1.1. Introduction to money
1.1.2. A brief historical outline
Before the creation of money, valuable articles with a purpose of their own were used to create equivalents and be exchanged. These articles had to meet certain criteria: they had to be durable, transportable and have their own inherent value. There were three important historical stages prior to the creation of money as we know it today:
- The use of non-durable items as money, for example, salt (in China, Northern Africa and Mediterranean Europe) or cacao (in Mexico).
- The use of metals as money. The durability of metals allowed them to be used as a store of value. They could also be manufactured into relatively small pieces, which made them a good medium of exchange. Gold has always been the most valuable metal. As early as the end of the third millennium BC, the Mesopotamian peoples began to use ingots of precious metals in exchange for goods. Sources also indicate that silver was being used as a method of payment around 2500 BC.
- The use of the coin, which appeared once social organization and technology had developed to the point of employing standardized quantities of gold and silver in exchanges. The words for coin in a number of modern languages, including Spanish, Russian and Italian, are derived from the Latin “moneta”, meaning piece. The first known coin was the Sumerian “shekel”, from the word for a unit of measurement similar to a bushel of wheat, created around 3200 BC in the small kingdom of Lydia (an area that is now part of Turkey), from where it would spread around the world. These coins constituted the first monetary revolution in history and would eventually give rise to the present-day Western monetary system.
After the invention of the coin, there were no major upheavals in the history of money until the issue of the first paper money. Although China had begun to produce paper money about a thousand years earlier, it was only in 1661 that the Bank of Stockholm issued notes to offset the scarcity of gold and silver coins. In 1729, the American Benjamin Franklin was responsible for the introduction of paper currency as we know it. Then, in the nineteenth century, London bankers created a monetary system which would spread throughout the world and become the first global monetary system based on the gold standard.
The history of banking predates that of banknotes by several hundred years, however. The first precursor of today’s banks appeared in the thirteenth century, when members of the Knights Templar religious order performed early banking services for kings and popes. During the fifteenth century, the new bankers were Italian families, who plied their trade in marketplaces rather than in castles. The word bank is derived from the Italian “banco” (desk or bench) because of the way in which marketplace benches were used as makeshift exchange counters. These bankers received gold coins, for which they issued a promissory note or bill of exchange. They invented the bill of exchange, which consisted of a document pledging payment of a certain amount of money to a certain person at a given time and place. In practice, the bankers loaned to the rich, while the existing moneylenders and pawnbrokers continued to lend to the poor.
In the nineteenth century, a bank designated the Central Bank was established in the capital of each country, and was awarded the monopoly for the issue of its national paper currency. Subsequent to the Bretton Woods Agreement, which will be discussed later in this COURSE, the Central Banks fulfilled other functions: they are the lenders of last resort to the commercial banks; they are also ultimately responsible for the control of “inflation”, through the issue of money and the variation of key interest rates. Their clients are the country’s other banks. All Central Banks form an association with the World Bank, the International Monetary Fund, and the Bank for International Settlements, an independent organization in Basel, Switzerland.