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Money: a History

This article is about forms of monies throughout history.

History of monies is a topic which can be found easily on the internet. Most people agree everything started with barter.

While it is possible to do a timeline and fill it with a recollection of events which drove us to the point where we are now. This meaningful work has been done more than once already1)2)3), I see fit to take these timeline and talk about the philosophical ground for money has had and still has in our society.

Function of Money

According to Ludwig von Mises book of 1912 the function of money is “The function of money is to facilitate the business of the market by acting as a common medium of exchange.” while the market's is “The balancing of production and consumption takes place in the market, where the different producers meet to exchange goods and services by bargaining together.”

The previous is a formal definition which complements the rationale behind the social evolution from the gift economy published in the Wikipedia article History of money.

Gift economy

In a gift economy, valuable goods and services are regularly given without any explicit agreement for immediate or future rewards (i.e. there is no formal quid pro quo). Ideally, simultaneous or recurring giving serves to circulate and redistribute valuables within the community.

There are various social theories concerning gift economies. Some consider the gifts to be a form of reciprocal altruism. Another interpretation is that implicit “I owe you” debt and social status are awarded in return for the 'gifts'. Consider for example, the sharing of food in some hunter-gatherer societies, where food-sharing is a safeguard against the failure of any individual's daily foraging. This custom may reflect altruism, it may be a form of informal insurance, or may bring with it social status or other benefits.

Different monies were invented more than once through history, this shows it serves the real need to provide physical backup for a basic human interaction, the exchange of goods. Having this interaction in place humans could focus on achieving expertise on the production of a specific good, while this is reason enough to invent money there are a number of secondary functions it has.

Secondary functions

Facilitating credit transactions

The first function fulfilled by money in facilitating credit transactions. It is simplest to regard this as part of its function as medium of exchange. Credit transactions are in fact nothing but the exchange of present goods against future goods. Frequent reference is made in English and American writings to a function of money as a standard of deferred payments. But the original purpose of this expression was not to contrast a particular function of money with its ordinary economic function, but merely to simplify discussions about the influence of changes in the value of money upon the real amount of money debts. It serves this purpose admirably4).

Transmitter of value through time and space

The functions of money as a transmitter of value through time and space may also be directly traced back to its function as medium of exchange. Carl Menger has pointed out that the special suitability of goods for hoarding, and their consequent widespread employment for this purpose, has been one of the most important causes of their increased marketability and therefore of their qualification as media of exchange. As soon as the practice of employing a certain economic good as a medium of exchange becomes general, people begin to store up this good in preference to others. In fact, hoarding as a form of investment plays no great part in our present stage of economic development, its place having been taken by the purchase of interest-bearing property. On the other hand, money still functions today as a means for transporting value through space. This function again is nothing but a matter of facilitating the exchange of goods. The European farmer who emigrates to America and wishes to exchange his property in Europe for a property in America, sells the former, goes to America with the money (or a bill payable in money), and there purchases his new homestead. Here we have an absolute textbook example of an exchange facilitated by money5).

Types of Money

About the forms money has taken over time. Through time money has acquired many forms. Let us take a brief look to the information about this next.

Early usage

Ancient Monies

An early type of money were cattle, which were used as such from between 9000 to 6000 BCE onwards (Davies 1996 & 1999)

It has long been assumed that metals, where available, were favored for use as proto-money over such commodities as cattle, cowry shells, or salt, because metals are at once durable, portable, and easily divisible. The use of gold as proto-money has been traced back to the fourth millennium BC when the Egyptians used gold bars of a set weight as a medium of exchange. The shekel was an ancient unit used in Mesopotamia around 3000 BC

The first gold coins of the Grecian age were struck in Lydia at a time approximated to the year 700 B.C.E. The talent in use during the periods of Grecian history both before and during the time of the life of Homer, weighed between 8.42 and 8.75 grammes.

