The History of Money

General Reference Section

The history of money is essentially about how people learned from the earliest days to carry out transactions through a physical medium of exchange to facilitate trade and commerce and value the material things. You may say that money means any clearly identifiable object of value which can be accepted as payment for goods and services or repayment of debts by the people or which is the legal tender within a country.

Historically, people used many things as medium of exchange in markets such as livestock, cowry shells, beads, valuables, and sacks of cereal or grain. They were things that were not only directly useful in themselves, but also used to exchange goods and services. In the early days precious metals were used in such exchanges, which might have gradually led to the use of coins having specific weight in commercial transactions. The history of money can be discussed mainly under two categories, transactions that involved no exchange of money, and those that were facilitated by money.

Non-monetary exchange

Barter

Barter is a system of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. It is distinguishable from gift economies in many ways; one of them is that the reciprocal exchange is immediate and not delayed in time. It is usually mutual or bilateral, but may be multilateral (i.e., mediated through barter organizations) and usually exists parallel to monetary systems in most developed countries, though to a very limited extent.

Barter usually replaces money as the method of exchange in times of monetary crisis, such as when the currency may be either unstable (e.g., hyperinflation or deflationary spiral) or simply unavailable for conducting commerce. The inefficiency of barter in archaic society has been used by economists since Adam Smith to explain the emergence of money, the economy, and hence the discipline of economics itself. However, no present or past society has ever been seen through ethnographic studies to use pure barter without any medium of exchange, nor the emergence of money from barter.

Since the 1830s, direct barter in western market economies has been aided by exchanges which frequently utilize alternative currencies based on the labor theory of value, and designed to prevent profit taking by intermediaries. Examples include the Owenite socialists, the Cincinnati Time store, and more recently Ithaca HOURS (Time banking) and the LETS system.

Barter was one of the earliest forms of monetary transactions. People exchanged what was in surplus. In his book Politics Aristotle (350 B.C) stated that every object was designed for a specific primary purpose but it also served a secondary purpose as an item for sale of barter. In the exchange of items, trust plays an important role. People may exchange them either for their monetary value, intrinsic value, utility value, or even sentimental value. Such exchange may take place directly between two individuals or through a third party or an intermediary. The person who facilitates such a transacting may also charge money for his services either from one party or both.

With barter, an individual possessing any surplus of value, such as a measure of grain or a quantity of livestock could directly exchange that for something perceived to have similar or greater value or utility, such as a clay pot or a tool. Barter is possible only when there is adequate demand for the items that are used in exchange. Hence, the capacity to carry out barter transactions is limited by the coincidence of wants. The seller of  an item has to find a buyer who not only wants to buy it and but also offers in return what the seller wants to buy. There are also no standard methods to determine the value of the goods exchanged, since such value depends upon several factors and may vary from person to person and place to place.

Barter system has many limitations. It does not scale well in complex markets and cannot be used for all transactions, especially those that involve promise, future payments, loans, or installments.  It might have served well primitive communities where people lived in close proximity and were familiar to each other. As agrarian communities developed and engaged in long distance trade and commerce, barter system was replaced by more advanced forms of monetary transactions. David Kinley argued that Aristotle's theory of barter was flawed because he lacked an understanding of how the primitive communities engaged in commerce. He might have drawn his conclusion about barter from his  experience or imaginatin. However, anthropologist David Graeber, in his book, Debt: The First 5000 Years,  suggested that the theory that money was invented to replace barter might not be true since sufficient evidence is lacking to support it. According to him, "gift economies" were common, at least in the early stages of the first agrarian societies, when people devised elaborate credit systems to manage their finances. Graeber proposed that money as a unit of account was invented when the unquantifiable obligation of "I owe you one" was translated into quantifiable "I owe you one unit of something". He thought that money emerged first to quantify credit and might have subsequently served as a medium of exchange and a store of value.

Gift economy

Barter is a two way transaction in comparison to gift economy in which goods or valuables are gifted without any explicit agreement, formal quid pro quo, promise of reciprocation, or expectation of future rewards. There are various social theories that explain how the gift economies might have functioned in the past. According to some the gifts represented a form of reciprocal altruism. According to another theory, gift economy might have served as tokens to facilitate future reciprocal payments, demarcate "I owe you" debt transactions, earn recognition or enhanced social status as a reward, or even as a form of tax payment to the local rulers. 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.

