Last week we discussed early trades, necessity, and characteristics of a currency. This week we will discuss metals as early currency to modern banknotes.
Originally money was a form of receipt, representing crop grain stored in temple granaries in Sumer in ancient Mesopotamia and in Ancient Egypt. In this first stage of currency, metals were used to represent value stored in the form of commodities. Then because of the instability of emporiums, there was no safe place to store value.
Later metal itself became the store of value, First silver, then both silver and gold, and at one point also bronze. Now we have copper coins and other non-precious metals as coins.
Most economies using coinage had several tiers of coins of different values, made of copper or bronze, silver, and gold. Gold coins were the most valuable and were used for large purchases, payment of the military, and backing of state activities. Units of account were often defined as the value of a particular type of gold coin. Silver coins were used for mid-sized transactions, while coins of copper or bronze, might be used for smaller transactions. The exact ratios among the coins were directly related to the size and weight of the metal but the ratio between the values of the three metals varied greatly between different eras and places. The rarity of gold consistently made it most valuable currency and almost every economies valued gold. Gold became the universal currency. That was the era of gold.
Once again, the credit for making the first paper money goes to China. And almost at the same time, several other regions started their paper currencies. Yet the banknotes issued were still only locally and temporarily valid. It was not until the mid-13th century that a standard and uniform government issue of paper money became an acceptable nationwide currency.
In Europe, paper money was first introduced on a regular basis in Sweden in 1661 (although Washington Irving records an earlier emergency use of it, by the Spanish in a siege during the Conquest of Granada). As Sweden was rich in copper, many copper coins were in circulation, but its relatively low value necessitated extraordinarily big coins, often weighing several kilograms.
The use of paper money reduced the need to transport gold and silver as well as the associated risk. It facilitated loans of gold or silver at interest since the underlying specie (money in the form of gold or silver coins rather than notes) never left the possession of the lender until someone else redeemed the note; and it allowed a division of currency into credit- and specie-backed forms. It enabled the sale of stock in joint-stock companies and the redemption of those shares in a paper.
Taking money against goods and gold is a form of trust because a note has no intrinsic value. Here you trust this 100$ bill will buy you a tiny piece of gold or equivalent goods.
- Everyone will accept this money and exchange it for goods.
- The only government-regulated central bank will print money and keep its authenticity.
- The government and the economy will last and their money’s value will be upheld.
- The government will not devalue the money (unregulated supply of money can bring the value to zero.)
Next week we will see how money failed to keep promises. Before that, we will discuss a few other forms of banknotes.
Since the 1980s, the use of banknotes has increasingly been displaced by credit and debit cards, electronic money transfers, and mobile payments. These payment methods make transactions easier but cash is still the primary means of payment (and store of value) for unbanked people with low income. And while accepting electronic money, we trust the bank (provider) will give our paper money back any time we want. The government-issued banknote is still the store of value. So it is also a part of the era of paper money and era of Inflation.
This ends the 2nd week of Gold, Inflation and crypto. Next week we will discuss the era of inflation and potential future of currency.