Money Exchange History

Thanks to historical inquiry, we have an ever-growing body of knowledge about the economic history of our world. Discussion about the origins of money, the desire for and implementation of exchange throughout history, and the evolution of our current system of money, is an integral part of the discipline of economic history. The development of modern fiat money is the culmination of thousands of years of economic evolution.

Origins of Money

Money, defined broadly as "units of exchange", has deep historical roots. The Babylonians developed (arguably) the first extensive economy in the world during the 16th century BC, using commodity money and a system of private property. The Code of Hammurabi, ca. 1760 BC, included laws on interest amounts for debt and required monetary compensation for certain infractions of law. The ancient shekel (emerging around 3000 BC) was at first both a weight and a currency and became widely used for exchange transactions. In addition to the Babylonians, many societies developed systems of exchange that could be considered commodity money. Ancient China and Africa used cowrie shells.

Precious Metals and Exchange

The usage of metal as both commodity money and eventually in the production of standard coins, arose because metal is easier to transport and simpler to divide into smaller currencies than commodity money in many cases. Precious metals were used as far back as the ancient Egyptians, who used weighted gold bars as currency. The use of quantities of precious metals as units of exchange improved with the development of the touchstone, which enabled a merchant or trader to estimate precious metal content in an unidentified coin or bar.

Metal Coinage

Greece produced the first stamped metal coins in the 6th c. BC, and metal coins improved on the usage of the touchstone by making units of exchange standard in alloy and weight, thereby reducing the calculations and equipment required for some transactions. While metal coins improved on commodity money in many cases, they came with their own set of problems. The process of "clipping" was one problem of standardized coinage, where the coin could be shaved on its edges to salvage precious metal content. This may have contributed to the tendency for government to asset that a coin's value in it's demarcation as a stamped coin and not as it's precious metal content and consequent currency debasement as governments lowered precious metal content in coins.

Representative Paper Money

Although paper money was invented and used in ancient China, paper money was not found anywhere in the world after 1500 until the development of the American colonies at the beginning of the 18th century. Generally, in response to fiscal crises usually leading from wartime activities, such as the French and Indian War, colonial governments printed money to increase the amount of money in circulation and to aid the new debtor nation. While this paper money was remarkable in that it did increase capital liquidity in the colonies, colonial paper money was plagued with problems. Without a governing body to correlate or regulate colonial money issues, the record for price inflation varied geographically. Inflation rates from the period 1720 to 1774 as measured by depreciation of sterling exchange were much higher in the New England colonies than in the South or Mid-Atlantic, reflecting the relative licentiousness of New England's policies for new money printing.

Modern Money Exchange

Modern money typically takes the form of fiat money, which refers to money that is not backed by reserves of gold or other precious commodity, unlike representative money, which legally represents that physical commodity. The United States switched to fiat money indefinitely in 1971, and because many currencies were pegged to the US dollar at this time, much of the world's currencies became fiat money at this time. The rise of an increasingly integrated world economy has not consolidated the number of currencies in worldwide use; the CIA World Factbook indicates that there are over 173 currencies currently exchanged. The currency exchange markets that exist today are much more institutional than money exchange agents of the past, like moneychangers and merchants. In 2009, exchange markets experienced an average daily turnover of $3.98 trillion, making the currency exchange market one of the largest and most important markets worldwide.

References

• Triennial Central Bank Survey of Foreign Exchange and Derivative Market Activity (Dec 2007)
• The Issue of Paper Money in the American Colonies, 1720-1774 (1970), by Roger W. Weiss
• History of the American Economy, 11th Ed., Gary M. Walton and Hugh Rockoff (2010)

Resources

• A Case for the World's First Coin: The Lydian Lion