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Better than barter

Money, one of the earliest and most significant inventions of civilization, is essential to the development of trade. Without it there is only barter, a relationship between two people each of whom has something which the other wants.

Money (which everybody wants) provides an intermediary substance, enabling the seller to choose when and where he wishes to become a buyer.

All primitive societies invest certain things with a special value - particularly livestock, and items of rarity or beauty. They are presented on ceremonial occasions such as weddings. The possession of large numbers of cattle or pigs is clear evidence of wealth and prestige.

But these objects are not money in our sense, capable of easy use in everyday transactions.

The most often quoted example of primitive money is shells - in Africa cowries and wampum in America. The small cowrie shell, deriving from the Maldive Islands in the Indian Ocean, is a treasured item in the civilizations of China and India from very early times. From India these attractive objects are carried along the trade routes to Africa. Similarly the American Indians use a small white cylindrical shell for ceremonial gifts, embroidered on to decorated belts or other ornaments. Europeans give the name 'wampum' to these precious items.

Both wampum and cowries eventually become a market currency, in the conventional sense, but only after the arrival of Europeans.

The earliest currency used in commercial transactions appears in Egypt and Mesopotamia by the third millennium BC. It consists of gold bars which need to be weighed to establish their value each time they are exchanged. Later they are supplemented by gold rings for smaller sums. In about 2500 BC an extensive trade, at Ebla in modern Syria, is based on currency of this kind in silver and gold.

Gold rings and ornaments, which can be worn for safe keeping as well as display, approach the ideal of a portable currency. Many poor women in India today still wear their limited wealth in this way, even when working in the fields or on the roads.

Safe in the temple: 18th century BC

Wealth compressed into the convenient form of gold brings one disadvantage. Unless well hidden or protected, it is easily stolen.

In early civilizations a temple is considered the safest refuge; it is a solid building, constantly attended, with a sacred character which itself may deter thieves. In Egypt and Mesopotamia gold is deposited in temples for safe-keeping. But it lies idle there, while others in the trading community or in government have desperate need of it. In Babylon at the time of Hammurabi, in the 18th century BC, there are records of loans made by the priests of the temple. The concept of banking has arrived.

The first mint: 7th century BC

The earliest known coins in the western world come from the city of Ephesus in Ionia (in western Turkey) in about 650 BC. The metal used is electrum, a natural alloy of gold and silver found locally. The coins are bean shaped and are struck on one side with a distinguishing mark, such as the image of a lion. The underlying purpose is to ensure a stable value in this variable metal of exchange, previously traded by weight alone. The state mint adds silver to the alloy to guarantee a mix of 55% gold to 45% silver.

A century later Croesus, king of neighbouring Lydia and famous for his wealth, becomes the first ruler to mint coins in pure gold and pure silver. Like the earlier coins, his are still stamped on just one side. They show the facing heads of a lion and a bull.

Greek cities, to the west of Lydia, and the great Persian empire to the east are quick to adopt the useful new technique of metal currency. By the end of the 6th century coinage is common throughout the region.

In distant Rome, as yet more backward, unworked lumps of bronze are now in use as currency. Their value is expressed in terms of sheep and cattle, a concept reflected still in the word 'pecuniary' in languages influenced by Latin. The Roman word for money, pecunia, derives from pecus, meaning cattle.

Bronze coins in China: 7th - 3rd century BC

By one of the strange coincidences of history, the idea of coinage occurs at the same period in two far separated parts of the world. While the craftsmen of Ephesus are striking coins in Asia Minor, the skilled casters of China are making coins by a different method - pouring molten bronze into moulds.

The results look very different. The Chinese bronze-casters, accustomed to turning out elaborate shapes for ritual vessels, incline to something more complex than a simple round coin.

Two shapes in particular are characteristic of the first Chinese coins. Coins of one type resemble the metal part of a spade, while others are like a knife blade with a handle. In both cases the flat surfaces are decorated with Chinese characters. These designs are copied in nearly all the states of China during the later centuries of the Zhou dynasty.

Shi Huangdi, the first emperor of China, introduces the more rational round coin in the late 3rd century BC. Still cast in bronze rather than struck, they have a square hole in the middle - a shape characteristic of far eastern coins for the next two millennia.

Greek and Roman financiers: from the 4th century BC

Banking activities in Greece are more varied and sophisticated than in any previous society. Private entrepreneurs, as well as temples and public bodies, now undertake financial transactions. They take deposits, make loans, change money from one currency to another and test coins for weight and purity.

They even engage in book transactions. Moneylenders can be found who will accept payment in one Greek city and arrange for credit in another, avoiding the need for the customer to transport or transfer large numbers of coins.

Rome, with its genius for administration, adopts and regularizes the banking practices of Greece. By the 2nd century AD a debt can officially be discharged by paying the appropriate sum into a bank, and public notaries are appointed to register such transactions.

The collapse of trade after the fall of the Roman empire makes bankers less necessary than before, and their demise is hastened by the hostility of the Christian church to the charging of interest. Usury comes to seem morally offensive. One anonymous medieval author declares vividly that 'a usurer is a bawd to his own money bags, taking a fee that they may engender together'.

