By 3,000 BCE the shekel had become a standard monetary unit in Mesopotamia, defining a specific weight of barley for equivalents in silver, bronze, and copper. Using a single unit to define both mass and currency was later adopted for the British pound, which originated as a 1-pound lump of silver.
Early codes of law formalized the role of money in civil society, beginning with the oldest known laws: the Mesopotamian Code of Ur-Nammu (~2,100 BCE), which decreed in its prologue: “equity in the land.” The Mesopotamian civilization developed a currency-based large-scale economy.
Transactions using precious metals as currency were carried out by clipping off material equivalent to the value of the item purchased. This is how coinage came into use.
The Indus Valley Civilization in India may have used coins sometime in the 2nd millennium bce. But the first documented coinage there dates to the 7th century bce, contemporaneous with coins being used in Asia Minor.
China had minted base-metal coins – bronze and copper – a few hundred years earlier. The first Chinese coins were shaped like small knives: valuable tools in an agrarian society. In later taking a circular shape, Chinese coins were most often made with holes so they could be strung together. The Chinese method for making coins spread throughout east and southeast Asia.
It is most likely that the first coins struck in the Western world were by an enterprising banker or merchant in a coastal Greek city as a form of advertising. It was not long before government officials recognized the prestige and profit from arrogating money minting as a state monopoly.
The effigy of a ruler, or even a symbol, such as the owl of Athens, stamped on a coin face signified both a purity of the metal and the glory of its issuer. Beyond inspirational symbols, coins commonly had their weights stamped on them. These measures were taken to avoid debasement. Counterfeiting has been a constant problem throughout history.
In Mexico before its invasion by Europeans, indigenous people used cacao beans as currency. These were debased by replacing the contents of the beans with mud.
The earliest Western coins were struck from electrum: a natural pale-yellow alloy of gold and silver found in the alluvial valleys of Anatolia (Lydia). The relative proportions of metals in electrum were variable, and so pure gold or silver gained preference.
Silver was more plentiful and so more practical for commerce. The leading role of Athens in ancient Greek society contributed to the predominance of silver then and there. That the Greek state-owned silver mines at Laurium set silver as standard. From those mines the Greeks were able to afford the resources to dominate the region, especially against Persian encroachment. The Athenian Golden Age owes its luster, if not its name, to the silver at Laurium.
The ancient Greek city-states exhausted themselves in internecine struggles, but Hellenistic culture survived, and even spread, thanks to the 4th-century-bce conquests of Alexander the Great. Although the empire Alexander carved out disintegrated after his death, economic and cultural continuity persisted, as Greek civil servants manned successor states, and Greek merchants established themselves throughout the lands that Alexander took. Commerce has long been a glue for human sociality.
The use of precious-metal coinage did not obviate other commodity currencies. In Roman times salt served as a common currency. Roman soldiers were sometimes paid in salt: salarium in Latin, which formed the root of the modern word salary.
The difficulty with currency comes in its preservation of value over an expanse; hence coinage with intrinsic value has been historically employed. This has most often meant precious metals, especially gold, and, less preferably, silver.
The trust in Rome’s coins was so strong that even outside the empire’s borders, people were happy to receive payment in denarii. In the 1st century ce Roman coins were an accepted medium of exchange in the markets of India, even though the closest Roman legion was thousands of miles away. ~ Yuval Noah Harari
China was the first-known purveyor of banknotes. By ~1300 bce notebook-sized sheets of mulberry bark were circulating as currency. The sheets carried the emperor’s seal and the signatures of the country’s treasurers.
The first government-issued paper money was printed in Song Dynasty China (960–1279) during in the 11th century. This followed from deposit receipts that developed during the earlier Tang Dynasty (618–907), as merchants and wholesalers sought to avoid carrying bulky coinage for costly commercial transactions.
The notion of paper money came to Europe in the 13th century through accounts of travelers to the Far East, such as itinerant Italian merchant Marco Polo and Flemish explorer William of Rubruck.
As trade expanded in Europe toward the end of the Middle Ages bills of exchange became prevalent. Their main purpose was to avoid the dangerous practice of traveling with cash. A deposit could be made with a banker in one town for a bill of exchange, which could be redeemed in another town. Such bills could also be used as payment.
This early form of credit became a significant source for creating money, in similar fashion to ancient Egyptian grain banks which issued notes from deposits. Bills of exchange were widely used in England before credit lines became widely available in the mid-19th century.
Offa of Mercia ruled the Anglo-Saxon English kingdom of Mercia from 758 until his death in 796. Offa popularized the silver penny in England. The king’s coin makers produced 240 pennies from a pound of silver, whence the pound became the basic unit of British currency.
The London Mint was instituted in 886 during the reign of Alfred the Great. At the time it was only one of many mints throughout the kingdom.
By 1279, the Mint had moved to the tower of London, where it resided for next 500 years. The Royal Mint attained a monopoly on making the coins of the realm in the 16th century. But it was not the sole source of currency: precious metals themselves still served as money.
From 1300, to ensure quality, the precious-metal trade was regulated by law in Britain. During the 14th century, goldsmiths in England were incorporated into local guilds. These measures provided both quality assurance and stability to the industry.
Goldsmiths were not merely bullion merchants. They were also money lenders; in the process creating new money – as lending always does, by creating a temporal rift between assets and liabilities.
Once established, merchants and traders entrusted their deposits of wealth to the Royal Mint. In 1640, King Charles I, a staunch believer in the divine right of kings, took advantage of that trust: seizing the private gold stored in the Mint as a forced loan. Thereafter, merchants deemed their gold more secure in the private vaults of local goldsmiths.
Charles’ regal caprice led to goldsmiths becoming the forerunners of Britain’s modern banking system, by evolving various financial instruments, including lending via promissory notes, offering checking accounts, and lines of credit.
The first banknotes issued were let by a Swedish banker in 1661. He then went about multiplying loans through banknotes. A few years later, unable to repurchase his notes with coin, the banker went bankrupt. He managed to escape the death penalty that awaited coin forgers but did spend the rest of his sorry days in prison.
Banknotes were always a statement of confidence in its issuer: an implicit promise that each slip was backed by a precious metal, typically gold, equivalent to the denomination of the note. Such trust occasionally wavered.
The Bank of England, founded in 1694 to fund the government, went through crises of confidence in its early years, provoked by those who opposed the nascent institution. The Bank experienced its first crisis in 1696, when it was just 2 years old. There was a want of money throughout the country. All the clipped silver had been called in, but the new currency was not yet ready.
Even the rich were living on credit. The stock price of the Bank precipitously declined. Sensing the distress, London goldsmiths, who detested the corporation that had broken in on their private banking system, demanded payment in gold on their notes. Caught out, the Bank directors partially paid all legitimate creditors, but refused the goldsmiths’ notes. Though the episode proved a severe shock to the financial system, the panic subsided.
Another Bank crisis arose a decade later, after the conquests of Louis XIV alarmed England and shook the credit of the Bank. The goldsmiths struck again, buying up Bank bills and demanding payment. Loyal nobility chipped in and saved the credit of the Bank.
Industrialization in England was propelled by banknotes. This was the first time in modern history that money was massively created in the private sector rather than exclusively by a government and its mines.
Britain was able to self-finance its industrialization only because of its expansive private banking sector. The Pax Britannica that lasted a century (1815–1914) owed much to the financial embezzlement of Charles I, which set off a chain of fortuitous events.
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A fool and his money are soon parted. ~ English poet and farmer Thomas Tusser in the mid-16th century
The history of finance continues later, within topical context.