The emergence of money

Anatolian obsidian as a raw material for stone-age tools was distributed as early as 12,000 B.C., with organized trade occurring in the 9th millennium.(Cauvin;Chataigner 1998)[In Sardinia, one of the four main sites for sourcing the material deposits of obsidian within the Mediterranean, trade in this was replaced in the 3rd millennium by trade in copper and silver. As early as 9000 BC both grain and cattle were used as money or as barter (Davies) (the first grain remains found, considered to be evidence of pre-agricultural practice date to 17,000 BC).

In the earliest instances of trade with money, the things with the greatest utility and reliability in terms of re-use and re-trading of these things (their marketability), determined the nature of the object or thing chosen to exchange. So as in agricultural societies, things needed for efficient and comfortable employment of energies for the production of cereals and the like were the most easy to transfer to monetary significance for direct exchange. As more of the basic conditions of the human existence were met to the satisfaction of human needs, so the division of labour increased to create new activities for the use of time to solve more advanced concerns. As people's needs became more refined, so indirect exchange became more likely as the physical separation of skilled labourers (suppliers) from their prospective clients (demand) required the use of a medium common to all communities, to facilitate a wider market.

Aristotle's opinion of the creation of money 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.The worship of Moneta is recorded by Livy with the temple built in the time of Rome 413 (123); a temple consecrated to the same god was built in the earlier part of the fourth century (perhaps the same temple).The temple contained the mint of Rome for a period of four centuries.

Early administration

 The Code of Hammurabi, the best preserved ancient law code, was created ca. 1760 BC (middle chronology) 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 (ca. 2050 BC), the Code of Eshnunna (ca. 1930 BC) and the code of Lipit-Ishtar of Isin (ca. 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. The Mesopotamian civilization developed a large scale economy based on commodity money. 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 was not only an emergence, it was a necessity.

Early usage

The earliest places of storage were thought to be money-boxes containments  made similar to the construction of a bee-hive, as of the Mycenae tombs of 1550–1500 BC. An early type of money were cattle, which were used as such from between 9000 to 6000 BCE onwards (Davies 1996 & 1999) Both the animal and the manure produced were valuable; animals are recorded as being used as payment as in Roman law where fines were paid in oxen and sheep (Rollin 1836) and within the Iliad and Odyssey, attesting to a value c.850–800 BCE (Evans & Schmalensee 2005).

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 of the use of money within the Bible is within the book "Genesis" in reference to criteria of the circumcision of a bought slave. Later, the Cave of Machpelah is purchased (with silver by Abraham, during a period dated as being the beginning of the twentieth century B.C.E., some-time recent to 1900 B.C.E. (after 1985). The currency was also in use amongst the Philistine people of the same time-period.

The shekel was an ancient unit used in Mesopotamia around 3000 BC to define both a specific weight of barley and equivalent amounts of materials such as silver, bronze and copper. The use of a single unit to define both mass and currency was a similar concept to the British pound, which was originally defined as a one-pound mass of silver.

A description of how trade proceeded includes for sales the dividing (clipping) of an amount from a weight of something corresponding to the perceived value of the purchase. Of this the ancient Greek term was Κέρờς. From this one might understand the development of how coinage was imagined from the small metallic clippings (of silver) resulting from trade exchanges. The word used in Thucydides writings History for money is χρήματα ("chremata"), translated in some contexts as "goods" or "property", although with a wider ranging possible applicable usage, having a definite meaning "valuable things".

The first gold coins of the Grecian age were struck in Lydia at a time approximated to the year 700 B.C.E. The talent in use during the periods of Grecian history both before and during the time of the life of Homer, weighed between 8.42 and 8.75 grammes. 

Commodity money

Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects that have value in themselves as well as value in their use as money. Examples of commodities that have been used as mediums of exchange include gold, silver, copper, salt, peppercorns, tea, large stones (such as Rai stones), decorated belts, shells, alcohol, cigarettes, cannabis, candy, cocoa beans, cowries and barley. These items were sometimes used in a metric of perceived value in conjunction to one another, in various commodity valuation or price system economies.

Commodity money is to be distinguished from representative money which is a certificate or token which can be exchanged for the underlying commodity, but only as the trade is good for that source and the product. A key feature of commodity money is that the value is directly perceived by the users of this money, who recognize the utility or beauty of the tokens as they would recognize the goods themselves. That is, the effect of holding a token for a barrel of oil must be the same economically as actually having the barrel at hand. This thinking guides the modern commodity markets, although they use a sophisticated range of financial instruments that are more than one-to-one representations of units of a given type of commodity.

