Throughout history, money was seen as a store of wealth and value; it represented power and influence and led to an ever-present cycle of global wars as countries battled to control the supply and ownership of it.
Over the centuries, money has taken many forms which has allowed buyers and sellers to exchange goods and services, using objects as surreal as whales’ teeth and as common-place as a polymer £5 banknote.
What we learn from exploring the history of money and what became more apparent over time was that society needed an effective monetary system; one where governments, banks and other financial institutions worked together to provide a framework for money to be properly managed and controlled.
The objective was to create a practical monetary system, one that could play a meaningful and legitimate role within a functioning, civilised world.
Bartering
Long before the concept of money as we know it today existed, we had a system of bartering where goods and services were swapped between individuals. Cattle were used to buy grain, barley could be swapped for sheep, individuals would supply their labour to the local farmer in return for food and accommodation.
While livestock and vegetables were very useful as a means of facilitating trade, there were limitations in how bartering worked in practice. For example, how many sacks of barley would be needed to buy one cow; would the grain merchant accept half a sheep in settlement of a debt.
And then, there were the seasonal implications of harvesting crops: what would happen to the labour force during the fallow winter period.
Clearly, a better system was needed; something that would give buyers and sellers greater control over how they settled their debts with each other.
Coins
For money to work as a medium of exchange between buyers and sellers it needs many characteristics:
- it must be portable (be capable of being carried in your pocket);
- it must be durable (it cannot simply disintegrate over time and be rendered worthless);
- it must also be easily divisible (so that different denominations can be issued to purchase goods and services of differing values);
- and finally, it must be scarce (the supply of money must be carefully controlled to give it some meaningful value).
The solution which addressed all these requirements was surprisingly simple – it was a coin; a piece of round precious metal comprising a mix of gold and silver that was first minted in the Ancient Kingdom of Lydia (present-day Turkey) around 550 BC.
The first coin was known as the Lydian. It appeared to meet all the ‘money tests’ (above) so its popularity spread and eventually led to the advent of greater global trading between nations.
From those early days, coins have had many iterations across different eras and through scores of individual countries; from the introduction in 1252 AD of the florin – a gold coin minted in Florence and accepted throughout Europe – to the roll-out of the shilling in Britain in 1503 AD.
All these coins had one key element in common, they were all primarily made from precious metals. So, those countries with an abundance of natural resources not only became wealthy by default, they also became a target for aggressors who wanted to control that wealth.
Banknotes
While there is no doubt that the emergence of coins as a form of currency re-shaped the international monetary system and led to an increase in global trade; the ongoing supply and existence of money relied on the availability of suitable raw materials.
In order for coins to be minted, gold, silver and copper needed to be mined and this required a significant commitment in terms of finance, labour and equipment. To literally make money, cost money, time and effort so the concept of the banknote emerged as a viable and better alternative to the minting of coins.
Money, in the form of banknotes could be manufactured in vast quantities using nothing other than printing paper and the previous reliance on natural resources would no longer be necessary.
In Britain, during the 16th century, Goldsmiths played a pivotal role in the creation of banknotes. Goldsmiths were essentially metalworkers but they increasingly agreed to store gold coins on behalf of their customers. In exchange for these coins, the Goldsmith would issue a receipt to their customer which promised to pay the bearer on demand.
The word “bearer” meant that any individual in possession of the receipt could present it for payment. These receipts effectively became a form of money in their own right and eventually became the foundation of the banknotes that we know today.
Fiat money
Money in the form of banknotes issued by governments is often referred to as “Fiat” money; that is money which is not backed by a physical commodity.
Unlike gold or silver, banknotes or coins have no intrinsic worth; their value as legal tender relies on the democratic legitimacy of the government which issues them.
The word “fiat” is Latin in origin and translates as “let it be done”. In effect, this means the acceptance of money is based on a system of trust; trust that banknotes and coins will be honoured when presented in settlement of a debt.
Gold standard
One of the more unusual aspects when considering the history of money during the period beginning around 1870 right up to the 1930s, was that governments and central banks restricted the amount of money in circulation to the amount of central bank gold reserves in existence.
Money had an intrinsic value and was underpinned by gold; which meant that banknotes could be exchanged for an equivalent value in gold. In addition, exchange rates in different countries were also fixed against a specified amount of physical gold. This concept was known as the Gold Standard.
Britain – as the pre-eminent political and economic force of the time – was the main proponent of this system and by 1900 AD all countries with the exception of China and some Central American countries had signed up.
The rationale behind the Gold Standard was to provide exchange rate certainty between different currencies, something that was considered essential for global trade and also to cap the rate of inflation by linking the supply of money to the availability of gold.
The idea was to promote a more efficient and regulated international monetary system and remove some of the financial risks of trading between nations and ensure that price stability was maintained.
Bretton Woods System
In 1945, following the end of the second world war, 44 Allied nations met in Bretton Woods, New Hampshire, USA. Their purpose was to agree a new international monetary system.
The conference decided that the Gold Standard should be formally abandoned and, in its place, the USA government, which was now the dominant global political and economic force positioned the US dollar at the centre of this new system. A new era in the history of money had begun.
The dollar was now the only currency to be pegged against gold (at a price of $35/oz) and all other currencies would then be fixed against the dollar.
This ‘regime’ continued right up until 1971 when US president Nixon removed the dollar from the Gold Standard because economic concerns over the value of the dollar had led to US gold reserves being depleted.
The Bank of England museum
For anyone who wants to learn more about the history of money, I can thoroughly recommend a trip to the Bank of England museum. It’s open during banking hours, Monday to Friday. It holds a series of ever-changing exhibitions where admission is free.
Money facts
Some very interesting facts emerge when exploring the history of money:
The word “dollar” derives from the word “thaler” which was a silver coin minted in 1519 from the Joachimsthal mine in Bohemia (a region of the Czech republic).
The US dollar is sometimes referred to as the greenback, a paper currency that was literally coloured green on the back.
The US dollar was officially launched as a unit of currency in 1792.
The term British pound derives its name from the Latin word “poundus” meaning “weight” and the pound is sometimes referred to as pound sterling.
The use of the word “sterling” in connection with British currency has its origins in the weight of silver used in the making of a pound coin which contained one troy pound of sterling silver.
The history of banking
To learn about the history of banking, please follow the link.
