subsequently reduce the value of 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
Sparta
Sparta or Lacedaemon, was a prominent city-state in ancient Greece, situated on the banks of the River Eurotas in Laconia, in south-eastern Peloponnese. It emerged as a political entity around the 10th century BC, when the invading Dorians subjugated the local, non-Dorian population. From c...
minted coins from iron
Iron
Iron is a chemical element with the symbol Fe and atomic number 26. It is a metal in the first transition series. It is the most common element forming the planet Earth as a whole, forming much of Earth's outer and inner core. It is the fourth most common element in the Earth's crust...
to discourage its citizens from engaging in foreign trade. In the early seventeenth century Sweden lacked more precious metal and so produced "plate money
Swedish riksdaler
The riksdaler was the name of a Swedish coin first minted in 1604. Between 1777 and 1873, it was the currency of Sweden. The daler, like the dollar, was named after the German Thaler. The similarly named Reichsthaler, rijksdaalder, and rigsdaler were used in Germany and Austria-Hungary, the...
", 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
Isaac Newton
Sir Isaac Newton PRS was an English physicist, mathematician, astronomer, natural philosopher, alchemist, and theologian, who has been "considered by many to be the greatest and most influential scientist who ever lived."...
, 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
Seigniorage
Seigniorage can have the following two meanings:* Seigniorage derived from specie—metal coins, is a tax, added to the total price of a coin , that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area.* Seigniorage derived from notes is more...
.
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
Tally stick
A tally was an ancient memory aid device to record and document numbers, quantities, or even messages. Tally sticks first appear as notches carved on animal bones, in the Upper Paleolithic. A notable example is the Ishango Bone...
. 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 girobanks 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.
Goldsmith bankers
Goldsmiths in England had been craftsmen, bullion merchants, money changers and money lenders since the 16th century. But they were not the first to act as financial intermediates; in the early 17th century, the scriveners were the first to keep deposits for the express purpose of relending them. Merchants and traders had amassed huge hoards of gold and entrusted their wealth to the Royal Mint for storage. In 1640 King Charles I seized the private gold stored in the mint as a forced loan (which was to be paid back over time). Thereafter merchants preferred to store their gold with the goldsmiths of London, who possessed private vaults, and charged a fee for that service. In exchange for each deposit of precious metal, the goldsmiths issued receipts certifying the quantity and purity of the metal they held as a bailee (i.e. in trust). These receipts could not be assigned (only the original depositor could collect the stored goods). Gradually the goldsmiths took over the function of the scriveners of relending on behalf of a depositor and also developed modern banking practices; promissory notes were issued for money deposited which by custom and/or law was a loan to the goldsmith, i.e. the depositor expressly allowed the goldsmith to use the money for any purpose including advances to his customers. The goldsmith charged no fee, or even paid interest on these deposits. Since the promissory notes were payable on demand, and the advances (loans) to the goldsmith's customers were repayable over a longer time period, this was an early from of fractional reserve banking. The promissory notes developed into an assignable instrument, which could circulate as a safe and convenient form of money backed by the goldsmith's promise to pay. Hence goldsmiths could advance loans in the form of gold money, or in the form of promissory notes, or in the form of checking accounts. 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 based on credit.Demand deposits
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. 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.Demand deposits are funds that are deposited in bank accounts and are available for withdrawal at the discretion of the depositor. The withdrawal of funds from the account does not require contacting or making any type of prior arrangements with the bank or credit union. As long as the account balance is sufficient to cover the amount of the withdrawal, and the withdrawal takes place in accordance with procedures set in place by the financial institution, the funds may be withdrawn on demand
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 ‘banknoteBanknote
A banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. In addition to coins, banknotes make up the cash or bearer forms of all modern fiat money...
s’ 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
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
.
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 standardGold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of 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.
Fiat money
Fiat moneyFiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...
refers to money that is not backed by reserves of another commodity. The money itself is given value by government fiat (Latin
Latin
Latin is an Italic language originally spoken in Latium and Ancient Rome. It, along with most European languages, is a descendant of the ancient Proto-Indo-European language. Although it is considered a dead language, a number of scholars and members of the Christian clergy speak it fluently, and...
