Continuation of Part I: Bartering and Commodity money.
Standardized coinage
It was the discovery of the touchstone that paved the way for metal-based commodity money and
coinage. Any soft metal can be tested for purity on a touchstone, allowing one to quickly
calculate the total content of a particular metal in a lump. Gold is a soft metal, which is
also hard to come by, dense, and storable. For these reasons gold as a money spread very
quickly from Asia Minor where it first gained wide use, to the entire world.
Using such a system still required several steps and some math. The touchstone allowed you to
estimate the amount of gold in an alloy, which was then multiplied by the weight to find the
amount of gold alone in a lump.
To make this process easier, the concept of standard coinage was introduced. Coins were
pre-weighed and pre-alloyed, so as long as you were aware of the origin of the coin, no use
of the touchstone was required.
Coins were typically minted by governments in a carefully
protected process, and then stamped with an emblem that guaranteed the weight and value of
the metal. It was however extremely common for governments to assert that the value of such
money lay in its emblem and to subsequently debase the currency by lowering the content of
valuable metal.
Although gold and silver were commonly used to mint coins, other metals could be used. Ancient
Sparta minted coins from iron to discourage its citizens from engaging in foreign trade. In
the early seventeenth century Sweden lacked more precious metal and so produced "plate money,"
which were large slabs of copper approximately 50cm or more in length and width, appropriately
stamped with indications of their value.
The Value of metal Coins
Metal based coins had the advantage of carrying their value within the coins themselves - they
induced on the other hand manipulations: the clipping of coins in attempts to get and recycle
the precious metal.
The bigger problem was the simple co-existence of gold, silver and copper
coins in Europe's nations. English and Spanish traders valued gold coins at a higher rate of
silver coins than their neighbours would do, with the effect that the English gold-based
guinea coin began to rise against the English silver based crown in the 1670s and 1680s and
with the consequence that silver was ultimately pulled out of England for dubious amounts of
gold coming into the country at a rate no other European nation would share.
Stability came into the system with national Banks guaranteeing to change money into gold at
a promised rate, it did, however, not come easily. The Bank of England risked a national
financial catastrophe in the 1730s when customers demanded their money to be changed into
gold in a moment of crisis. Eventually London's merchants saved the bank and the nation with
financial guarantees.
Representative money
The system of commodity money
in many instances evolved into a system of representative money.
In this system, the material that constitutes the money itself had very little intrinsic
value, but none the less such money achieves significant market value through being scarce
as an artefact.
Paper currency and non-precious coinage was backed by a government or bank's promise to redeem
it for a given weight of precious metal, such as silver. This is the origin of the term
"British Pound" for instance; it was a unit of money backed by a Tower pound of sterling
silver - hence the currency Pound Sterling.
For much of the nineteenth and twentieth centuries, many currencies were based on
representative money through the use of the gold standard.
Read in Part III about Fiat money and Credit money.
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