 Bartering has several problems, most notably that it requires a "coincidence of wants". For example, if a wheat farmer needs what a fruit farmer produces, a direct swap is impossible as seasonal fruit would spoil before the grain harvest. A solution is to trade fruit for wheat indirectly through a third, "intermediate", commodity: the fruit is exchanged for the intermediate commodity when the fruit ripens. If this intermediate commodity doesn't perish and is reliably in demand throughout the year (e.g. copper, gold, or wine) then it can be exchanged for wheat after the harvest. The function of the intermediate commodity as a store-of-value can be standardized into a widespread commodity money, reducing the coincidence of wants problem. By overcoming the limitations of simple barter, a commodity money makes the market in all other commodities more liquid.

Many cultures around the world eventually developed the use of commodity money. Ancient China, Africa, and India used cowry shells. Trade in Japan's feudal system was based on the koku – a unit of rice. The shekel was an ancient unit of weight and currency. The first usage of the term came from Mesopotamia circa 3000 BC and referred to a specific weight of barley, which related other values in a metric such as silver, bronze, copper etc. A barley/shekel was originally both a unit of currency and a unit of weight.

Wherever trade is common, barter systems usually lead quite rapidly to several key goods being imbued with monetary properties. In the early British colony of New South Wales, rum emerged quite soon after settlement as the most monetary of goods. When a nation is without a currency it commonly adopts a foreign currency. In prisons where conventional money is prohibited, it is quite common for cigarettes to take on a monetary quality. Contrary to popular belief, precious metals have rarely been used outside of large societies. Gold, in particular, is sufficiently scarce that it has only been used as a currency for a few relatively brief periods in history.

Standardized coinage

A coin is a piece of hard material used primarily as a medium of exchange or legal tender. They are standardized in weight, and produced in large quantities at a mint in order to facilitate trade. They are most often issued by a government. Coins are usually metal or alloy, or sometimes made of synthetic materials. They are usually disc shaped. Coins made of valuable metal are stored in large quantities as bullion coins. Other coins are used as money in everyday transactions, circulating alongside banknotes. Usually the highest value coin in circulation (i.e. excluding bullion coins) is worth less than the lowest-value note. In the last hundred years, the face value of circulation coins has occasionally been lower than the value of the metal they contain, for example due to inflation. If the difference becomes significant, the issuing authority may decide to withdraw these coins from circulation, or the general public may decide to melt the coins down or hoard them (see Gresham's law). Exceptions to the rule of face value being higher than content value also occur for some bullion coins made of silver or gold (and, rarely, other metals, such as platinum or palladium), intended for collectors or investors in precious metals. Examples of modern gold collector/investor coins include the British sovereign minted by the United Kingdom, the American Gold Eagle minted by the United States, the Canadian Gold Maple Leaf minted by Canada, and the Krugerrand, minted by South Africa. While the Eagle, Maple Leaf, and Sovereign coins have nominal (purely symbolic) face values; the Krugerrand does not.

 From approximately 1000 BC money in the shape of small knives and spades made of bronze were in use in China during the Zhou dynasty, with cast bronze replicas of cowrie shells in use before this. The first manufactured coins seems to have taken place separately in India, China, and in cities around the Aegean sea between 700 and 500 BC. While these Aegean coins were stamped (heated and hammered with insignia), the Indian coins (from the Ganges river valley) were punched metal disks, and Chinese coins (first developed in the Great Plain) were cast bronze with holes in the center to be strung together. The different forms and metallurgical process implies a separate development.

The first ruler in the Mediterranean known to have officially set standards of weight and money was Pheidon. Minting occurred in the latter parts of the 7th century amongst the cities of Grecian Asia Minor, spreading to Aegean parts of the Greek islands and the south of Italy by 500 BC. The first stamped money (having the mark of some authority in the form of a picture or words) can be seen in the Bibliothèque Nationale of Paris. It is an electrum stater of a turtle coin, coined at Aegina island. This coin dates about 700 BC.

