History of money
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The history of money is a story spanning thousands of years. Related to this, Numismatics is the scientific study of money and its history in all its varied forms.
Money itself must be a scarce good. Many items have been used as money, from naturally scarce precious metals and conch shells through cigarettes to entirely artificial money such as banknotes. Modern money (and most ancient money too) is essentially a token — in other words, an abstraction. Paper currency is perhaps the most common type of physical money today. However, goods such as gold or silver retain many of money's essential properties.
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[edit] The emergence of money
The use of proto-money may date back to at least 100,000 years ago. Trading in red ochre is attested in Swaziland, from about that date, and ochre seems to have functioned as a proto-money in Aboriginal Australia[citation needed]. Shell jewellery in the form of strung beads also dates back to this period[1] and had the basic attributes needed of early money[citation needed]. In cultures where metal working was unknown, shell or ivory jewellery were the most divisible, easily storeable and transportable, scarce, and hard to counterfeit objects that could be made. It is highly unlikely that there were formal markets in 100,000 B.P. (any more than there are in recently observed hunter-gatherer cultures). Nevertheless, proto-money would have been useful in reducing the costs of less frequent transactions that were crucial to hunter-gatherer cultures, especially bride purchase, splitting property upon death, tribute, and inter-tribal trade in hunting ground rights (“starvation insurance”) and implements.
In the absence of a medium of exchange, all of these transactions suffer from the basic problem of barter — they require an improbable coincidence of wants or events. Overcoming this without money requires some system of in-kind "credit" or "gift exchange", restricting trade to those who know one another.
[edit] Commodity Money
Bartering has several problems, most notably the coincidence of wants problem, but even if a farmer growing fruit and a wheat-field farmer need what the other produces a direct barter swap is impossible for seasonal fruit that would spoil before the grain harvest. A solution is to indirectly trade fruit for wheat through a third, "intermediate", commodity: the fruit is exchanged for this when it 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.
Where 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 fiat currency it commonly adopts a foreign fiat currency. In some 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. The emergence of monetary goods is not dependent on central authority or government, it is a quite natural market phenomenon.
[edit] Standardized coinage
From early times, metals, where available, have usually been favored for use as 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 money has been traced back to the fourth millennium B.C. when the Egyptians used gold bars of a set weight as a medium of exchange, as the Sumerians had done somewhat earlier with silver bars. The first gold coins were introduced about 650 B.C. in Lydia (now western Turkey).[2] Coinage was then widely adopted across Ionia and mainland Greece during the 6th century B.C., eventually leading to the Athenian Empire's 5th century 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 denominated in Electrum, Aegina in 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. Coins were pre-weighed and pre-alloyed, so as long as the manufacturer was aware of the origin of the coin, no use of the touchstone was required. Coins were typically minted by governments in a carefully protected process, and then stamped with an emblem that guaranteed the weight and value of the metal. It was, however, extremely common for governments to assert the value of such money lay in its emblem and thus to subsequently debase the currency by lowering the content of valuable metal.
Although gold and silver were commonly used to mint coins, other metals could be used. For instance, Ancient Sparta minted coins from iron to discourage its citizens from engaging in foreign trade. In the early seventeenth century Sweden lacked more precious metal and so produced "plate money," which were large slabs of copper approximately 50 cm or more in length and width, appropriately stamped with indications of their value.
Metal based coins had the advantage of carrying their value within the coins themselves — on the other hand, they induced manipulations: the clipping of coins in the attempt to get and recycle the precious metal. A greater problem was the simultaneous co-existence of gold, silver and copper coins in Europe. English and Spanish traders valued gold coins more than silver coins, as many of their neighbors did, with the effect that the English gold-based guinea coin began to rise against the English silver based crown in the 1670s and 1680s. Consequently, silver was ultimately pulled out of England for dubious amounts of gold coming into the country at a rate no other European nation would share. The effect was worsened with Asian traders not sharing the European appreciation of gold altogether — gold left Asia and silver left Europe in quantities European observers like Isaac Newton, Master of the Royal Mint observed with unease.[3]
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.[4]
See also: Roman currency, coinage metal, for conversions of the European coins before the introduction of paper money: The Marteau Early 18th-Century Currency Converter.