Commodity money

Many cultures around the world eventually developed the use of commodity money. Ancient China, Africa, and India used cowry shells. Trade in Japan's feudal system was based on the koku – a unit of rice. The shekel was an ancient unit of weight and currency. The first usage of the term came from Mesopotamia circa 3000 BC and referred to a specific weight 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 weight6).

Standardized coinage

From approximately 1000 BC money in the shape of small knives and spades made of bronze were in use in the society of China, with cast bronze replicas of cowrie shells in use before this. The first manufactured coins seem to have taken place separately in India, China, and in cities around the Aegean sea between 700 and 500 BC.

The first ruler in the Mediterranean known to have officially set standards of weight and money was Pheidon. Minting occurred in the latter parts of the 7th century amongst the cities of Grecian Asia Minor, spreading to Aegean parts of the Greek islands and the south of Italy by 500 BC. The first stamped money (having the mark of some authority in the form of a picture or words) can be seen in the Bibliothèque Nationale of Paris. It is an electrum stater of a turtle coin, coined at Aegina island. This coin dates about 700 BC.

The use and export of silver coinage, along with soldiers paid in coins, contributed to the Athenian Empire's 5th century BC, dominance of the region.

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.

Gold coinage began to be minted again in Europe in the thirteenth century. Frederick the II is credited with having re-introduced the metal to currency during the time of the Crusades. During the fourteenth century Europe had en masse converted from use of silver in currency to minting of gold. Vienna transferred from minting silver to instead gold during 1328.

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 are seignior age7).

Trade bills of exchange

Bills of exchange became prevalent with the expansion of European trade toward the end of the Middle Ages. A flourishing Italian wholesale trade in cloth, woolen clothing, wine, tin and other commodities was heavily dependent on credit for its rapid expansion. Goods were supplied to a buyer against a bill of exchange, which constituted the buyer's promise to make payment at some specified future date. Provided that the buyer was reputable or the bill was endorsed by a credible guarantor, the seller could then present the bill to a merchant banker and redeem it in money at a discounted value before it actually became due. The main purpose of these bills nevertheless was, that traveling with cash was particularly dangerous at the time. A deposit could be made with a banker in one town, in turn a bill of exchange was handed out, that could be redeemed in another town8).

Banknotes

Paper money was introduced in Song Dynasty China during the 11th century. The development of the banknote began in the seventh century, with local issues of paper currency. Its roots were in merchant receipts of deposit during the Tang Dynasty (618–907), as merchants and wholesalers desired to avoid the heavy bulk of copper coinage in large commercial transactions. The issue of credit notes is often for a limited duration, and at some discount to the promised amount later. The jiaozi nevertheless did not replace coins during the Song Dynasty; paper money was used alongside the coins. The central government soon observed the economic advantages of printing paper money, issuing a monopoly right of several of the deposit shops to the issuance of these certificates of deposit. By the early 12th century, the amount of banknotes issued in a single year amounted to an annual rate of 26 million strings of cash coins.

In the 13th century, paper money became known in Europe through the accounts of travelers, such as Marco Polo and William of Rubruck. Marco Polo's account of paper money during the Yuan Dynasty is the subject of a chapter of his book, The Travels of Marco Polo, titled “How the Great Kaan Causeth the Bark of Trees, Made into Something Like Paper, to Pass for Money All Over his Country.” In medieval Italy and Flanders, because of the insecurity and impracticality of transporting large sums of money over long distances, money traders started using promissory notes. In the beginning these were personally registered, but they soon became a written order to pay the amount to whoever had it in their possession. These notes can be seen as a predecessor to regular banknotes.

The use of bank notes issued by private commercial banks as legal tender has gradually been replaced by the issuance of bank notes authorized and controlled by national governments. The Bank of England was granted sole rights to issue banknotes in England after 1694. In the USA, the Federal Reserve Bank was granted similar rights after its establishment in 1913. Until recently, these government-authorized currencies were forms of representative money, since they were partially backed by gold or silver and were theoretically convertible into gold or silver9).

