A History of Money!

Banking & Credit

By :- Danish Dua Pulkit Sen Karan of class X-A

What did we do before money?

In the beginning, people bartered. Barter is the exchange of a good or

service for another good or service bag of rice for a bag of beans.

Barter

Commodity Money

However, what if you couldn't agree what something was worth in exchange or you didn't want what the other person had?

To solve that problem humans developed what is called commodity money.

Commodity Money Commodity money consists of objects

that have value but which are used as a medium of exchange.

Pretty shells could serve as commodity money.

Gold jewelry can serve as commodity money.

Among prisoners, cigarettes often serve as commodity money.

Soo…

As a practical matter, money is: Anything that is widely accepted in

exchange.

Which brings us to “Fiat” money

No, not the Italian cars… Fiat money is something that has no

intrinsic value, but which the government declares by fiat to be money.

Wait, back up, what’s this fiat again?

Fiat money is money that has value only because of government regulation or law.

The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree

So, our dollars are Fiat? If you look at a dollar bill, you will see the

phrase "legal tender for all debts, public and private."

What that means is that if someone sells you something and you "tender" the currency (offer the currency as payment), you have legally paid, whether or not the seller accepts your currency.

By making U.S. currency legal tender in this country, the government forces people to accept it as a medium of exchange.

Holla at the dolla

…And we accept it, right?

With the concept of fiat money, the government can turn worthless pieces of paper into something of value.

The reason that people value money is that it allows for complex exchanges to take place more easily than using barter.

Trading Commodities A commodity is a basic item

used by almost everyone. In the past, salt, tea,

tobacco, cattle and seeds were commodities and therefore were once used as money.

Carrying bags of salt and other commodities was hard, and commodities were difficult to store or were perishable.

Coins!

Metals objects were introduced as money around 5000 B.C.

By 700 BC, the Lydians became the first in the Western world to make coins.

Countries were soon minting their own series of coins with specific values.

Metal was used because it was readily available, easy to work with and could be recycled.

Since coins were given a certain value, it became easier to compare the cost of items people wanted.

Cha-ching! More than 2,700 years old Made from electrum, a natural alloy of gold

and silver, the coin originated in the area of Lydia (Asia Minor/Turkey)

(Weighed about as much as a quarter.)

Paper? Some of the earliest known paper

money dates back to China, where the issue of paper money became common from about AD 960 onwards.

Oldest Surviving Banknote

Printed with the block on the previous page

1 Kuan, 1368-1398

Paper worth as much as gold coins?

With the introduction of paper currency and non-precious coinage, commodity money evolved into representative money.

This meant that what money itself was made of no longer had to be very valuable.

Representative money was backed by a government or bank's promise to exchange it for a certain amount of silver or gold.

The “Standard”

For example, the old British Pound bill or Pound Sterling was once guaranteed to be redeemable for a pound of sterling silver.

For most of the nineteenth and twentieth centuries, the majority of currencies were based on representative money through the use of the gold standard.

Early Money in America Traditional native currencies such as furs and

wampum - Massachusetts declared white wampum legal tender for sums up to one shilling, a limit raised substantially in 1643.

The so-called "Country Pay" or "Country Money" such as tobacco, rice, indigo, wheat, maize, etc. - "cash crops" in more than one sense.

Tobacco was used as money in and around Virginia for nearly 200 years, so lasting about twice as long as the US gold standard.

Early American Money (continued) Unofficial coinages, mostly foreign, and

especially Spanish and Portuguese coins.

Not all the unofficial coins were foreign. John Hall set up a private mint in

Massachusetts in 1652 and his popular "pine-tree" shillings until the mint was forced to close down in 1684.

The scarce but official British coinage.

Tobacco Notes Another early form of paper money used in

north America was "tobacco notes". These were certificates attesting to the quality

and quantity of tobacco deposited in public warehouses.

These certificates circulated much more conveniently than the actual leaf and were authorized as legal tender in Virginia in 1727 and regularly accepted as such throughout most of the eighteenth century.

A tobacco note

Tobacco Notes = how

Let's say I lived in Maryland in 1740 and wanted to buy a new wagon wheel from the local store.  How could I pay for it?

Since tobacco served as money, I could offer the merchant a certain weight of tobacco, say 100 pounds, in exchange for the wheel. 

The merchant might not be too comfortable with this, since he knows that I might try to hide some "bad" tobacco with high quality tobacco. 

Tobacco Notes = continued The Maryland Tobacco Inspection Act of 1747

changed all of that.  Now, all tobacco had to be inspected by colonial inspectors.  Once the tobacco was inspected, tobacco "notes"

were issued that certified the quality.  Whoever held these tobacco notes owned the

tobacco.  Thus, I could pay the merchant 100 pounds of

tobacco by simply signing over the notes to him.  That way, he could go to the warehouse with the

notes in hand and claim the tobacco as his.

I.O.U. Tobacco

There is another way that I could pay for the wagon wheel with tobacco…  I could give the merchant an I.O.U. that

promised to pay him 100 pounds of tobacco in the future, when my crop came in. 

Before the Inspection Act, the merchant would be less willing to accept this I.O.U., since he would not be sure of the quality of tobacco. 

After the Inspection Act, the I.O.U. could promise to pay in "certified" tobacco

Early American Paper Money

Sources:

http://inventors.about.com/od/mstartinventions/a/money.htm

http://projects.exeter.ac.uk/RDavies/arian/northamerica.html

http://users.humboldt.edu/erick/econ323/topics/tobacco_notes.html