Currencies - part 1
- Dobromir Risov
- Oct 23
- 5 min read
Updated: Nov 5
Intro
I came up with the idea to write about currencies following the blogs on Cryptocurrencies Crypto (pt.1) - an overview. This article covers the beginnings of currencies. I keep it concise and reach at the end of the article the 1970s. Part 2 which follows soon, takes it from there. In part 2 I will also review Bitcoin from a currency perspective. Thus providing to you an all round view on Cryptocurrencies when you account for the investment article Crypto (pt.2) - an investment?
Now, here, when you look at the symbols in the picture above - it´s the US dollar, the Euro, the British Pound and the Japanese Yen. These four currencies have been and still are amongst the most important currencies in the world. I will write about foreign currencies in part 2 as understanding those markets is important for personal investing. And now let´s get started with history:
Main
The beginnings
Human existence is about 300.000 years old and roots on the African continent. For about 90% of this time little happened from a currency perspective. This started to change when complex societies developed. That was around 6.000 years ago. From there, humans conducted trade through barter: "Bartering is a direct trade of goods and services." Bartering lasted for about 1000 years. Around 5000 years ago for the first time some sort of a currency came into play. A shift away from barter to shells. Yes. Shells were the means of exchange and have been used for the longest period of time in history.
For about 2000 years. It was not coins or banknotes. Now, the existence of a currency as we know it today, is about 3.000 years old:
The first coins
Coins closest to what we know today, were first used in Lydia around 700 BC. Lydia was located in current Turkey. Turkey is geographically mostly in Asia. This next step in currency development took place to facilitate trade across continents. What we in Europe are used to, today, was first introduced in Asia. Over time metal coins proved to be impractical in particular for transport. So, people started looking for new, easier or lighter ways to do business between each other.
Around 700 AC, this is some 1400 years after the discovery of coins in Lydia, the first banknotes were introduced. Again in Asia. It was not in current Turkey but in China. A mix of various banknotes, iron and copper coins and silver were in circulation. (At 1000 AC, the first financial bonds were introduced by merchants. I dedicate a chapter on this asset class in my Courses (List).) Well, still in China, it was under the Yuan dynasty in 1271 AC that banknotes were backed by silver. The introduction of the silver standard. Marco Polo, the merchant and explorer from Venice, known for his travels along the Silk Road in China said about banknotes:
“the Chinese emperor issues so many banknotes a year
that he could buy all the treasures in the world,
though it costs him nothing”.
What about Europe? Banknotes found late acceptance in Europe. Why so late, why did countries and kings in Europe stick for so much longer to coins as the sole currency?
A lack of trust in paper money, exemplified by the statement from Marco Polo was the cause. In 1661 the first banknotes were printed by the predecessor of today´s Swedish Central Bank. What we know today as a Central Bank did not exist back then. The Bank of England followed soon after. The issuance of standardised notes took another 100 years until implementation. People were able to exchange banknotes for silver and gold coins at their bank.
In Europe banknotes were issued by banks and private institutions, the government was not yet the sole provider as it is today. Richard Cooper writes "until the late 19th century most countries were on a bimetallic standard." A bimetallic standard means two precious metals - gold and silver are accepted as a backing of paper money. Banknotes could be exchanged for precious metals at a bank.
Europe in the 19th and 20th century
From a Western perspective, England was the first country to adopt the gold standard. France followed, then Germany, Switzerland and the United States. This took place in the period between 1820s to 1900s. Two non western countries, China and Mexico stuck with the silver standard writes Richard Cooper. The gold standard may have been a good idea but it didn´t work well, in particular during times of crisis, like wars. As a result the gold standard had to be temporarily interrupted. For the first time in 1914 when the first World War 1 broke out. The cause was simple: governments had to pay for more than they had gold for. Gold reserves were not enough.
After World War 2 the Bretton Woods System was introduced. Here countries agreed to use the US dollar as a reserve instead of gold, while the United States agreed to keep gold to allow conversion of the US dollar into gold. Some 25 years after Bretton Woods, the United States under Richard Nixon terminated the conversion of the US dollar to gold, and thus Bretton Woods ceased to exist. Since 1971, there is fiat currency. Fiat is a latin word, meaning:
"let it be done" or "it shall be".
Fiat is used as a command, as something becoming into existence. The command came from governments. While there was backing by gold there was little need to command to accept a currency. Another thing which changed as a result from leaving the gold standard: countries moved from a fixed exchange to a floating exchange rate. To be continued in part 2.
Sources:
The rise and fall of paper money in Yuan China 1260 - 1368 (Guan, Palma, Wu)
The Gold Standard: Historical Facts and Future Prospects (Richard N. Cooper)
The history of money and the emergence of forex (FTMO)
The history of money: Bartering to Banknotes to Bitcoins (Investopedia).
Frequently Asked Questions (FAQ)
What is the longest serving currency in history? Shells, they replaced barter trading and preceded coins.
Where were coins found first? Coins were found first in Lydia. They were dated from around 700 BC. Today, Lydia is part of Turkey. Asia as a continent played a pivotal role developing currencies.
How did people trade before there were currencies? People did barter trading. Barter is an exchange of a good or service for some other good or service.
What is the bi-metallic standard? It refers to two precious metals - gold and silver. These were used to back paper money to increase trust in paper banknotes.
What is the Bretton Woods system? With Bretton Woods countries agreed to use the US dollar as a reserve to their own currency. Prior countries used gold as their main reserve.
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