The history of cash part 2
Primitive Banks
At this stage there were no coins. Instead, the value of metal was judged by its weight. The legacy of this can be seen in words such as the English “spend”, which is derived from the Latin verb expendere, meaning “to weigh”.
Before coins (and later, bank-notes) could come into existence, the institution of banking had to be invented. This order of events may seem surprising, but if you think about it, notes and coins need pre-existing bureaucratic structures to give them their validity. One of their crucial features until relatively recently was the “promise to pay the bearer” clause. The holder had to have confidence that there were institutions that would exchange these symbolic forms of money for the commodity that underpinned them (often gold), or at least that they would do so in theory.
The first banking institutions were royal palaces, temples and state warehouses in Mesopotamia and Egypt. Because they were well guarded, these places were considered ideal for the storage of grain and other commodities. Those making deposits would be issued with receipts, which could then be used to conduct transactions with other parties. Written on clay tablets or papyrus, they can be regarded as the forerunners of today’s transferable cheques and banknotes. As the practice of using such receipts to make purchases caught on, private banking houses began to appear. They are mentioned (and regulated) in the Babylonian Code of Hammurabi (c1760BC).
Early Coins
The scene was almost set for the invention of coins. In the meantime, the Chinese came up with a couple of interesting intermediate stages between commodity money and true coinage. In about 1000BC, after at least two centuries of conducting transactions with the genuine articles, they started using bronze and copper models of cowrie shells. Then, around the eighth century BC, “spade” and “knife” monies came into vogue. These were miniaturised versions of agricultural implements that were too small to be of practical use, but gave nods to items that were. They came in standardised weights and tended to be marked by the issuing authority.
The world’s first true coins are widely believed to have been minted in Lydia in Asia Minor around 640BC. They were made of an alloy of gold and silver called electrum and were probably made in order to guarantee the purity of the constituent metal.
The design – a roaring lion’s head symbolising the ruling Mermnad dynasty – was stamped on one side only. This was a result of the primitive method of manufacture. Blank pieces of electrum were placed over dies and blows were struck against their reverses. At first such “hammer marks” were plain, but when the practice of minting coins spread to other parts of the Greek-speaking world, they began to incorporate the badges of the issuing cities. In time, the Persians and other ancient peoples started to produce coins of their own.
The Rise of Paper Money
The next phase in the evolution of currency was the invention of paper money. The first banknotes were issued in China during the reign of Emperor Hien Tsung (AD806-821), but not as a result of any great financial insight. The sole reason for their introduction was an acute copper shortage that precluded the striking of new coins. Eventually, China got carried away with the ease of producing this new form of cash. Too much of it was printed and this led to inflation. In 1455, the Chinese abandoned the use of paper money and did not return to it for several centuries.
The Chinese experience was repeated when Sweden became the first European nation to experiment with paper money. In 1661, a banker named Johan Palmstruch began to issue credit notes that could be exchanged at his Stockholm bank for stated numbers of silver coins. Unfortunately for Palmstruch, who had consulted the Swedish government before launching the scheme, he got carried away with his licence to print money. He issued more notes than his bank had silver deposits to redeem, and in 1668 was prosecuted for fraud. He was initially sentenced to death, but the penalty was later commuted to imprisonment.
Despite the less than glorious outcomes to these early trials of paper money, the tide of history was firmly on the side of the new form of currency. As economic activity increased in Europe, it became apparent that the money supply needed to be expanded beyond the limits imposed by holdings of precious metals.
This recognition led to the establishment of the first national central banks. People were much more likely to trust notes backed by government reserves than those issued by private institutions. They even proved willing to accept temporary governmental bans on the redemption of banknotes for silver, as happened in Britain during the “Restriction Period” of 1797 to 1821.