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
Legal tender
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....
(offering) extinguishes the debt in the same way acceptance does. At times in history (e.g. Rome
Roman Empire
The Roman Empire was the post-Republican period of the ancient Roman civilization, characterised by an autocratic form of government and large territorial holdings in Europe and around the Mediterranean....
under Diocletian
Diocletian
Diocletian |latinized]] upon his accession to Diocletian . c. 22 December 244 – 3 December 311), was a Roman Emperor from 284 to 305....
, and post-revolutionary France
French Revolution
The French Revolution , sometimes distinguished as the 'Great French Revolution' , was a period of radical social and political upheaval in France and Europe. The absolute monarchy that had ruled France for centuries collapsed in three years...
during the collapse of the assignat
Assignat
Assignat was the type of a monetary instrument used during the time of the French Revolution, and the French Revolutionary Wars.- France :...
s) 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
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
, the money supply overtakes economic value. Therefore, the excess money eventually dilutes the market value of all money issued. This is called inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
. 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
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
(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
Gulf War
The Persian Gulf War , commonly referred to as simply the Gulf War, was a war waged by a U.N.-authorized coalition force from 34 nations led by the United States, against Iraq in response to Iraq's invasion and annexation of Kuwait.The war is also known under other names, such as the First Gulf...
the president of Iraq, Saddam Hussein
Saddam Hussein
Saddam Hussein Abd al-Majid al-Tikriti was the fifth President of Iraq, serving in this capacity from 16 July 1979 until 9 April 2003...
, 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 Kurd
Kürd
Kürd or Kyurd or Kyurt may refer to:*Kürd Eldarbəyli, Azerbaijan*Kürd Mahrızlı, Azerbaijan*Kürd, Goychay, Azerbaijan*Kürd, Jalilabad, Azerbaijan*Kürd, Qabala, Azerbaijan*Qurdbayram, Azerbaijan...
ish 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 Iraq War.
See also
- BanknoteBanknoteA banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. In addition to coins, banknotes make up the cash or bearer forms of all modern fiat money...
- Central bankCentral bankA central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
- History of coinsHistory of coinsThe history of coins extends from ancient times to the present, and is related to economic history, the history of minting technologies, the history shown by the images on coins, and the history of coin collecting. Coins are still widely used for monetary and other purposes.All western histories of...
- History of the rupeeHistory of the rupeeAncient India, presently modern states of Pakistan and north-western India, was one of the earliest issuers of coins in the world , along with the Chinese wen and Lydian staters....
- History of the United States dollarHistory of the United States dollarThe history of the United States dollar covers more than 200 years.-Early history:The history of the dollar in North America pre-dates US independence. It began with the issuance of Early American currency called the colonial script, whereby the issuance of currency was equal to the goods and...
- ManillasManillasManillas are penannular armlets, mostly in bronze or copper, very rarely gold, which served as a form of money or barter coinage and to a degree, ornamentation, amongst certain West African peoples...
- Trade beads
Further reading
- Jevons, W. S. (1875), Money and the Mechanism of Exchange, London: Macmillan.
- Menger, CarlCarl MengerCarl Menger was the founder of the Austrian School of economics, famous for contributing to the development of the theory of marginal utility, which contested the cost-of-production theories of value, developed by the classical economists such as Adam Smith and David Ricardo.- Biography :Menger...
, "On the Origin of Money" - Szabo, Nick, Shelling Out – The Origins of Money
External links
- The Marteau Early 18th-Century Currency Converter A Platform of Research in Economic History.
- Linguistic and Commodity Exchanges by Elmer G. Wiens. Examines the structural differences between barter and monetary commodity exchanges and oral and written linguistic exchanges.
- Historical Currency Conversion Page by Harold Marcuse. Focuses on converting German marks to US dollars since 1871 and inflating them to values today, but has much additional information on the history of currency exchange.