How Has Currency Evolved?
Currency in some form or another has been in use for thousands of years. The earliest type of currency was commodity money, where items that were considered to have value were used to trade with, for example cowrie shells in ancient China and Africa, the koku - a unit of rice in Japan and the shekel - a unit of barley in Mesopotamia.
Metals have always been preferable over the use of commodities because they are portable, durable and can be easily divided. Gold was commonly used by the Egyptians. Widespread use of coinage began through Ionia and Greece in the 6th Century B.C. Metal based currency came into its own with the discovery of the touchstone, a stone which can be used to identify precious metals and therefore verify their authenticity and total content. This led to the standardisation of coinage. Coins were pre-weighed and pre-alloyed to negate the use of the touchstone and were usually minted by governments. Eventually coinage changed from being a unit of weight to a unit of value, setting it apart from its commodity value.
Following coinage, bills of exchange became more common with the expansion of European trade in the Middle Ages. Trade in cloth, wine and other commodities expanded rapidly and became reliant upon credit in order to maintain momentum. A bill of exchange essentially represented the buyer's promise to make a payment in the future. It was then possible for the seller to present the bill of exchange (provided it was endorsed by a guarantor) to a banker in order to receive the money before it was due. They could also be used by the seller as a form of payment to his suppliers. Trade credit had become an important source for the creation of new money.
The emergence of symbolic money, the ability to use a symbol to represent something of value elsewhere allowed the development of new ways to pay for goods, services and taxes. One example is the tally system used by the English monarchy in the 12th Century for taxes. Various forms of symbolic money followed with the goldsmith bankers issuing paper receipts in exchange for a deposit of precious metal. Banks followed on from the goldsmiths, issuing paper notes as a form of representative money which circulated in pretty much the same way as bank notes do today. The notes were representative of gold or silver which could be converted by the bank.
Bank notes eventually came under the control of national governments and until the Great Depression of the 1920's the notes were representative money, valued against the gold standard, a fixed weight of gold. Fiat money is money that is not backed by reserves of another commodity but the money itself it valued by a government fiat or decree. The money is legal tender and to be accepted as such to relieve a person of their debt. The rapid production of fiat money beyond the rate of economic growth leads to inflation and a devaluation of the currency. In 1971 the USA began to use fiat money indefinitely and as a result of the Bretton Goods Conference, most countries currencies were fixed to the US dollar and as a consequence became fiat money also.
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