and currencies, which in turn depends on the relative strengths of national economies, which in turn depend on commodity prices, which in turn…
Perhaps we should look at it another way. A dollar is worth a dollar because the US government says it is. Okay?
Better still, let’s go back to the beginning.
A goat and two shekels
The first forms of money were commodities that were in common use and had a generally agreed value relative to other goods, and which therefore became accepted as payment. The most obvious examples are coins made of gold, silver or copper, but before coins came into general use people used all kinds of things: seeds, tobacco, rice, salt, tea, grain, linen, even goats.
The value usually depended on the weight, which is why so many currency units are still called lira (from the Latin libra) or pound. The original pound sterling, introduced to Britain in the 12th century, was equal to one troy pound of sterling silver. (Silver currently costs around £200 per pound, by the way). The troy weight system is still used for precious metals, as in the troy ounce of gold. The name comes from the French town of Troyes, an important trading center since early Roman times.
Historical evidence suggests that the first unit of currency was the shekel of Mesopotamia, which came into use around 3000 BCE. Shekel probably referred to a weight of barley initially, but by 550 BCE a coin had been introduced by the king of Lydia (in what is now Turkey) to make life easier for traders. These gold discs were stamped with an official seal to certify their purity and weight, giving them a readily accepted value. They also had the advantage of being easy to carry around, and they didn’t rot away, unlike most commodities. The use of coins quickly spread throughout ancient Greece. By around 350 BCE, Aristotle was writing about the concept of non-commodity money, such as we use today: ‘Money exists not by nature, but by law,’ he explained.
Aristotle was one of the first philosophers to write about economics, and in particular the value of money. In trying to explain how we arrive at an agreed value when exchanging goods, and how money makes this process easier, he concluded that money provided a measure of value determined by need, or demand, rather than the value being intrinsic to the goods themselves. Value is subjective – we each put different values on goods because our perception of a thing’s usefulness or desirability varies – but demand, for the purposes of trade through the market, requires a standard unit of measure, and money provides this. The price represents a threshold determined by wants; if you want something enough, you’ll pay the price.
Coins were also used in China and India by Aristotle’s time, possibly earlier, but these were more like bronze tokens than true coins, as they weren’t marked by an official stamp. By 280 BCE, the Roman Republic had begun minting coins in gold, silver, brass and copper. Initially these coins were stamped with the image of the goddess Roma, but by Julius Caesar’s time they featured the emperor himself. These early Roman coins had an intrinsic value in their content of precious metal, though as coins they tended to be worth around twice that value.
Later coinage issued in Europe and elsewhere had a lower content of precious metal relative to its face value, allowing the issuing government to mint more coins from its limited supply of gold, silver or copper. This process of ‘debasement’ of coins reduces the value of the coinage. This in turn causes inflation, which is bad for the citizens, because their money will buy less, but can be good for the government because its debts will be devalued along with the currency.
The first banknotes
Around 2500 BCE, when the shekel was being used as currency in Mesopotamia, there was also a form of credit money authorized by the Babylonian kings, who used clay tablets to record transactions of some kind. It is thought that these clay tablets, hundreds of which have been found in temple ruins, were receipts for barley paid to the temple as a tax, and there is evidence to suggest that they were also traded as a form of ‘IOU’, in which case they would have been the first form of banknote, and as such the first form of actual money, predating coins by two millennia or more. This would mean that the first forms of money were also the first forms of recorded debt; so the link between money creation and debt creation might be as old as money itself.
Paper money was first introduced in China around the eighth century, as a form of receipt used by merchants who didn’t want to carry large quantities of coins around. The merchant would deposit coins with a trusted person – the banker – who would write a note confirming that a certain number of coins had been deposited, or a certain weight of gold. This note could then be exchanged for goods. The person who sold those goods, on presentation of the note to the banker, or any other banker in the region, could then redeem the coins.
In the case of clay tablets, paper currency and coins that lacked intrinsic value (in other words, were not worth their weight in gold), money was representative of a value rather than actually holding that value itself. This ‘representative money’ acted like a certificate to show that a certain amount of gold or silver (or grain in the earliest cases) was stored at the central bank, or treasury, in the way that a note for one pound sterling could be exchanged for one troy pound of sterling silver. In effect, it was a promise by the government, or the bank on the government’s behalf, to hand over that amount of bullion.
By the 19th century, most of the world’s currencies had become ‘representative’ by being linked to the gold standard, and remained so until the 1970s, after which time money became nothing more than a government promise, known as ‘fiat’ money, from the Latin for ‘it shall be’.
The gold standard
Gold has been valued as a commodity, both for jewelry and as coinage, for thousands of years, and has for a long time been accepted everywhere as a trusted currency, thanks to a proven record of holding its value. Along with silver, gold was the standard medium of payment for international trade well into the 20th century. Its value is guaranteed by its rarity.
Like all elemental metals, gold was formed in space by nucleosynthesis, the process by which a nuclear explosion, a collapsing star for example, creates new atomic nuclei.
Relatively small quantities of these metals combined with more abundant elements in the formation of planets, as happened with Earth. Because of its weight, gold sank deep within the molten mantel of the newly formed planet. The traces we find today have mostly been thrown up from the mantel by deep volcanic activity. It is also likely that some of the heavy metals found near the surface of the earth, including gold, come from asteroid impacts, most of which occurred around four billion years ago.
Figure 23
Unlike the mineral wealth that we use as fuel, or metals lost through industrial process or corrosion, nearly all the gold that has ever been mined, around 175,000 tonnes by 2014, is still around today, mostly in the form of bullion or jewelry. Around 2,500 tonnes are mined every year, and this quantity is limited by the physical constraints of the mining process, so although it has generally risen with economic growth, the rate of gold production doesn’t greatly change.
At one time silver was more popular for coinage in Europe, being more available than gold but still scarce enough to hold its value. Silver ingots had been used as a medium of exchange in China since around 200 CE. As world trade began to increase in the 16th century, in particular between China and the Spanish and Portuguese, silver became the standard method of payment.
Silver dollar coins became popular. The term ‘dollar’ was originally the English term for the German ‘thaler’ – an abbreviation of the name of a place where silver was mined in what is now the Czech Republic. This region of Bohemia was part of
