The Money History spans thousands of years. Numismatics is the scientific study of money and its history in all its varied forms.
Many items have been used as commodity money such as naturally scarce precious metals, conch 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. The term Price system is sometimes used to refer to methods using commodity valuation or money accounting systems.
Contents
1. The emergence of money
1.1. Commodity Money
2. Standardized coinage
3. Representative money
4. Fiat money
5. Credit money
6. Etymology
1. The emergence of money
The Sumer civilization developed a large scale economy based on commodity money. The Babylonians and their neighboring city states later developed the earliest system of economics as we think of it today, in terms of rules on debt , legal contracts and law codes relating to business practices and private property.[1][2
The Code of Hammurabi (Codex Hammurabi), the best preserved ancient law code, was created ca. 1760 BC (middle chronology) in ancient Babylon. It was enacted by the sixth Babylonian king, Hammurabi. Earlier collections of laws include the codex of Ur-Nammu , king of Ur (ca. 2050 BC), the Codex of Eshnunna (ca. 1930 BC) and the codex of Lipit-Ishtar of Isin (ca. 1870 BC).[3] These law codes formalized the role of money in civil society. They set amounts of interest on debt... fines for 'wrong doing'... and compensation in money for various infractions of formalized law.
The Shekel referred to an ancient unit of weight and currency. The first usage of the term came from Mesopotamia circa 3000 BC. and referred to a specific mass of barley which related other values in a metric such as silver, bronze, copper etc. A barley/shekel was originally both a unit of currency and a unit of weight... just as the British Pound was originally a unit denominating a one pound mass of silver.
The use of proto-money, may date back to at least 100,000 years ago. Trading in red ochre is attested in Swaziland. Shell jewellery in the form of strung beads also dates back to this period,[4] and had the basic attributes needed of early money, such as being scarce in inland areas, and not easily counterfeited. Also they were 'worked' to be made into something using a technique... or workmanship, into an attractive object, that may have been considered then, valuable.
In cultures where metal working was unknown, shell or ivory jewelry 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 BCE (any more than there are in recently observed hunter-gatherer cultures). Nevertheless, proto-money would have been useful in reducing the costs of less frequent transactions that were crucial to hunter-gatherer cultures, especially bride purchase, splitting property upon death, tribute, and inter-tribal trade in hunting ground rights (“starvation insurance”) and implements.
In the absence of a medium of exchange, 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.
1.1 Commodity Money
Main article: 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.
2. Standardized coinage
A 640 BC one-third stater coin from Lydia, shown larger.
From early times, metals, where available, have usually been favored for use as proto-money over such commodities as cattle, cowry shells, or salt, because they are at once durable, portable, and easily divisible. The use of gold as proto-money has been traced back to the fourth millennium B.C. when the Egyptians used gold bars of a set weight as a medium of exchange, as the Sumerians had done somewhat earlier with silver bars. The first stamped money (having the mark of some authority in the form of a picture or words) was introduced about 650 B.C. in Lydia .[5]
Coinage was widely adopted across Ionia \ and mainland Greece during the 6th century B.C. , eventually leading to the Athenian Empire's 5th century B.C., dominance of the region through their export of silver coinage , mined in southern Attica at Laurium and Thorikos. A major silver vein discovery at Laurium in 483 BC led to the huge expansion of the Athenian military fleet. Competing coinage standards at the time were maintained by Mytilene and Phokaia using coins 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.
A Persian 309-379 AD silver drachm from the Sasanian Dynasty.
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.[6]
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.[7]
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.
3. Representative money
An example of representative money, this 1896 note could be exchanged for five US Dollars worth of silver.
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.
In the 600s there were local issues of paper currency in China and by 960 the Song Dynasty, short of copper for striking coins, issued the first generally circulating notes. A note is a promise to redeem later for some other object of value, usually specie. The issue of credit notes is often for a limited duration, and at some discount to the promised amount later.