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ECONOMICS - THE HISTORY OF MONEY

We often take our money for granted, thinking that it has always consisted of banknotes and metal coins. It is true that coins were first minted about 2500 years ago, but banknotes issued by governments have been around for only a few hundred years. We must also realise that the development of money took place separately in different parts of the world, in different ways, over several thousand years.

When trade first began around 9000 years ago, the barter system was often used, in which items like cattle and sacks of grain were exchanged, either for gifts or in markets. This practice evolved into the exchange of scarce, attractive objects like shells or beads, or useful commodities such as precious metals.

Gold and silver carry their value in themselves, and the use of gold can be traced back to around 4000 BC, when gold and silver bars were used for payment of debts and payment for goods.

The use of manufactured coins, often from silver, sems to have originated in India, China and the Mediterranean region between 700 BC and 500 BC, often for paying soldiers.

As trade expanded in Europe towards the end of the Middle Ages, 1200 to 1600 AD, a huge change took place in the development of money. Payment for goods began to be made by bills of exchange. These were actually promissory notes, or IOUs, in which the buyer promised to make payment at some future date. ("IOU" stands for "I owe you"). Look at this banknote picture, in which you can see the words "I promise to pay the bearer - - -".
SA_RESERVE_BANK_1 (21K)

The goldsmiths of London, some of whom became major banks, issued the first banknotes. Many people don't realise that banknotes - and all types of paper money - are actually IOUs. In England, banknotes were issued until around 1700, and Scottish banks continued this practice until 1850. In America, throughout the 19th century, there were more than 5000 different kinds of bank notes issued by various commercial banks.

This was the start of the modern world financial system which is based almost entirely on credit, which in turn is just the other side of debt.

At first, national banks created a stable system by guaranteeing to convert banknotes into gold at a promised rate. This was called The Gold Standard. However, countries one by one abandoned the gold standard, and began to print money which was backed by gold only in part, or not at all. For example, President Nixon took America off the gold standard in 1971, and the value of the US dollar has varied widely since then.

Banknotes are now issued only by the central banks of each country. In the absence of a gold standard, the value of a country's currency or money can undergo huge changes, as that value now depends on how well the country is doing in world trade and national prosperity. Such a judgement depends not simply on the size of the GDP (Gross Domestic product) of the country, but also on the size of its budget deficit (spending more than it borrows) and the size of its national debt (total amount of debt in the country).

Recently, the world has experienced financial crises, e.g. in 2008, when countries and companies ran up huge amounts of debt which they could not repay. In other words, they defaulted on their debt. Many governments, e.g. the US Federal Reserve, have yielded to the temptation of simply printing money to pay their debts - thus creating even bigger problems for their people.


SELECT THE CORRECT ANSWERS TO THESE QUESTIONS:

1. How has money developed during world history ?
   
   
   
   

2. How far back in history can we trace the "barter" system ?
   
   
   
   

3. What type of exchange first began to replace the barter system ?
   
   
   
   

4. What is the important difference between paper money and precious metals such as gold ?
   
   
   
   

5. What are the 4 important words on promissory notes and early banknotes ?
   
   
   
   

6. Who were the first issuers of banknotes in London
   
   
   
   

7. Who carried on issuing banknotes until around 1900 ?
   
   
   
   

8. What was first used to guarantee the value of a country's money ?
   
   
   
   

9. What can happen to money in the absence of a gold standard ?
   
   
   
   

10. What usually causes financial crises in the world ?
    
    
    
    

Now click the "Check Your Answers" button below to see your score.

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