The History of Currency

Currency represents wealth, a means to an end, and much more—has undergone a long, storied evolution that can be traced back to the origins of human civilisation itself. The use of currency is intertwined with the history of money, which by its most common definition is a means of exchanging goods and services.

Ancient Origins

Historians note that ancient societies discovered over time that it was often easier, and safer, to exchange goods with one another than to go to battle for them. Scholars trace such exchange back into human prehistory, 10,000 years or more ago.^[1]

It's been found that humans relied on barter as money, or the direct exchange of goods and services. Examples of items bartered include anything considered of value, be it food, tools, weapons, materials, property, clothing, adornments or household wares.

The barter system evolved, and certain items, such as livestock, grains and metals, gained broader acceptance as a standard means of exchange, most likely for their easy measurability. Historical records show that as early as the 10th millennium B.C. onward, certain domestic animals such as cattle and goats were frequently traded among individuals and societies.^[2]

With the development of farming and later writing in Mesopotamia from the 8th millennium BC onward, the use of grains for trade became commonplace. The Sumerian rulers in cities such as Uruk and Ur built large granaries and developed sophisticated accounting systems to assure that fair exchanges were made to farmers and especially to local authorities. Initially, in some societies, transactions were been made with tokens that resembled coins.^[3] The purpose of the tokens, which were marked with an image of the item being traded, was to serve as a reminder that an item had exchanged hands.

The Evolution of Coin

Around the 7th millennium BC in western and central Asia, societies developed a means of trade centered on that region's rich mineral deposits, extracting metals such as gold, copper and tin. By the 3rd millennium BC, the use of gold bars with standardised weights and value was common in cities in Egypt and Mesopotamia.^[4] At the time these "commodity currencies" came into existence, other societies around the globe also started experimenting with standardised forms of currency. Among some items used for trade were cowrie shells, common in East Asia and Africa, as well as stones, beads, animal skins and weapons like knives and spearheads. These forms of currency trade persisted and were refined over the next millennia, until the appearance of the first standardised unit of currency, the coin.

According to historians, coins were first crafted in the 7th century BC, in the ancient kingdom of Lydia, on the western coast of the region now known as Turkey. These first coins were made of a mixture of gold and silver known as electrum. The coins were not always round, as commonly seen today, but they often had irregular sizes and shapes, and were inscribed on only one side. They did come in standardised weights, however, ranging from about 0.15 grams to around 14 grams. Some of the earliest found had the names of two individuals inscribed in ancient Lydian script, Walwel and Kalil, which were thought to possibly refer to the Lydian ruler at the time, King Alyattes, and his father Sadyattes.^[5]

From Lydia, the use of electrum coins spread to Greek cities on the coast of Asia Minor, and then to the mainland of ancient Greece. Almost as early as rulers and nations began to produce coin currencies, the practice of counterfeiting followed suit. One early practice was to shave the edges of coins to gain material to produce new coins through forgery.

China and Paper Currency

Independently from Lydia and Greece, kingdoms and individuals in China also disseminated the use of their own form of coins, based on miniaturised metallic representations of tools such as knives, agricultural implements and axes. Later, the Chinese adopted rounded coins with inscriptions of Chinese characters.

The Chinese also innovated as they were the first to use paper currency. As the first to manufacture paper around the year 100 by using materials such as linen, hemp, bamboo and mulberry bark, the Chinese had already developed the practice of writing credit notes on paper and deer skins as guarantees for long-distance trade. The paper bills first appeared during China's Tang dynasty around the 7th century in the Valley of the Yellow River.^[6]

The practice evolved into the development of paper currency, which was found to be a lighter weight substitute for the thousands of coins that needed to be transported between regions to carry out increasingly larger transactions from growing trade. Local Chinese authorities at that time suggested that merchants exchange their metallic coins at the government treasury for paper notes. It came to be known as "fei qian," or flying money, likely for its tendency to carried away in a strong wind. The use of paper currency later became fully institutionalised in China during the Song dynasty, which began around 960.^[7]

The Emergence of the Banknote in Europe

Paper currency didn't gain widespread usage in Europe until later. It was first brought to the region by travelers like Marco Polo and William of Rubruck. Europe, however, didn't have the necessary material for paper currency. The first paper mill in Europe was only established by the Moors in the region that is now Spain in around 1150.

But in the tumultuous environment of the early Renaissance period in Europe, where transporting increasingly large sums of metallic coins was risky, merchants and governments around Europe began to adopt the practice of making transactions with the handwritten promissory notes.

By the 1500s, banking institutions had emerged that gave receipts in exchange for currency deposits. The receipts were made in the name of the depositors and were payable upon demand. Many of the receipts also had the words "or the bearer" after the name of the depositor, meaning they could be redeemed later by anyone presenting them.

In 1661, the government of Sweden became the first European government to issue its own state-sponsored banknote as legal tender.^[8] By 1694, the Bank of England, as part of King William III's effort to finance a war against France, became the first government bank to make permanent issuance of paper currency.