Technically, and in some countries legally as well, the transfer of a banknote scarcely differs from that of a coin. The similarity of outward appearance is such that those who are engaged in commercial dealings are usually unable to distinguish between those objects that actually perform the function of money and those that are merely employed as substitutes for them. The businessman does not worry about the economic problems involved in this; he is only concerned with the commercial and legal characteristics of coins, notes, checks, and the like10).

Fiat Money

Modern currency in several countries around the world including the United States had become fiat money. As anna J. Schwarts stated in her article.

The abandonment of convertibility of money into a commodity since August 15, 1971, when President Richard M. Nixon discontinued converting U.S. dollars into gold at $35 per ounce, has made the monies of the United States and other countries into fiat money—money that national monetary authorities have the power to issue without legal constraints.

Money in the Modern Society

We may give the name commodity money to that sort of money that is at the same time a commercial commodity; and the name fiat money to money that comprises things with a special legal qualification. A third category may be called credit money, this being that sort of money which constitutes a claim against any physical or legal person. But these claims must not be both payable on demand and absolutely secure; if they were, there could be no difference between their value and that of the sum of money to which they referred, and they could not be subjected to an independent process of valuation on the part of those who dealt with them. In some way or other the maturity of these claims must be postponed to some future time11).

Cryptocurrency

At this point monies from ancient past as well as their modern forms have been reviewed, there is a new form of currency which has come to life, In his article of June 3 2013 Robert P. Murphy states about Bitcoin (his article applies to any digital currency):

Bitcoin

Bitcoin is an ingenious peer-to-peer “virtual” or “digital currency” that challenges the way economists have traditionally thought about money. Its inbuilt scarcity provides an assurance of purchasing power arguably safer than any other system yet conceived.

Is Bitcoin Fiat? Could It Ever Be Money?

Whether to call Bitcoin a “fiat” currency depends on the definition. If “fiat” means a currency that is not legally redeemable in some other commodity, then yes, Bitcoin is a fiat currency. But if “fiat” means a currency relying on government fiat to define what will count as legal money, then Bitcoin is not.

More substantively, some critics (who are often proponents of hard money such as gold) object that Bitcoin is in a perpetual “bubble” because it has no “intrinsic value.” Yet these critics often seem to overlook just how much the exchange value of gold and silver is (and was) due to their use as media of exchange. Thus, if Bitcoin is currently in a bubble, then, by the same token, gold bullion in the year 1900 (say) was also in a massive bubble because it was trading for a far higher exchange value than could be explained merely by its industrial and ornamental uses.

Some critics rely on the work of Ludwig von Mises and his “regression theorem” to argue that the world will never embrace Bitcoin as a true money. According to this argument, Mises demonstrated that all money—even today's fiat money—must have been, at some point in the past, linked to a commodity that was useful in the days of barter. Since Bitcoin has no such history, the critics argue, we have the authority of Mises himself to show that Bitcoin will never be more than a fad.

This article won't address the question of whether this is a valid interpretation of Mises' writings. Instead, I will make the modest point that if Mises is used to rule out Bitcoin's acceptance as money, then it seems that Mises has already lost. If this logic is correct, then Bitcoin should never have been adopted as even a medium of exchange because it served no useful role as a regular commodity. (Recall that money is simply a medium of exchange that is accepted by everyone in the community.) But Bitcoin has already surpassed that hurdle, as there are websites on which people from all over the world exchange their bitcoins directly for goods and services.

Bitcoin: Last Words

Bitcoin is an ingenious concept that challenges the way economists have traditionally thought about money. Its inbuilt scarcity provides an assurance of purchasing power arguably safer than any other system yet conceived.

Critics argue that because of its lack of commodity backing, Bitcoin is doomed to eventual failure. Yet the popular versions of these arguments either would apply just as well to gold or have already been proven wrong by the use of Bitcoin as a medium of exchange among a small (but growing) group of users.


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