History of money

Overview

The history of money is the development over time of systems for the exchange of goods and services. Money is a means of fulfilling these functions indirectly and in general rather than directly, as with barter. Money may take a physical form as in coins and notes, or may exist as a written or electronic account. It may have intrinsic value (commodity money), be legally exchangeable for something with intrinsic value (representative money), or have only nominal value (fiat money).

Overview

The invention of money was prehistoric. Consequently, any story of how money first developed is mostly based on conjecture and logical inference. A significant amount of evidence establishes that many things were traded in ancient markets that could be described as a medium of exchange. These included livestock and grain–things directly useful in themselves–but also merely attractive items such as cowrie shells or beads which were exchanged for more useful commodities. Due to the complexities of ancient history (ancient civilizations developing at different paces and not keeping accurate records, or having their records destroyed), and because the ancient origins of economic systems precede written history, it has not been possible to trace the true origin of the invention of money. Further, historical evidence supports the idea that money has taken two main forms, divided into the broad categories of money of account (debits and credits on ledgers) and money of exchange (tangible media of exchange made from clay, leather, paper, bamboo, metal, etc.). As "money of account" depends on the ability to record a count, the tally stick was a significant development. The oldest of these dates from the Aurignacian, about 30,000 years ago. The 20,000-year-old Ishango bone–found near one of the sources of the Nile in the Democratic Republic of the Congo–seems to use matched tally marks on the thigh bone of a baboon for correspondence counting. Accounting records–in the monetary system sense of the term accounting–dating back more than 7,000 years have been found in Mesopotamia, and documents from ancient Mesopotamia show lists of expenditures, and goods received and traded and the history of accounting evidences that money of account pre-dates the use of coinage by several thousand years. David Graeber proposes that money as a unit of account was invented when the unquantifiable obligation "I owe you one" transformed into the quantifiable notion of "I owe you one unit of something". In this view, money emerged first as money of account and only later took the form of money of exchange. Regarding money of exchange, the use of representative money historically pre-dates the invention of coinage as well. In the ancient empires of Egypt, Babylon, India and China, the temples and palaces often had commodity warehouses which made use of clay tokens and other materials which served as evidence of a claim upon a portion of the goods stored in the warehouses. There is no concrete evidence these kinds of tokens were used for trade, however, only for administration and accounting.

Use of metals

While not the oldest form of money of exchange, various metals (both common and precious metals) were also used in both barter systems and monetary systems; and the historical use of metals provides some of the clearest illustration of how barter systems gave way to monetary systems. The Romans' use of bronze, while not among the most ancient examples, is well documented, and it illustrates this transition clearly. First, the aes rude (rough bronze) was used. This was a heavy weight of unmeasured bronze used in what was probably a barter system: the suitability of bronze for barter resulted solely from the alloy's usefulness in metalsmithing, and it was bartered with the intent of being turned into tools. The next historical step was bronze in bars that had a 5-pound pre-measured weight (presumably to make barter easier and fairer), called aes signatum (signed bronze), which is where debate arises as to whether this was still barter, or had become a monetary system. Finally, there is a clear break from the use of bronze in barter into its indisputable use as money, because of lighter measures of bronze not intended to be used as anything other than coinage for transactions. The aes grave (heavy bronze) (or As) is the start of the use of coins in Rome, but not the oldest known example of metal coinage. Likewise, ancient Sparta minted coins from iron to discourage its citizens from engaging in foreign trade. In the early 17th century Sweden lacked precious metals, and so produced "plate money": large slabs of copper 50 cm or more in length and width, stamped with indications of their value. Gold coins began to be minted again in Europe in the 13th century. Frederick II is credited with having reintroduced gold coins during the Crusades. During the 14th century Europe changed from use of silver in currency to minting of gold. Vienna made this change in 1328. Metal-based coins had the advantage of carrying their value within the coins themselves. On the other hand, they induced manipulations, such as the clipping of coins to remove some of the precious metal. A greater problem was the co-existence of gold, silver and copper coins in Europe. The exchange rates between the metals varied with supply and demand. For instance the gold guinea coin began to rise against the silver crown in England in the 1670s and 1680s. Consequently, silver was exported from England in exchange for gold imports. 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. Stability came when national banks guaranteed to change silver money into gold at a fixed 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 (its value as a coin). The difference in these values is seigniorage.