Other coins made of Electrum (a naturally occurring alloy of silver and gold) were manufactured on a larger scale about 650 BC in Lydia (on the coast of what is now Turkey). Similar coinage was adopted and manufactured to their own standards in nearby cities of Ionia, including Mytilene and Phokaia (using coins of Electrum) and Aegina (using silver) during the 6th century BC. and soon became adopted in mainland Greece itself, and the Persian Empire (after it incorporated Lydia in 547 BC).

The use and export of silver coinage, along with soldiers paid in coins, contributed to the Athenian Empire's 5th century BC, dominance of the region. The silver used was mined in southern Attica at Laurium and Thorikos by a huge workforce of slave labour. A major silver vein discovery at Laurium in 483 BC led to the huge expansion of the Athenian military fleet.

It was the discovery of the touchstone which led the way for metal-based commodity money and coinage. Any soft metal can be tested for purity on a touchstone, allowing one to quickly calculate the total content of a particular metal in a lump. Gold is a soft metal, which is also hard to come by, dense, and storable. As a result, monetary gold spread very quickly from Asia Minor, where it first gained wide usage, to the entire world.

Using such a system still required several steps and mathematical calculation. The touchstone allows one to estimate the amount of gold in an alloy, which is then multiplied by the weight to find the amount of gold alone in a lump. To make this process easier, the concept of standard coinage was introduced. Coins were pre-weighed and pre-alloyed, so as long as the manufacturer was aware of the origin of the coin, no use of the touchstone was required. Coins were typically minted by governments in a carefully protected process, and then stamped with an emblem that guaranteed the weight and value of the metal. It was, however, extremely common for governments to assert that the value of such money lay in its emblem and thus to subsequently reduce the value of the currency by lowering the content of valuable metal.

Gold and silver were used as the most common form of money throughout history. In many languages, such as Spanish, French, and Italian, the word for silver is still directly related to the word for money. Although gold and silver were commonly used to mint coins, other metals were used. For instance, Ancient Sparta minted coins from iron to discourage its citizens from engaging in foreign trade. In the early seventeenth century Sweden lacked more precious metal and so produced "plate money", which were large slabs of copper approximately 50 cm or more in length and width, appropriately stamped with indications of their value.

Gold coinage began to be minted again in Europe in the thirteenth century. Frederick the II is credited with having re-introduced the metal to currency during the time of the Crusades. During the fourteenth century Europe had en masse converted from use of silver in currency to minting of gold Vienna transferred from minting silver to instead gold during 1328.

Metal based coins had the advantage of carrying their value within the coins themselves – on the other hand, they induced manipulations: the clipping of coins in the attempt to get and recycle the precious metal. A greater problem was the simultaneous co-existence of gold, silver and copper coins in Europe. English and Spanish traders valued gold coins more than silver coins, as many of their neighbors did, with the effect that the English gold-based guinea coin began to rise against the English silver based crown in the 1670s and 1680s. Consequently, silver was ultimately pulled out of England for dubious amounts of gold coming into the country at a rate no other European nation would share. 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 into the system with national Banks guaranteeing to change money into gold at a promised 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. The difference is these values is seigniorage.

Trade bills of exchange

Bills of exchange became prevalent with the expansion of European trade toward the end of the Middle Ages. A flourishing Italian wholesale trade in cloth, woolen clothing, wine, tin and other commodities was heavily dependent on credit for its rapid expansion. Goods were supplied to a buyer against a bill of exchange, which constituted the buyer's promise to make payment at some specified future date. Provided that the buyer was reputable or the bill was endorsed by a credible guarantor, the seller could then present the bill to a merchant banker and redeem it in money at a discounted value before it actually became due. The main purpose of these bills nevertheless was, that traveling with cash was particularly dangerous at the time. A deposit could be made with a banker in one town, in turn a bill of exchange was handed out, that could be redeemed in another town.

These bills could also be used as a form of payment by the seller to make additional purchases from his own suppliers. Thus, the bills – an early form of credit – became both a medium of exchange and a medium for storage of value. Like the loans made by the Egyptian grain banks, this trade credit became a significant source for the creation of new money. In England, bills of exchange became an important form of credit and money during last quarter of the 18th century and the first quarter of the 19th century before banknotes, checks and cash credit lines were widely available.

Tallies

The acceptance of symbolic forms of money opened up vast new realms for human creativity. A symbol could be used to represent something of value that was available in physical storage somewhere else in space, such as grain in the warehouse. It could also be used to represent something of value that would be available later in time, such as a promissory note or bill of exchange, a document ordering someone to pay a certain sum of money to another on a specific date or when certain conditions have been fulfilled.

