History of Money

Money is almost as old as recorded history. Primitive societies have used beads, stones, blankets, cattle, tobacco, hides, or shells as money (America, Africa, Asia, and Australia). While none of these is ideal, each can serve as money as long as it is universally acceptable. During World War II, cigarettes were used as money in prisoner-of-war camps.

Primitive and Ancient Forms of Money

One of the most unusual forms of money was the stone used by primitive peoples on the island of Yap in the South Pacific until the early 20th century. Their money, called the fei, consisted of large stone wheels ranging in size from 1 to 12 feet (0.3-3.6 meters) in diameter with a hole in the center. The larger the stone the greater was its value. Since many of these stones were massive and difficult to move, they remained at a given location, although their ownership changed hands.

The early Phoenician and Babylonian traders in the Mediterranean area used a system of barter that evolved into the practice of using metal as money. The early Egyptians and Greeks followed the same pattern. Gold, silver, copper, and bronze were used, but at first not in the form of coins. In 2500 b. c. the Egyptians used metal rings as money. About the same time, the Babylonians instituted a system that some have referred to as the forerunner of paper money. This took the form of day tablets on which due bills and receipts were written.

Most exchange, however, was financed with bullion — gold or silver bars — whose weight had to be verified. Later these bullion bars were stamped with the imprint of the various merchants who processed them, and the weight was included in the imprint. Some of these evolved into round or oblong shapes and became the forerunners of coins. Stamped metal also was used in China beginning about 2000 b. c.

The evolution from metal ingots to true coins apparently first took place among the Lydians in western Turkey and was then developed to a fine art by the early Greeks during the 8th century b. c. Soon the state, in the form of the city or the temple, added its stamp to uniform pieces of metal to certify the coin's weight.

It is believed that the first paper money was printed by the Chinese in the early part of the 9th century a. d. Marco Polo, on his return from China in 1295, wrote about the paper money issued by Kubla Khan. This money was a black, paperlike substance made from the thin skin that lies beneath the bark of the mulberry tree. By the middle of the 12th century, paper money was overissued in China to such an extent that it had depreciated substantially.

Europe

While coins survived in the Byzantine Empire after the fall of Rome in 476 a. d., they almost disappeared in the Western World. Bullion and barter financed much of the trade and commerce that existed, although the Byzantine coin (called the bezant) financed some of it. With the fall of Constantinople in 1453, the city-states of Italy emerged as leaders in trade and commerce, and coinage and a money economy developed once more in western Europe.

Paper money did not appear in Europe until sometime after the end of the 13th century, when the art of papermaking was developed there. However, some evidence exists that money made of leather was used by feudal princes as early as about 1000. By the end of the 17th century the use of paper money had become widespread on the Continent.

In England, paper money developed in the 17th century out of the activities of goldsmiths, who provided a safe gold depository for merchants by issuing warehouse receipts for gold left with them. These receipts circulated as paper money. The goldsmiths also issued receipts for gold in excess of the gold they had on hand and lent them out at interest — that is, they made loans. The smiths also honored written requests from one merchant, who had gold on deposit, to pay another merchant. In this way they provided, in a sense, checking accounts.

The use of paper money and bank notes received an impetus in the late 18th and early 19th centuries as private companies and even individuals issued fiduciary money, based on a promise to pay specified amounts in gold and silver. Eventually the government stepped in and began to issue fiat money, whose value is decreed by the state. France began to issue large amounts of such money in the early 18th century. In times of crisis, paper money became devalued when governments suspended payments of gold for bank notes. This occurred in Britain during the Napoleonic Wars (1801-1815) and in the United States during the Civil War (1861-1865).

After World War I, Germany greatly overissued paper money. The result was hyperinflation that made the mark worthless. Eventually the monetary system collapsed and the German government established a new mark, the supply of which was closely controlled. Essentially the same thing happened in Hungary after World War II when the pengo became worthless. It was also during the first half of the 20th century, in the decade of the 1930's, that the old established international. gold standard broke down and finally was abandoned.

United States

In the early American colonies money was scarce. While some British and Spanish coins circulated, numerous other items served as the media of exchange. These consisted of wampum (Indian beads), beaver skins, tobacco, and rice.

Various types of paper money also circulated. Some of this was in the form of colonial notes (bills of credit) issued by the individual colonies. After 1730 a number of land banks were established and issued currency secured by real estate. During the Revolutionary War the Continental Congress issued currency that was referred to as the "Continental Currency." However, it was overissued and quickly became worthless, and the phrase "not worth a continental" stems from that unhappy experience. In 1781 the Bank of North America, in Philadelphia, received its charter from Congress and began issuing currency in the form of bank notes. In subsequent years a number of other banks were chartered by the various states and issued bank notes that became the currency of the day. In 1793 the Philadelphia Mint struck the first coins of the United States.

In 1791 the First Bank of the United States was established by the federal government. It may be looked on as the forerunner of the Federal Reserve System. It joined state banks in issuing bank notes that became the country's currency The charter of this bank lapsed in 1811.

In 1816 the Second Bank of the United States was established, and until 1836, when its charter was allowed to expire, its notes replaced those of the First Bank. From 1836 until 1863 when Congress passed the National Banking Act, the country's currency consisted only of the various state bank notes. These notes differed widely in quality and in many cases were accepted only in the general geographic area in which the bank was located Currency issued by a bank in Boston, for example, might be accepted at par value, at a discount, or perhaps not at all in Virginia.

In 1863, Congress passed the National Banking Act, which approved the establishment of national banks with authority to issue national bank notes. The act also forced state-chartered bank notes out of existence by taxing all new issues. From 1863 until the establishment of the Federal Reserve System in 1913, the nation's main currency consisted of national bank notes. After 1913, Federal Reserve notes gradually replaced national bank notes. These notes are the dominant currency in circulation today.

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