Tuesday, June 18, 2013


Question: Who came up with the idea of money?

The Greeks believed that money originated in Lydia, an ancient kingdom of Asia Minor, and it does seem likely that coinage in the West originates with silver coins minted in Lydia in the sixth century BCE.  By this time, though, the Chinese had already been using coins for about 500 years.  The Chinese had long used cowrie shells as a type of currency, and it seems that the first coins were in the shape of these shells.  The Chinese also used other valuable items as "trade markers," and they made replicas of these before they developed the idea of round coins.  Throughout Chinese history, coins typically had holes in the middle so that they could be held on a string.

In the East, coins tended to be made of base metals, and the value of the coins was not completely tied to the value of the metal that makes up the coins.  In the West, early coins were essentially developed as a convenient means of determining how much of a valuable metal you actually had. The early Lydian coins were made of silver, which was a metal that had long been used for trade.  The coins were standard sizes and were stamped with the insignia of the issuing authority, originally the King of Lydia.  If you trusted the king and were sure that you did not have a counterfeit, then you would not have to weigh the silver you received in payment, which was useful because people often argued over the accuracy of various scales.  Some coins were even made in a such a way that they could be divided into pieces if you were buying something at discount; our terms "pieces of eight" and "two bits" originate from this practice.

Another question is suggested by all this: When did people decide that the value of money should not be based on the value of the metal but on some other, less tangible, value? This is something that took longer than you might expect, particularly in the West.  Today, all major, international currencies are what we call "fiat currencies."  A US dollar, for example, is not worth a dollar because it is made of something valuable, but because the US government says it is worth a dollar.  As long as people trust that other people will continue to value the currency, then they will use them and accept them as payment.

When I was born, the currency was still "tied to" gold.  In other words, each dollar bill presumably had the same value as a dollar gold coin, and each dollar was supposed to correspond to some amount of gold held by the United States.  In other words, the dollar bills were essentially representations of actual gold currency.  Of course, the US did not have gold backing up all the money, which is essentially what is meant by "inflation" - an increase in the amount of currency available resulting in the lowering of value of the currency.  In 1971, the US gave up the pretext of backing money using gold.

In the East,  a pure fiat currency was instituted in the 11th century CE.  Why wasn't the original coin currency of China considered a fiat currency?  It seems that historical economists don't consider it a fiat currency because the coins were thought to have some intrinsic value, although their value as currency was not limited entirely to this value.

As archaeologists continue to explore ancient sites, it seems likely that they will find that the idea of currency arose slowly rather than being developed all at once.  For example, there are prehistoric carved obsidian objects found in sites in Asia Minor that may have been used as coins.  They are typically found in collections near places of trade, and analysis does not indicate that they had been used for any practical purposes.  It seems that they were likely first used to keep track of trades, and that the notion of using them as a means of purchase developed from that.

Write me a note to let me know if I answered your question.

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