Theories of money

The earliest ideas included Aristotle's "metallist" and Plato's "chartalist" concepts, which Joseph Schumpeter integrated into his own theory of money as forms of classification. Especially, the Austrian economist attempted to develop a catallactic theory of money out of Claim Theory. Schumpeter's theory had several themes, but the most important of these involved the notions that money can be analyzed from the viewpoint of social accounting and that it is also firmly connected to the theory of value and price. There are at least two theories of what money is, and these can influence the interpretation of historical and archeological evidence of early monetary systems. The commodity theory of money (money of exchange) is preferred by those who wish to view money as a natural outgrowth of market activity. Others view the credit theory of money (money of account) as more plausible and may posit a key role for the state in establishing money. The commodity theory is more widely held and much of this article is written from that point of view. Overall, the different theories of money developed by economists largely focus on functions, use, and management of money. Other theorists also note that the status of a particular form of money always depends on the status ascribed to it by individuals and by society. For instance, gold may be seen as valuable in one society but not in another or that a bank note is merely a piece of paper until it is agreed that it has monetary value.

Money supply

In modern times economists have sought to classify the different types of money supply. The different measures of the money supply have been classified by various central banks, using the prefix "M". The supply classifications often depend on how narrowly a supply is specified, for example the "M"s may range from M0 (narrowest) to M3 (broadest).

Assaying

Assaying is analysis of the chemical composition of metals. The discovery of the touchstone during the Harappa period of the Indus Valley civilization ca. 2600–1900 BC for assaying helped the popularisation of metal-based commodity money and coinage. Any soft metal, such as gold, can be tested for purity on a touchstone. As a result, the use of gold for as commodity money spread from Asia Minor, where it first gained wide usage. A touchstone allows the amount of gold in a sample of an alloy to be estimated. In turn this allows the alloy's purity to be estimated. This allows coins with a uniform amount of gold to be created. Coins were typically minted by governments and then stamped with an emblem that guaranteed the weight and value of the metal. However, as well as intrinsic value coins had a face value. Sometimes governments would reduce the amount of precious metal in a coin (reducing the intrinsic value) and assert the same face value, this practice is known as debasement.

Non-monetary exchange

Anthropologists argue that non-monetary societies operated primarily through gift economies and debt systems, where goods and services circulated through social obligations rather than market exchange. In contrast, classical economic theory, dating back to Adam Smith, posits that money emerged from barter to solve the inefficiency of finding trading partners with matching wants. However, there is no historical or contemporary evidence of a society in which barter served as the main mode of exchange. The distinction between these exchange systems is not always clear as transactions often combined economic and social elements.

Gifting and debt

There is no evidence, historical or contemporary, of a society in which barter is the main mode of exchange; instead, non-monetary societies operated largely along the principles of gift economy and debt. When barter did in fact occur, it was usually between either complete strangers or potential enemies. 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, where relationships are created through this type of exchange. 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.

Hypothesis of barter as the origin of money

With barter, an individual possessing any surplus of value, such as a measure of grain or a quantity of livestock, could directly exchange it for something perceived to have similar or greater value or utility, such as a clay pot or a tool, however, the capacity to carry out barter transactions is limited in that it depends on a coincidence of wants. For example, a farmer has to find someone who not only wants the grain he produced but who could also offer something in return that the farmer wants. Anthropological evidence suggests that barter was never used systemically within a society, and that it played little role in the emergence of money. In Politics (c. 350 BC) the Greek philosopher Aristotle contemplated the nature of money. He considered that every object has two uses: the original purpose for which the object was designed, and as an item to sell or barter. The assignment of monetary value to an otherwise insignificant object such as a coin or promissory note arises as people acquired a psychological capacity to place trust in each other and in external authority within barter exchange. Finding people to barter with is a time-consuming process; Austrian economist Carl Menger hypothesised that this reason was a driving force in the creation of monetary systems–people seeking a way to stop wasting their time looking for someone to barter with.

Hypothesis of credit as the origin of money

In his book Debt: The First 5,000 Years, anthropologist David Graeber argues against the suggestion that money was invented to replace barter. The problem with this version of history, he suggests, is the lack of any supporting evidence. His research indicates that gift economies were common, at least at the beginnings of the first agrarian societies, when humans used elaborate credit systems. Graeber proposes that money as a unit of account was invented the moment when the unquantifiable obligation "I owe you one" transformed into the quantifiable notion of "I owe you one unit of something". In this view, money emerged first as credit and only later acquired the functions of a medium of exchange and a store of value. Graeber's criticism partly relies on and follows that made by A. Mitchell Innes in his 1913 article "What is money?". Innes refutes the barter theory of money, by examining historic evidence and showing that early coins never were of consistent value nor of more or less consistent metal content. Therefore, he concludes that sales is not exchange of goods for some universal commodity, but an exchange for credit. He argues that "credit and credit alone is money". Anthropologist Caroline Humphrey examines the available ethnographic data and concludes that "No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing". Economists Robert P. Murphy and George Selgin replied to Graeber saying that the barter hypothesis is consistent with economic principles, and a barter system would be too brief to leave a permanent record. John Alexander Smith from Bella Caledonia said that in this exchange Graeber is the one acting as a scientist by trying to falsify the barter hypotheses, while Selgin is taking a theological stance by taking the hypothesis as truth revealed from authority.

