Commodity Money
Many cultures around the world eventually developed the use of commodity money. Ancient
Where ever 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 currency it commonly adopts a foreign currency. In 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
A 640 BC one-third stater coin from Lydia , shown larger. 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 earlier had done 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.[7]
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 of Electrum; Aegina used silver.
It was the discovery of the touchstone which led the way for metal-based commodity money and coinage. Any soft metal can be tested for purity on a touchstone, allowing one to quickly calculate the total content of a particular metal in a lump. Gold is a soft metal, which is also hard to come by, dense, and storable. As a result, monetary gold spread very quickly from Asia Minor, where it first gained wide usage, to the entire world. Using such a system still required several steps and mathematical calculation. The touchstone allows one to estimate the amount of gold in an alloy, which is then multiplied by the weight to find the amount of gold alone in a lump.
A Persian 309-379 AD silver drachm from the Sasanian
Dynasty.
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. It was, however,
extremely common for governments to assert the value of such money lay in its
emblem and thus to subsequently debase the currency by lowering the content of
valuable 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
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
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
Another step in the evolution of money was the change from a coin being a unit of weight to being a unit of value. a distinction could be made between its commodity value and its specie value. The difference is these values is seigniorage. See also: Roman currency, coinage metal, for conversions of the European coins before the introduction of paper money: The Marteau Early 18th-Century Currency Converter.
Representative money
An example of representative money, this 1896 note could be
exchanged for five US Dollars worth of silver.
Representative money refers to money that consists
of a token or certificate made of paper (legal
tender). The use of the various types of money including representative
money, tracks the course of money from the past to the present.[10]
Token
money may be called “representative money” in the sense that, say, a piece
of paper might 'represent' or be a claim on a commodity also.[11]
Gold certificates or Silver certificates are a type of
representative money[11]
which were used in the United
States as currency until 1933.
The term 'representative money' has been used in the past "to signify that a certain amount of bullion was stored in a Treasury while the equivalent paper in circulation" represented the bullion.[12] Representative money differs from commodity money which is actually made of some physical commodity. In his Treatise on Money,(1930:7) Keynes distinguished between commodity money and representative money, dividing the latter into “fiat money” and “managed money.”
Fiat money
Fiat money refers to money that is not backed by
reserves of another commodity. The money itself is given value by government fiat
(Latin for
"let it be done") or decree, enforcing legal tender laws,
previously known as "forced tender", whereby debtors are legally
relieved of the debt if they (offer to) pay it off in the government's money.
By law the refusal of "legal tender" money in favor of some other form
of payment is illegal, and has at times in history (Rome
under Diocletian,
and post-revolutionary France during the collapse of
the assignats)
invoked the death penalty.
Governments through history have often switched to forms of fiat money in times of need such as war, sometimes by suspending the service they provided of exchanging their money for gold, and other times by simply printing the money that they needed. When governments produce money more rapidly than economic growth, the money supply overtakes economic value. Therefore, the excess money eventually dilutes the market value of all money issued. This is called inflation. See open market operations.
In 1971 the US finally switched to fiat money indefinitely. At this point in time many of the economically developed countries' currencies were fixed to the US dollar (see Bretton Woods Conference), and so this single step meant that much of the western world's currencies became fiat money based.
Following the first Gulf War the president of
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).
Strictly speaking a debt is not money, primarily because debt can not act as a unit of account. All debts are denominated in units of something external to the debt. However, credit money certainly acts as a substitute for money when it is used in other functions of money (medium of exchange and store of value).
No comments:
Post a Comment