Origins of today's currencies: 7th - 16th century

Many of the units of currency in use today derive from Roman originals, and more specifically from versions of the Roman coins minted during the Middle Ages. The stable currency of the Byzantine empire is a gold coin, the solidus, linked in later history with the various forms of European shilling. From about 690 it is joined as a hard currency by another gold coin, the dinar (from the Latin denarius), first minted by the caliph Abd-al-Malik in Damascus in about 690.

In the following century the Frankish king Pepin III introduces a silver denarius, or penny, which becomes the standard medieval coin in western Europe.

Later kings of the Carolingian dynasty standardize the penny, decreeing that 240 are to be struck from a pound of silver. It is subsequently established that twelve silver pennies are to be considered the equivalent of the Byzantine gold solidus or shilling.

Thus there evolves a monetary scale of 1:12:20 (penny:shilling:pound) which prevails in much of Europe until the decimalizing innovations of the French Revolution, and in Britain until 1971. At first the silver penny is the only local currency of the three. The shilling is a Byzantine gold coin used as a yardstick of value, while the pound is a measure of weight. Shillings and pounds later become European coins in their own right.

Subsequent coins of lasting resonance are the Venetian ducat, first minted in 1284, and Florence's famous fiorino d'oro ('golden florin') launched in 1252. Bearing the city's own name, this widely respected coin becomes a factor in Florence's banking success.

One of the most resonant names among modern currencies, that of the dollar, derives from a somewhat later coin - the large silver Joachimsthaler, widely known as the thaler, which is minted from 1517 in Bohemia and is named from the silver mines at Joachimsthal.

Paper money in China: 10th - 15th century

Paper money is first experimented with in China in about910, during the Five Dynasties period. It is a familiar currency by the end of the century under the Song dynasty. Another three centuries later it is one of the things about China which most astonishes Marco Polo (see Bank notes in China).

He describes in great detail how the notes are authenticated, and then unwittingly touches on the danger lurking within the delightful freedom to print money. He says that the emperor of China makes so many notes each year that he could buy the whole treasure of the world, 'though it costs him nothing'. By the early 15th century inflation has become such a problem that paper currency is abolished in the Ming empire.

Bank notes: 1661-1821

Paper currency makes its first appearance in Europe in the 17th century. Sweden can claim the priority (as also, a few years later, in the first national bank).

In 1656 Johan Palmstruch establishes the Stockholm Banco. It is a private bank but it has strong links with the state (half its profits are payable to the royal exchequer). In 1661, in consultation with the government, Palmstruch issues credit notes which can be exchanged, on presentation to his bank, for a stated number of silver coins.

Palmstruch's notes (the earliest to survive dates from a 1666 issue) are impressive-looking pieces of printed paper with eight hand-written signatures on each. If enough people trust them, these notes are genuine currency; they can be used to purchase goods in the market place if each holder of a note remains confident that he can indeed exchange it for conventional coins at the bank.

Predictably, the curse of paper money sinks the project. Palmstruch issues more notes than his bank can afford to redeem with silver. By 1667 he is in disgrace, facing a death penalty (commuted to imprisonment) for fraud.

Another half century passes before the next bank notes are issued in Europe, again by a far-sighted financier whose schemes come to naught. John Law, founder of the Banque Générale in Paris in 1716 (and later of the ill-fated Mississippi scheme) issues bank notes from January 1719. Public confidence in the system is inevitably shaken when a government decree, in May 1720, halves the value of this paper currency.

Throughout the commercially energetic 18th century there are frequent further experiments with bank notes - deriving from a recognized need to expand the currency supply beyond the availability of precious metals.

Gradually public confidence in these pieces of paper increases, particularly when they are issued by national banks with the backing of government reserves. In these circumstances it even becomes acceptable that a government should impose a temporary ban on the right of the holder of a note to exchange it for silver. This limitation is successfully imposed in Britain during the Napoleonic wars. The so-called Restriction Period lasts from 1797 to 1821.

With governments issuing the bank notes, the inherent danger is no longer bankruptcy but inflation. When the Restriction Period ends, in 1821, the British government takes the precaution of introducing the gold standard.

Minting shells: 16th - 18th century

The age of European exploration, from the 16th century, leads to interesting encounters between traders accustomed to a cash economy and traditional tribes valuing shells (cowries in Africa, wampum in America) as precious objects used primarily for ceremonial purposes. The Europeans, eager to trade in regions where there is no established coinage, make use of the value attached to these shells - and in doing so transform them, for a while, into a conventional currency.

In both regions the result is massive inflation. The Europeans, finding they have the power to flood the market with shells, inevitably debase the currency.

In America the colonists in the 18th century go to the length of inventing a machine which can manufacture white shell beads accepted as wampum by their Indian trading partners.

The African market is even more easily flooded with shell currency. Cowries, previously brought with difficulty to India and then overland through Africa, are now imported in shiploads by Dutch and British ships calling at the Maldives on their way back from the far east. They become a standard part of the price for slaves in west Africa. It has been calculated that during the 18th century more than 10,000 tons of these shells are brought round the Cape. By 1770 the price of a single slave is about 150,000 cowries.

This History is as yet incomplete.