In our last article, we concluded by looking at the merits of paper money as an alternative to coins and how many European countries adopted this form of currency after the ancient Chinese. In this article we are going to pick up from where we last left off by going through the development of money from the Middle Ages to modern times.
Banking and gold (1450 - 1971)
Goldsmiths, people who specialize with gold and other precious metals, were money lenders in England since the 16th century. But unlike today’s banking, they didn’t “connect” savers and people who took out loans. It’s a rather interesting story:
In 1640, King Charles I seized the gold that was hoarded by merchants and traders in the Royal Mint and set up a “forced loan” that was to be paid back overtime in order to fund the Anglo-French War (1627-1629). Realizing that their gold was no longer safe there, merchants began to store their gold with goldsmiths, who operated private vaults and charged a fee for the storage.
In exchange for each deposit of precious metal, the goldsmiths issued receipts stating the quantity and purity of the metals they had. Gradually, as more people deposited their gold, the goldsmiths began of relending on behalf of a depositor and developed a modern banking system like today’s.
Promissory notes were issued for money deposited which was a sort of loan to the goldsmith - only if the depository gave permission could the goldsmith lend out the money. The promissory notes became a safe and convenient form of money backed by the goldsmith's promise to pay and so they could give loans either in the form of gold money or in the form of promissory notes. Gold deposits were stable and trusted by the public, eventually becoming the leaders of British banking and creators of new money based on credit.
The first European banknotes were issued by Stockholms Banco (Sweden’s central bank back then) and soon replaced copper-plates in the country. Other banks around Europe, inspired by the success of England’s goldsmiths, also began issuing paper notes and referred to them to what we call them today: “banknotes.” In the United States during the free banking era (1837-1862), there were more than 5000 different types of banknotes issued by all sorts of private banks across the country. However, only the notes issued by the largest and most creditworthy banks were widely accepted.
Towards the end of the 19th century, there was a gradual centralization of who had the authority to issue bank notes. At first it was just any private bank, but then only some commercial banks were granted this privilege and then in most Western countries, only one institution had the authority to do so. In England, it was the Bank of England and in the US it was the Federal Reserve.
Electronic money (1980 - present)
With the world increasingly becoming digitized, it was only a matter of time before money itself was molded into 1s and 0s. David Chaum first proposed the idea of digital cash in a 1981 research paper and a few years later decided to give this idea a spin with DigiCash, an electronic cash company. He filed for bankruptcy in 1998.
While the company may have failed, the idea didn’t. By the 2000s, most banks stored money digitally in their databases and the number of electronic transactions more than doubled in 2012. The benefits of digital money were the same that paper money had compared to coins - easier, faster, and more flexible payments.
From its first appearances in ancient times to its importance in today’s economies, money has a lengthy and rich history. As such, its essence is deceptively complex: ask a friend what money is, and they’ll probably go on about green dollar bills. But upon further questioning, it’s soon realized that what money really is can’t be explained simply by everyday observation. We have to look through history and find out why money emerged in the first place - it didn’t come from some central authority suddenly introducing it, but rather, from ordinary people who stumbled upon a superior way to facilitate trade.