In the 12th century, the English monarchy introduced an early version of the bill of exchange in the form of a notched piece of wood known as a tally stick. Tallies originally came into use at a time when paper was rare and costly, but their use persisted until the early 19th Century, even after paper forms of money had become prevalent. The notches were used to denote various amounts of taxes payable to the crown. Initially tallies were simply used as a form of receipt to the tax payer at the time of rendering his dues. As the revenue department became more efficient, they began issuing tallies to denote a promise of the tax assessee to make future tax payments at specified times during the year. Each tally consisted of a matching pair – one stick was given to the assessee at the time of assessment representing the amount of taxes to be paid later and the other held by the Treasury representing the amount of taxes be collected at a future date.

The Treasury discovered that these tallies could also be used to create money. When the crown had exhausted its current resources, it could use the tally receipts representing future tax payments due to the crown as a form of payment to its own creditors, who in turn could either collect the tax revenue directly from those assessed or use the same tally to pay their own taxes to the government. The tallies could also be sold to other parties in exchange for gold or silver coin at a discount reflecting the length of time remaining until the taxes was due for payment. Thus, the tallies became an accepted medium of exchange for some types of transactions and an accepted medium for store of value. Like the girobanks before it, the Treasury soon realized that it could also issue tallies that were not backed by any specific assessment of taxes. By doing so, the Treasury created new money that was backed by public trust and confidence in the monarchy rather than by specific revenue receipts.

Goldsmith bankers

Goldsmiths in England had been craftsmen, bullion merchants, money changers and money lenders since the 16th century. But they were not the first to act as financial intermediates; in the early 17th century, the scriveners were the first to keep deposits for the express purpose of relending them. Merchants and traders had amassed huge hoards of gold and entrusted their wealth to the Royal Mint for storage. In 1640 King Charles I seized the private gold stored in the mint as a forced loan (which was to be paid back over time). Thereafter merchants preferred to store their gold with the goldsmiths of London, who possessed private vaults, and charged a fee for that service. In exchange for each deposit of precious metal, the goldsmiths issued receipts certifying the quantity and purity of the metal they held as a bailee (i.e. in trust). These receipts could not be assigned (only the original depositor could collect the stored goods). Gradually the goldsmiths took over the function of the scriveners of relending on behalf of a depositor and also developed modern banking practices; promissory notes were issued for money deposited which by custom and/or law was a loan to the goldsmith, i.e. the depositor expressly allowed the goldsmith to use the money for any purpose including advances to his customers. The goldsmith charged no fee, or even paid interest on these deposits. Since the promissory notes were payable on demand, and the advances (loans) to the goldsmith's customers were repayable over a longer time period, this was an early form of fractional reserve banking. The promissory notes developed into an assignable instrument, which could circulate as a safe and convenient form of money backed by the goldsmith's promise to pay. Hence goldsmiths could advance loans in the form of gold money, or in the form of promissory notes, or in the form of checking accounts.[81] Gold deposits were relatively stable, often remaining with the goldsmith for years on end, so there was little risk of default so long as public trust in the goldsmith's integrity and financial soundness was maintained. Thus, the goldsmiths of London became the forerunners of British banking and prominent creators of new money based on credit.

Demand deposits

The primary business of the early merchant banks was promotion of trade. The new class of commercial banks made accepting deposits and issuing loans their principal activity. They lend the money they received on deposit. They created additional money in the form of new bank notes. The money they created was partially backed by gold, silver or other assets and partially backed only by public trust in the institutions that created it. Demand deposits are funds that are deposited in bank accounts and are available for withdrawal at the discretion of the depositor. The withdrawal of funds from the account does not require contacting or making any type of prior arrangements with the bank or credit union. As long as the account balance is sufficient to cover the amount of the withdrawal, and the withdrawal takes place in accordance with procedures set in place by the financial institution, the funds may be withdrawn on demand

Banknotes

A banknote (often known as a bill, paper money, or simply a note) is a type of negotiable instrument known as a promissory note, made by a bank, payable to the bearer on demand. When banknotes were first introduced, they were, in effect, a promise to pay the bearer in coins, either gold or silver, but they gradually became a substitute for the coins and a form of money in their own right. Banknotes were originally issued by commercial banks, but since their general acceptance as a form of money, most countries have assigned the responsibility for issuing national banknotes to a central bank. National banknotes are legal tender, meaning that medium of payment is allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Historically, banks sought to ensure that they could always pay customers in coins when they presented banknotes for payment. This practice of "backing" notes with something of substance is the basis for the history of central banks backing their currencies in gold or silver. Today, most national currencies have no backing in precious metals or commodities and have value only by fiat. With the exception of non-circulating high-value or precious metal issues, coins are used for lower valued monetary units, while banknotes are used for higher values.

