History of money

The history of money spans thousands of years. Numismatics is the scientific study of money and its history in all its varied forms.
Modern money (and most ancient money) is essentially a token — in other words, an abstraction. Paper currency is perhaps the most common type of physical money today. However, objects of gold or silver present many of money's essential properties. The term Price system is sometimes used to refer to methods using commodity valuation or money accounting systems.

The emergence of money
Shells of the pea-sized sea snail Nassarius kraussianus from Blombos Cave, South Africa, 75,000 B.C. Wear marks indicate the shells were strung as a necklace or bracelet.
The Sumer 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.
The Code of Hammurabi (Codex 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 codex of Ur-Nammu, king of Ur (ca. 2050 BC), the Codex of Eshnunna (ca. 1930 BC) and the codex 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 'wrong doing'... and compensation in money for various infractions of formalized law.
In cultures where metal working was unknown, shell or ivory jewelry were the most divisible, easily storeable and transportable, scarce, and hard to counterfeit objects that could be made. It is highly unlikely that there were formal markets in 100,000 BCE (any more than there are in recently observed hunter-gatherer cultures). Nevertheless, proto-money would have been useful in reducing the costs of less frequent transactions that were crucial to hunter-gatherer cultures, especially bride purchase, splitting property upon death, tribute, and inter-tribal trade in hunting ground rights (“starvation insurance”) and implements.

Commodity Money
Bartering has several problems, most notably the coincidence of wants problem, but even if a farmer growing fruit and a wheat-field farmer need what the other produces a direct barter swap is impossible for seasonal fruit that would spoil before the grain harvest. A solution is to indirectly trade fruit for wheat through a third, "intermediate", commodity: the fruit is exchanged for this when it ripens
Where 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 fiat currency it commonly adopts a foreign fiat currency. In some prisons where conventional money is prohibited, it is quite common for cigarettes to take on a monetary quality, and throughout history, gold has taken on this unofficial monetary function.

Standardized coinage
From early times, metals, where available, have usually been favored for use as proto-money over such commodities as cattle, cowry shells, or salt, because they are at once durable, portable, and easily divisible. The use of gold as proto-money has been traced back to the fourth millennium B.C. when the Egyptians used gold bars of a set weight as a medium of exchange, as the Sumerians had done somewhat earlier with silver bars. The first stamped money (having the mark of some authority in the form of a picture or words) was introduced about 650 B.C. in Lydia.[5]
Coinage was widely adopted across Ionia and mainland Greece during the 6th century B.C., eventually leading to the Athenian Empire's 5th century B.C., dominance of the region through their export of silver coinage, mined in southern Attica at Laurium and Thorikos. A major silver vein discovery at Laurium in 483 BC led to the huge expansion of the Athenian military fleet. Competing coinage standards at the time were maintained by Mytilene and Phokaia using coins denominated in Electrum, Aegina in silver.

A Persian coin.
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.Although gold and silver were commonly used to mint coins, other metals could be 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.
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.

Representative money
The system of commodity money in many instances evolved into a system of representative money. This occurred because banks would issue a paper receipt to their depositors, indicating that the receipt was redeemable for whatever precious goods were being stored (usually gold or silver money). It didn't take long before the receipts were traded as money, because everyone knew they were "as good as gold". Representative paper money made possible the practice of fractional reserve banking, in which bankers would print receipts above and beyond the amount of actual precious metal on deposit.
So in this system, paper currency and non-precious coinage had very little intrinsic value, but achieved significant market value by being backed by a promise to redeem it for a given weight of precious metal, such as silver. This is the origin of the term "British Pound" for instance; it was a unit of money backed by a Tower pound of sterling silver, hence the currency Pound Sterling. For much of the nineteenth and twentieth centuries, many currencies were based on representative money through use of the gold standard.

Credit money
Credit money often exists in conjunction with other money such as fiat money or commodity money, and from the user's point of view is indistinguishable from it. Most of the western world's money is credit money derived from national fiat money currencies.
In a modern economy, a bank will lend to borrowers in excess of the reserve it carries at any time, this is known as fractional reserve banking. In doing so, it increases the total money supply above that of the total amount of the fiat money in existence (also known as M0). While a bank will not have access to sufficient cash (fiat money) to meet all the obligations it has to depositors if they wish to withdraw the balance of their cheque accounts (credit money), the majority of transactions will occur using the credit money (cheques and electronic transfers).


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