HISTORY OF MONEY
Miniature bronze knives, axes, and other tools, used in place of the real tools which served as items of exchange, were circulating in China as early as 1100 bc. Coins, made of electrum, first appeared around the 6th-century bc in the district of Lydia, in Asia Minor, at that time an important industrial and trading country. Such money was genuine commodity money, with a value determined by its metallic content. Coins rapidly proliferated throughout the world’s more developed economies. Monarchs, aristocrats, cities, and institutions began making money stamped with their identifying mark as a certificate of authenticity testifying to the coin’s metallic value.
Some early coins had a very stable composition, such as the drachma issued by Athens from the 6th-century bc which kept a fairly constant content of 65-67 grains of fine silver, or the round copper Chinese qian (cash) introduced in the 4th century, which remained a standard coin for 2,000 years. However, coins were always being clipped or shaven by holders for their precious metal, and issuing authorities were prone to debasing the coinage, securing a short-term profit by reducing the precious metal content. Low-denomination coins of bronze or copper were effectively fiat money, with a value depending mainly on the number of gold or silver coins they could be exchanged for. Gold or silver coins in particular often circulated outside their country of the issue because of their intrinsic value: thus the Spanish silver peso became a current coin in China from the 16th century.
Once established, coins created a monetary system whose characteristics remains essentially constant for millennia, one of the few enduring changes being the introduction of milled edges for European coins in the 17th century to deter clipping. Paper currency was first introduced in China around the 9th century, as redeemable cash certificates issued for the Tang dynasty government by private bankers. Backed by the pervasive authority of the Chinese state, such money could retain its value across the empire, obviating the need for transport of weighty silver. Made a government monopoly under the Song dynasty, paper currency persisted through Chinese history, despite upsets caused by political change and issuing of paper not backed by silver or other reserves. The problem of paper debasement kept silver as the Chinese standard for big transactions thereafter. Paper money first arose in the West in the 16th century, as promissory notes issued by banks against money deposits held in the bank. Such notes of exchange proliferated: French colonial authorities in Canada used playing cards signed by the governor as a promise of payment from 1685 since the shipment of money from France was slow.
Paper money became increasingly common from the 18th century but remained credit money, issued against deposits in gold or silver. Fiat money, when it arose, was usually an emergency measure in wartime, like the American greenback. Private banks were increasingly supplanted by central banks as the issuing authorities for paper currency. By the late 19th century, falls in the value of gold led to an international gold standard, in which all currencies were interchangeable with gold, and money value (rather than prices) fixed by the currency’s accepted parity with gold. Most governments suspended their currencies’ convertibility in World War I and attempts to reintroduce the international gold standard foundered after the Depression. Great Britain left the gold standard in 1931, and the transformation of the world’s currencies into fiat money with values fixed wholly by market demand was completed by the severance of the United States dollar’s link to gold in 1971.