[edit] Representative money
The system of commodity money in many instances evolved into a system of representative money. This occurred because banks would issue a paper receipt to their depositors, indicating that the receipt was redeemable for whatever precious goods were being stored (usually gold or silver money). It didn't take long before the receipts were traded as money, because everyone knew they were "as good as gold". Representative paper money made possible the practice of fractional reserve banking, in which bankers would print receipts above and beyond the amount of actual precious metal on deposit.
So in this system, paper currency and non-precious coinage had very little intrinsic value, but achieved significant market value by being backed by a promise to redeem it for a given weight of precious metal, such as silver. This is the origin of the term "British Pound" for instance; it was a unit of money backed by a Tower pound of sterling silver, hence the currency Pound Sterling. For much of the nineteenth and twentieth centuries, many currencies were based on representative money through use of the gold standard.
[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", whereby debtors are legally relieved of the debt if they (offer to) pay it off in the government's money. By law the refusal of "legal tender" money in favor of some other form of payment is illegal, and has at times in history (Rome under Diocletian, and post-revolutionary France during the collapse of the assignats) invoked 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 US finally switched to fiat money indefinitely. At this point in time many of the economically developed countries' currencies were fixed to the US dollar (see Bretton Woods Conference), and so this single step meant that much of the western world's currencies became fiat money based.
Following the first Gulf War the president of Iraq, Saddam Hussein, repealed the existing Iraqi fiat currency and replaced it with a new currency. Despite having no backing by a commodity and with no central authority mandating its use or defending its value the old currency continued to circulate within the politically isolated Kurdish regions of Iraq. It became known as the "Swiss dinar". This currency remained relatively strong and stable for over a decade. It was formally replaced following the second Gulf War.
[edit] Credit money
Credit money often exists in conjunction with other money such as fiat money or commodity money, and from the user's point of view is indistinguishable from it. Most of the western world's money is credit money derived from national fiat money currencies.
In a modern economy, a bank will lend to borrowers in excess of the reserve it carries at any time, this is known as fractional reserve banking. In doing so, it increases the total money supply above that of the total amount of the fiat money in existence (also known as M0). While a bank will not have access to sufficient cash (fiat money) to meet all the obligations it has to depositors if they wish to withdraw the balance of their cheque accounts (credit money), the majority of transactions will occur using the credit money (cheques and electronic transfers).
Strictly speaking a debt is not money, primarily because debt can not act as a unit of account. All debts are denominated in units of something external to the debt. However, credit money certainly acts as a substitute for money when it is used in other functions of money (medium of exchange and store of value).
[edit] Etymology
The English word "money" dates to c.1290, "coinage, metal currency," from old French moneie, from Latin monēta "mint, coinage," from Monēta = "she who warns", a title of the Roman goddess Juno, as money was coined in or near the Capitoline Temple of Juno in Rome. [1] [2] [3]
[edit] Notes
- ^ Shells are believed to be 100,000-year-old jewelry - 6/23/2006 8:12:00 AM - JCK-Jewelers Circular Keystone
- ^ http://pubs.usgs.gov/of/2002/of02-303/OFR_02-303.pdf Butterman, W. C. and Amey, Earle B. III, Mineral Commodity Profiles–Gold, Open-File Report 02-303, U.S. Department of the Interior: U.S. Geological Survey
- ^ Sir Isaac Newton's state of the gold and silver coin (25 September 1717).. Pierre Marteau.
- ^ Mineral Profiles. U.S. Geological Survey.
[edit] References
- Davies, Glyn, History of Money from Ancient Times to the Present Day
- Jevons, W. S. (1875), Money and the Mechanism of Exchange, London: Macmillan.
- Menger, Carl, "On the Origin of Money"
- Szabo, Nick, Shelling Out -- The Origins of Money
- United States Mint
- Royal Mint
- American Numismatic Association
- World Bank
[edit] See also
[edit] 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.
