A brief history of money

Where all begins

1792 - 1750 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!

640 - 630 BC The earliest coins made in Lydia, Asia Minor, consisted of electrum, a naturally occurring amalgam of gold and silver.

640 - 630 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.

1095-1270: 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 doesn’t 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.

1542-1551 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. 960- 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.

1690 - 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.

1704 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).

1848 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