history of money

History of Money: The Story Behind Currencies

The advent of money was one of the greatest advances of human civilization. Like many inventions, it arose from a universal need. Bartering, which was the first form of trade, began to become tedious and complicated as time went on. 

How could one know how much wool a jug of wine was worth? In addition to estimating values, other factors such as the expansion of trade beyond borders left the barter in obsoletism.

The transition from barter to money

3.000 BC: Commodity Money

In this period, the concept of money consisted of any object that was considered valuable. Among the first forms of commodity money were shells, salt, spices, and hides, just to name a few. 

Shells were used as currency for thousands of years in large parts of Africa, the Indian Ocean, and Oceania. Cowrie shells were used as a means of payment in India, the Middle East, and China, continuing in circulation in historical times in much of Asia, Africa, and the Pacific Islands, in an area ranging from Nigeria to Siam and from Sudan to the New Hebrides. 

Cocoa was the currency in pre-Columbian America and in the early years of colonization. These cocoa beans used as a currency gave rise to frauds based on emptying, with great care, the inside of the seed to fill it with sand.

The scarcity of spices in Europe made them an element of exchange before the Middle Ages. Spices from the East were highly valued for their scarcity and varied applications, which made them a valuable instrument of exchange. The spice route led to great discoveries during the Renaissance.

600 BC: The Lydian Leon

The first known coins were minted in Lydia, today’s Turkey in the 7th century B.C., and were made of a natural electro alloy of gold and silver, since for all people, gold was the most valuable metal followed by silver, a pattern that was transferred to the manufacture of money. 

Croesus, the last king of Lydia, was the first ruler to mint pure gold and silver coins. The coins retained the one-sided seal, showing a lion and a goat. At the East of Lydia, Greek cities, as well as the Persian Empire, decided to use this new coinage technique. 

In the distance, in Rome, pieces of uncarved and unworked bronze are used as currency. Their value is measured in terms of cattle, the word “pecunia” in the Roman language is derived from the word “pecus” (cattle).

4th Century BC: Roman and Greek Financiers

By this period, Greece had developed sophisticated and varied banking activities, much more so than any preceding society. Temples, public bodies, and private entrepreneurs begin to undertake financial transactions: currency exchange, deposits, loans, and coin testing (purity and weight).

Some moneylenders start accepting payments in one city for the arrangement of the credit in a different city than that of the payment, so the purchaser wouldn’t have to transport large amounts of coins.

Rome decides to adopt the banking methods and practices of Greece. During the 2nd century A.D, debt can be discharged by paying the sum to a bank, so public notaries register those transactions. 

618 – 907 A.D: The first paper money

Paper money originated in China and would not have been possible without a series of previous inventions (paper, ink, and engraved printing) and intense commercial activity. Between 618 and 907 A.D, under the Tang dynasty, trade with the West via the Silk Road intensified thanks to improved road security and financial reform that would include a truly efficient instrument of exchange that would allow the movement of large amounts of money without having to carry large loads of metal. 

The use of paper money spread throughout the country during the year 812 AD due to the scarcity of copper, the metal in which coins were minted. Private individuals issued a kind of promissory note, understood as a deposit of coins. This was substituted by coins and could be used to pay with it since it was officially endorsed by the dynasty.

In China, the temptation to counterfeit this paper money quickly became irresistible even though this action was considered a serious crime punishable by death. 

Marco Polo was one of the first Europeans to report on an invention that would become fundamental to the economy, paper money. He devoted an entire chapter in his Book of Wonders to describing this ingenious invention. 

Although Marco Polo described this system in the 13th century and related it to commercial prosperity, it would be 300 years or so before anything similar could be found on the Old Continent.

1661-1821: Bank notes

The first paper money in Europe appeared on the continent in 1661. These were printed by the money changer Johan Palmstruch, manager of the Bank of Stockholm. 

The banknotes or Kreditivsedlar -as they were called to refer to credit paper- were issued by the bank at any time and could be exchanged for gold and silver coins. These primitive banknotes arose from the need of the Bank of Stockholm to be able to finance loans since these had a longer duration than deposits -which meant that depositors did not always have money to withdraw when they wanted-. With these banknotes, a solution to the problem was found.

These bills were very successful, but the bank began to lend without the necessary collateral, which led to the bank’s bankruptcy in 1668.

It would be followed by the Bank of England in 1694, which was also born with the objective of offering lines of credit to the Government to finance the war against France. In addition, although it was created as a private entity, the Bank of England received government authorization to issue banknotes backed by the gold it held in reserves (a privilege that no other bank held). 

During the 18th century, the issuance of banknotes with metallic backing became widespread in all European countries: in France, John Law introduced the banknote backed by the gold of the State; in Italy, the Royal Treasury of Turin was the first to issue banknotes in 1746, with the aim of facilitating public trade.

In Spain, it was not until the reign of Charles III that the first banknotes appeared in 1780. Over time, the use of paper money became widespread throughout the world: the expansion of empires and capitalism were key elements; globalization accelerated it.

However, there are differences between the original Chinese model and that of the old continent from the 18th century onwards. If paper money in China was fiduciary, that is, it was not based on the value of precious metals but on the general belief that this money had value, this was not the case in Europe. The expansion of paper money coincided with the birth of monetary standards in their modern facet, being backed by some precious metal: gold, silver, or bimetallic standards.

Origin of the U.S dollar

In 1751, Benjamin Franklin traveled to London to ask members of the English Parliament to allow his American colonies to print currency, so that they could stop relying on shipments of sterling that arrived late, badly, or never. Franklin’s request was diplomatically heard, before being crudely denied. 

The need for a new currency was perceived by Alexander Hamilton, Secretary of the Treasury in George Washington’s government, who proposed and achieved that the United States -with a legal decree signed on April 4, 1792- adopted as its own currency the “Thaler”, a Spanish coin minted in what today is Mexico, after the discovery of silver mines in the place, which soon began to be called “dollar” under the phonetics of the English language. This was due to the proximity of territories and the ease of obtaining these coins.

This dollar was practically the official currency of the new country until 1857 when its use was prohibited. Of course, the name of the new official currency of the United States would be none other than the U.S. dollar.

The silver dollar survived until the beginning of the 20th century. On March 1, 1900, President William MacKinley -who had declared war on Spain- officially decreed that as of that day the value of the dollar ceased to be quoted in silver and began to be quoted in gold. 

This precedent was used so that, shortly before the end of World War II, the victorious countries that had met at Bretton Woods decided that future transactions between the countries of the Western world should be carried out in dollars. In other words, the commitment to make the gold standard work in all its splendor was accepted internationally.

Origin of the Euro

The currency was officially introduced on January 1, 1999, when the currencies of the eleven countries of the Union that joined the single currency plan, the so-called eurozone, ceased to exist as independent systems: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom. Greece joined on January 1, 2001. However, due to the manufacturing period required for the new banknotes and coins, the old national currencies, despite having lost their official quotation in the foreign exchange market, remained as a means of payment until January 1, 2002, when they were replaced by euro banknotes and coins. Both coins and banknotes had a period of coexistence with the former national currencies until they were withdrawn from circulation. This period of coexistence had different timetables in the countries that adopted the euro.

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