Like earlier banknotes, these were also payable "to the bearer," allowing for their circulation among the population. The notes were denominated in "pounds," which was a currency unit that had been in existence in England since reign of Anglo-Saxon King Offa of Mercia in the middle ages. ^[10] Initially, the Bank of England issued notes in larger quantities of 50 pounds, far higher than the average annual earnings of most individuals, so most people continued to use coins and few actually did business with paper currency.

Technology to Foil Counterfeiting

With the growing issuance of paper currency, the problem of counterfeiting also increased. Among the successful early technologies used to foil counterfeiters was watermarking, a technique to make a physical impression on bills that first appeared in Italy around 1282. The technique was later advanced in 1826 by John Marshall with his invention of a rolling impression device called the "dandy roll."

The Dollar

Meanwhile, as the Bank of England was issuing banknotes, in the fledgling U.S. colonies many colonists who had no access to banknotes were still using forms of barter, such as trading furs, tools and foodstuffs with Native Americans.^[13] But by the time of the U.S. war for independence from England in 1775, the continental congress was already issuing paper currency known as "the Continental," which was denominated in units known as dollars.^[14]

The term "dollar" was taken from a widely circulated Dutch currency at the time that traced the etymology of its own name back to the German term "thaler" used to refer to coins minted in the 1500s in the region of Saint Joachim's valley in Bohemia.^[15] The colonial American government didn't have strong control over how many were created, however, and the currency quickly lost value.

In 1786, ten years after independence, the congress authorised the issuance of the dollar by the U.S. government, and in 1792 the government created the U.S. mint to manufacture and circulate coins. It wasn't until the Civil War began in 1861 that the government began regularly printing U.S. dollar bills for general circulation and redemption upon demand.^[16]

Forex Trading and Currency Guarantees

Although the pound, the dollar and other currencies of major industrialised nations have been in existence in some form for hundreds of years, the regulation and breadth of currency markets has undergone marked transformation since their beginnings. With the creation of standardised currencies by governments and their increased international trade, the first foreign exchange market, or forex market, appeared in Amsterdam in the 17th century. While currency began as a means of trade to obtain other items, it has evolved over time to where it is considered an asset itself, and now represents the world's largest market, with approximately US$5 trillion traded around the globe on a daily basis.^[17] Of principle importance for currency holders have been changes in the types of guarantees backing the value of currencies.

Early forms of money, including coins, were based on the intrinsic value of the materials they were made from, but paper currencies historically required the backing of some other asset. Since early on, the most common asset to guarantee currencies was gold, which was coveted both for its versatility of use and aesthetic appeal. Britain was the first to formally adopt a "gold standard" for its currency in 1821 based on the production of gold coins at its royal mint.^[18]

The relative value of currencies was not only important to individuals holding them, but was also a key factor for the prosperity of entire nations and economies, and it was frequently part of the circumstances leading to international conflicts over the years. In 1946, after the conflicts of WWI and WWII, countries around the world entered into the Bretton Woods agreement, which helped formalise the use of gold and also the U.S. dollar to back currency values around the world.

As in the past, the value of currencies under the system necessarily corresponded to the amount of gold held by governments. As the production and reserves of gold failed to keep pace with the demand for creation of money, the U.S. in 1973 decided to go off the gold standard, and other countries followed suit.^[19]

Since then, the relative value of currencies has been backed not by one particular asset, but by governments' creditworthiness and the faith of the public in their abilities to pay back any debts owed by them. The abandonment of the gold standard helped alleviate the need for some governments to amass and stockpile large supplies of gold, but it also forced countries to seek new means to guarantee stability for their currencies as they "floated" freely against one another.

The global currency market fluctuations that occurred from that time were among the factors that helped encourage the nations of continental Europe in 1999 to follow through with their long-held plans to consolidate their national currencies into a single unit called the Euro.

For investors, trading has grown ever more sophisticated since formal exchanges first appeared. And in the 20th century, with the emergence of electronic trading, large volumes of currencies began to be traded among banks, businesses and individuals around the globe nearly instantaneously.

Further, investors have also adopted new financial instruments known as derivatives to gain financial advantage in carrying out their currency trading. These instruments, such as futures, options and swaps, allow traders to time their exchange of currencies according to their wishes and hedge against large unpredictable fluctuations in the value of currencies caused by global political and economic events.

Continued Evolution

The concept of currency both as a physical and now digital means of trade continues to evolve. Recognising the steadfast popularity of physical currencies, governments have sought ways to make currency cheaper to produce, more durable and more difficult to counterfeit. The government of Australia was a recent innovator in that effort, introducing banknotes made from plastic polymers in the 1980s that have since gained popularity around the globe.^[20] The last century has also seen the rise in the popularity of credit, debit and electronic money transfer services. In some cases, this has reduced or eliminated the need for physical currency altogether.

Meanwhile, individual traders, seeking to circumvent the volatility and unpredictability of national currencies that are tied to political decision-making by governments, have experimented with new "digital" currencies such as the bitcoin that are traded entirely in an online electronic environments. History shows that it's unlikely that more traditional physical forms of currency will disappear as humans have shown a fundamental desire for a physical means of trade. But at the same time, developments have shown that individuals and societies will seek ever-widening definitions for the concept of "currency" to increase the economic efficiency and advantages obtained from trading.

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