The idea of using a durable light-weight substance as evidence of a promise to pay a bearer on demand originated in China during the Han Dynasty in 118 BC, and was made of leather. The first known banknote was first developed in China during the Tang and Song dynasties, starting in the 7th century. Its roots were in merchant receipts of deposit during the Tang Dynasty (618–907), as merchants and wholesalers desired to avoid the heavy bulk of copper coinage in large commercial transactions. During the Yuan Dynasty, banknotes were adopted by the Mongol Empire. In Europe, the concept of banknotes was first introduced during the 13th century by travelers such as Marco Polo, with European banknotes appearing in 1661 in Sweden. Counterfeiting, the forgery of banknotes, is an inherent challenge in issuing currency. It is countered by anticounterfeiting measures in the printing of banknotes. Fighting the counterfeiting of banknotes and cheques has been a principal driver of security printing methods development in recent centuries.

100 USD Banknote Paper money was introduced in Song Dynasty China during the 11th century. The development of the banknote began in the seventh century, with local issues of paper currency. Its roots were in merchant receipts of deposit during the Tang Dynasty (618–907), as merchants and wholesalers desired to avoid the heavy bulk of copper coinage in large commercial transactions. The issue of credit notes is often for a limited duration, and at some discount to the promised amount later. The jiaozi nevertheless did not replace coins during the Song Dynasty; paper money was used alongside the coins. The central government soon observed the economic advantages of printing paper money, issuing a monopoly right of several of the deposit shops to the issuance of these certificates of deposit. By the early 12th century, the amount of banknotes issued in a single year amounted to an annual rate of 26 million strings of cash coins

In the 13th century, paper money became known in Europe through the accounts of travelers, such as Marco Polo and William of Rubruck. Marco Polo's account of paper money during the Yuan Dynasty is the subject of a chapter of his book, The Travels of Marco Polo, titled "How the Great Kaan Causeth the Bark of Trees, Made into Something Like Paper, to Pass for Money All Over his Country." In medieval Italy and Flanders, because of the insecurity and impracticality of transporting large sums of money over long distances, money traders started using promissory notes. In the beginning these were personally registered, but they soon became a written order to pay the amount to whoever had it in their possession. These notes can be seen as a predecessor to regular banknotes. The first European banknotes were issued by Stockholms Banco, a predecessor of the Bank of Sweden, in 1661. These replaced the copper-plates being used instead as a means of payment although in 1664 the bank ran out of coins to redeem notes and ceased operating in the same year.

Inspired by the success of the London goldsmiths, some of which became the forerunners of great English banks, banks began issuing paper notes quite properly termed ‘banknotes’ which circulated in the same way that government issued currency circulates today. In England this practice continued up to 1694. Scottish banks continued issuing notes until 1850. In USA, this practice continued through the 19th Century, where at one time there were more than 5000 different types of bank notes issued by various commercial banks in America. Only the notes issued by the largest, most creditworthy banks were widely accepted. The script of smaller, lesser known institutions circulated locally. Farther from home it was only accepted at a discounted rate, if it was accepted at all. The proliferation of types of money went hand in hand with a multiplication in the number of financial institutions.

These banknotes were a form of representative money which could be converted into gold or silver by application at the bank. Since banks issued notes far in excess of the gold and silver they kept on deposit, sudden loss of public confidence in a bank could precipitate mass redemption of banknotes and result in bankruptcy.

The use of bank notes issued by private commercial banks as legal tender has gradually been replaced by the issuance of bank notes authorized and controlled by national governments. The Bank of England was granted sole rights to issue banknotes in England after 1694. In the USA, the Federal Reserve Bank was granted similar rights after its establishment in 1913. Until recently, these government-authorized currencies were forms of representative money, since they were partially backed by gold or silver and were theoretically convertible into gold or silver

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