Emergence of money

Anthropologists have noted many cases of "primitive" societies using what look to Westerners very much like money, but for non-commercial purposes; indeed, commercial use may have been prohibited:

Often, such currencies are never used to buy and sell anything at all. Instead, they are used to create, maintain, and otherwise reorganize relations between people: to arrange marriages, establish the paternity of children, head off feuds, console mourners at funerals, seek forgiveness in the case of crimes, negotiate treaties, acquire followers – almost anything but trade in yams, shovels, pigs, or jewelry. This suggests that the basic idea of money may have long preceded its application to commercial trade. After the domestication of cattle and the start of cultivation of crops in 9000–6000 BC, livestock and plant products were used as money. However, it is in the nature of agricultural production that things take time to reach fruition. The farmer may need to buy things that he cannot pay for immediately. Thus the idea of debt and credit was introduced, and a need to record and track it arose. The establishment of the first cities in Mesopotamia (c. 3000 BCE) provided the infrastructure for the next simplest form of money of account – asset-backed credit or representative money. Farmers would deposit their grain in the temple which recorded the deposit on clay tablets and gave the farmer a receipt in the form of a clay token which they could then use to pay fees or other debts to the temple. Since the bulk of the deposits in the temple were of the main staple, barley, a fixed quantity of barley came to be used as a unit of account. Aristotle's opinion of the creation of money of exchange as a new thing in society is:

When the inhabitants of one country became more dependent on those of another, and they imported what they needed, and exported what they had too much of, money necessarily came into use. Trading with foreigners required a form of money which was not tied to the local temple or economy, money that carried its value with it. A third, proxy, commodity that would mediate exchanges which could not be settled with direct barter was the solution. Which commodity would be used was a matter of agreement between the two parties, but as trade links expanded and the number of parties involved increased the number of acceptable proxies would have decreased. Ultimately, one or two commodities were converged on in each trading zone, the most common being gold and silver. The introductory section of Handbook of the History of Money and Currency provides a glimpse into the relationship between grains and precious metals during this emergence of currency: "Grain was used as unit of account to calculate values, measure labor time and land yield, and as means of payment in agricultural and handicraft activities. Silver was used as means of payments for taxes and fees and for long-distance trade." Stability of this type of currency was enforced by the ruler and backed by temples at that time. In essence, to reduce complications and nuisance of trading and bartering, grain and silver were utilized by early civilizations because they were portable, had use, and were divisible. This process was independent of the local monetary system so in some cases societies may have used money of exchange before developing a local money of account. In societies where foreign trade was rare money of exchange may have appeared much later than money of account. In early Mesopotamia copper was used in trade for a while but was soon superseded by silver. The temple (which financed and controlled most foreign trade) fixed exchange rates between barley and silver, and other important commodities, which enabled payment using any of them. It also enabled the extensive use of accounting in managing the whole economy, which led to the development of writing and thus the beginning of recorded history.

Bronze Age: commodity money, credit and debt

Many cultures around the world developed the use of commodity money, that is, objects that have value in themselves as well as value in their use as money. Ancient China, Africa, and India used cowry shells. The Mesopotamian civilization developed a large-scale economy based on commodity money. The shekel was the unit of weight and currency, first recorded c. 2150 BC, which was nominally equivalent to a specific weight of barley that was the preexisting and parallel form of currency. 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. Money emerged when the increasing complexity of transactions made it useful. The Code of Hammurabi, the best-preserved ancient law code, was created c. 1760 BC in ancient Babylon. It was enacted by the sixth Babylonian king, Hammurabi. Earlier collections of laws include the code of Ur-Nammu, king of Ur (c. 2050 BC), the Code of Eshnunna (c. 1930 BC) and the Code of Lipit-Ishtar of Isin (c. 1870 BC). These law codes formalized the role of money in civil society. They set amounts of interest on debt, fines for "wrongdoing", and compensation in money for various infractions of formalized law. 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, as had been done earlier in Mesopotamia with silver bars.

The first mention in the Bible of the use of money is in the Book of Genesis. Later, the Cave of Machpelah is purchased (with silver) by Abraham, some time after 1985 BC, although scholars believe the book was edited in the 6th or 5th centuries BC.