A brief history of money

Where all begins BC: Money and banking originates in Babylonia out of the activities of temples and palaces which provided safe places for the storage of valuables. Initially deposits of grain are accepted and later other goods including cattle, agricultural implements, and precious metals.

The Code of Hammurabi includes laws governing banking operations - all carved in stone! BC The earliest coins made in Lydia, Asia Minor, consisted of electrum, a naturally occurring amalgam of gold and silver.

BC: Athens issues bronze and silver coins. The Athenian public hoards silver coins which, as a result, quickly disappear from circulation, leaving only the inferior bronze ones According to Demosthenes 10% is the normal rate of interest for run-of- the-mill business. For risky business such as lending for shipping rates of between 20% and 30% are normal.

390 BC The Gauls attack Rome The cackling of geese in the capitol, where the city's reserves of money are kept, alerts the defenders. The grateful Romans build a shrine to Moneta, the goddess of warning, and from Moneta the words money and mint are derived.

: The Crusades The need to transfer large sums of money to finance the Crusades provides a stimulus to the re-emergence of banking in western Europe.

The functions of money measure of value medium of exchange store of value

Money throughout the history of the world Shells Live stock Precious stones Skulls Pearls Wheat Feathers Brass Silver Gold Paper money

Gold !

Gold as money widely accepted divisible easy to measure easy to carry non-perishable (although it wears out) impossible to forge

Macro-economic equilibrium Requires that the demand for money equals the supply of money

Demand for monetary gold is a function of economic needs an expanding economy needs extra money the demand for monetary gold competes with the demand from the industry (i.e., electronics, medical equipment, space research etc.)

Supply of gold Is a function of natural resources Nature doesnt care if the PM wants to increase the money supply

Why would governments want to issue more and more money? To keep up with demand Seignorage means more wealth for the issuer Seignorage = face value of money - cost of issuing money

250 AD: Nero debases the gold and silver coinages.Twenty years later, the silver content of Roman coins has fallen to only 4%

270 AD: Aurelian issues new, nearly pure coins, using gold from his eastern conquests He raises the coins nominal value by 2½ times hoping in this way to stay ahead of inflation. This "reform" sends inflation soaring.

The Great Debasement Henry VIII debases the coinage of England as a means of raising revenue.

1560 Elizabeth I begins the reform of England's debased coinage Thomas Gresham, after whom Gresham's law ("bad money drives out good") is named, is an influential adviser. The debased coins are recalled and melted down and the base and precious metals separated.

Gold as money: A summary When debasing of coins is prohibited: Very little incentive for governments to "fudge" with the money supply Gold is even deflationary

Paper money c Issues of Chinese paper money start to become regular

Paper money 1659 The earliest British cheque is issued This is an order to the London goldsmiths Morris and Clayton to pay a Mr Delboe £ 400. Because notes are accepted as evidence of ability to pay they are a convenient alternative to handling coins or bullion.

The Massachusetts Bay Colony issued the first paper money in the colonies which would later form the United States.

Paper money 1698 Coins form less than half the English money supply Davenant, a contemporary writer, estimates that the total value of coins in circulation is less than that of tallies, bills, banknotes etc. Increasingly the power of money creation is passing from the King, in charge of the mint, to the London money market and provincial banks. Political and constitutional power is also affected by this transfer of financial power Promissory Notes Act This confirms the legality in England of goldsmith's notes as negotiable, i.e. payable to the bearer rather than to a named person.

Paper money 1832 Capital punishment for forging banknotes abolished in Britain The maximum penalty for forgery is reduced from death to transportation for life (e.g. exile to Australia) Bank of France is given a nationwide monopoly of note issues The national bank is given a monopoly of note issuing to fill the gap left by the failure of numerous local banks. The Bank of France also begins to develop a large network of branches in different parts of the country.

Paper money was initially a claim on gold has no natural (intrinsic value), hence acceptance is backed by guarantees from a central authority during tumultuous economic periods, drove gold out of circulation