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FX101: The History of Money

In Business and Currency by Continental StaffLeave a Comment

While it has been said that “money is the root of all evil”, one thing is certain – for good or ill, it’s hard to imagine life without it. Some people have a lot, some people have a little but no one seems to have enough. We sweat and toil to make it and then spend it twice as quick. But what is money? Why do we ascribe value to paper and metal?

The History of Money

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Bartering

Money, in one form or another, has been around for at least 4000 years. Prior to the advent of money, bartering formed the backbone of the economy. Bartering, however, is not a very reliable or efficient method of exchange. If I want a goat but only have some grain to offer then I have to find someone with a goat who wants grain. But what if the goat seller doesn’t want grain? Instead he wants a new knife. I now have to trade my grain for a knife, for a goat. There is no set exchange rate of grain to knives or knives to goats, so bartering relies entirely on the subjective valuation of the parties involved.

Set Mediums

Eventually, from this rudimentary system of bartering our ancestors developed new systems which used items with great utility like animal skins, salt, grain and materials like obsidian (used for making sharp blades) as set mediums of exchange. Cattle were also used from 9000 to 6000 BCE in parts of the world.

All of these items remained negotiable in their value but less so than in preceding systems. Moreover, unlike today’s money, these mediums of exchange had intrinsic value. An animal skin could be used for clothing, grain could be eaten – whereas chewing on a bowl full of loonies or making a dress out of $5 notes are not exactly viable options. In Mesopotamia in 3000 BCE the shekel served as a unit of both weight and currency based on barley while ancient Japan used a set amount of rice called a koku.

Coins

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Just over 3000 years ago people in China took the next step towards modern currency. Rather than using axes, animal pelts or other goods as mediums of exchange, they used miniature replicas of these goods. Around 700 and 500 BCE coins were minted in separate civilisations stretching from Greece to India to China. India and China used coins punched with holes to demark value. This style allowed for coins to be threaded through string for easy storage and transportation. The first stamped coins were used in 700 BCE on the Greek island of Aegina.

In nearby Lidya (roughly western Turkey today), King Alyattes created the worlds first official currency in 600 BCE. Made from electrum, a naturally occurring mix of silver and gold, the coins were stamped with images of animals. Adopting a national currency allowed the Lydians to build a trading empire which grew into one of the richest in the world. Despite its wealth, or perhaps because of it, the formidable Persian empire conquered Lydia.

Paper

In 600 BCE China was once again on the forefront of the evolution of currency. Metal coins were costly to produce, heavy and – in large quantities – very difficult to exchange. To avoid these issues the ancient Chinese put one of their most notable inventions – paper – to work and created the first paper currency. When Marco Polo visited China in 1200 CE, paper notes had already been used for 1800 years.

Europeans would continue to use metal coins until 1600. By this time many European countries had empires spanning across the globe. This led to newfound wealth and created problems for coin production in that the emerging distant colonies were cut off from their homeland and the mint. Banks began to issue paper IOUs which could be exchanged for coins and transported much easier.

Surprisingly the first paper currency ever officially distributed by a European government occurred not in Europe, but in the isolated French North American colony after colonial expansion proved too much for the import of coins. In Canada during the year 1685, soldiers were paid by the governor with playing cards bearing his signature.

As the wealth and geographic scope of empires increased, Europeans became increasingly reliant on paper currency. The ease of its transport and exchange  increased economic and imperial expansion.

Gold Standard

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Paper notes became the norm and eventually coins made of precious metals were discontinued. Despite the end of precious metal coins, paper notes could still be traded for gold or silver. Eventually, the gold standard was adopted by the United States, tying the value of the USD to gold (previously some had used gold and others silver). After the Second World War the USD became the international standard. Currencies in Europe and around the world based their value on the USD, which remained tied to the value of gold.

The rapid economic expansion of the 20th century soon meant that the value of the world’s currencies exceeded the amount of gold that was available. In 1971, this led to the US – by then the world’s economic powerhouse and currency benchmark – to abandon the gold standard. Leaving the gold standard behind meant that a person could no longer redeem their currency for gold – a practice that had long since ended but which, up to that point, was still technically possible.

Modern Currency

Since the end of the gold standard, money’s value has been dictated by its purchasing power – how much of something a currency can buy – which is itself dependent on inflation and economic performance. The value of one loonie is tied to the strength of the Canadian economy, and the fact that in the current economy, one loonie can buy you one pack of gum, or half of a large double-double.

To recap: currency evolved from barter, to bartering with set mediums of exchange, to coins representing exchangeable goods, to coins stamped in precious metal, to paper representing coins, to notes representing gold or silver, to being redeemable exclusively for gold, to the end of the gold standard.

What does the future of currency hold?

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Already the next stage in the evolution of currency is well under way. Paper notes in Canada, Australia and other countries have been replaced with durable polymer notes. However, physical currency itself may be on the way out. It is now more common to pay for everything from your grocery bill to your phone bill not with physical notes but with electronic currency in the form of debit and credit cards or money transferred through your bank or PayPal. This trend seems set to continue and it is not unreasonable to assume that eventually physical money will be replaced entirely with electronic currency.

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