Money, from Cattle to Coins to Crypto: Part II
14th century to present day
In the previous post, we discussed the origins of money in the gift economies of the prehistoric times and commodity money in early civilizations. We also saw the introduction of banking and payments instruments like promissory notes and bills of exchange in the Roman empire and the Indian subcontinent. We ended the last article with the rise of trans-national banking during the Crusades.
Here’s a quick timeline of where we are in the story of money —
This article will pick up where we left off last time, at the end of the crusades in the 14th century AD. We are at the start of the Renaissance (14th-17th centuries), a period when many parts of Europe underwent a period of rapid scientific, cultural and economic progress.
Money & Banking during the Renaissance
Italy
Around the 14th and 15th centuries, the Renaissance was in full swing in the Italian city states of Florence, Venice and Genoa. [1]
Florence, in particular, was the epicenter of the commercial revival of Italy. Here, large wholesale merchants began settling accounts using bills of exchange, and in time began to carry out banking operations. Goods were supplied to a buyer against a bill of exchange, which constituted the buyer’s promise to make payment at some specified future date. The seller could then present the bill to a merchant banker and redeem it in money at a discounted value before it actually became due. [2]
The importance of Florentine bankers was magnified with the fall of the Templar order (see: previous article) in the early 14th century. Revenues accrued to the Roman Catholic Church in all the countries of the Christendom, including the tithes in England. The Church was everywhere receiving legacies and donations. Through their branches, the banking houses were in position to collect these revenues. They were also able to make advances of the money to the Pope. [1]
Indian Subcontinent
During the years of the Renaissance, even the Indian subcontinent saw some new monetary developments. In 1329, the taka (a currency still used in Bangaladesh today) was officially introduced by the monetary reforms of Muhammad bin Tughlaq, emperor of the Delhi Sultanate. [3]
Between 1540 and 1545, Sher Shah Suri introduced a silver coin called a rupiya. [4] Its use was continued by the Mughal rulers, and it was the prevalent medium of exchange when European traders arrived in Bengal nearly 300 years later.
Dutch golden age
Back in Europe, the 16th and 17th centuries witnessed an economic and cultural golden age for the Dutch republic. They dominated international trade, especially with the Far East, and witnessed the birth of precursors to many modern financial institutions. In 1602, the Dutch East India Company was created simultaneously with and financed by the Amsterdam Stock Exchange. The Company received a nationwide monopoly on trade with Asian countries, and by 1609 the Bank of Amsterdam (aka Wisselbank) was created to finance the growing trade with the region. This was a precursor to central banks, and inspired the founding of, among others, the Bank of England.[5]
Evolution of Modern Banking
Between 1600–1900, England and the USA saw the development of various modern banking practices like fractional reserve banking, issue of banknotes and central banks.
Goldsmith Bankers
By the 17th century, wealthy merchants in England had begun to store their gold with the goldsmiths in London. In exchange for deposits, the goldsmiths gave the merchants promissory notes, i.e., receipts certifying the quantity and purity of the deposit. The goldsmiths soon found themselves with money for which they had no immediate use, and they began to lend the money out at interest to both the merchants and the government. Finding substantial profit in this business, they began to solicit deposits and pay interest on them.
Over time, the receipts of deposit came to be used as a means of payment instead of coin. This was a crucial development, and was the first time that paper instruments became transferable, a crucial feature of cash today. They began to lend out more (in the form of paper money) than the gold and silver coins they had on hand, a practice that came to be known as holding fractional reserves. [6]
Bank of England
Meanwhile, the credit of the British monarchy had been diminished by a default in 1672. The monarchy’s urgent need for funds at rates lower than those charged by the goldsmiths, and the example of the public Bank of Amsterdam, which had been able to make an ample supply of credit available at low interest rates, led to the establishment of the Bank of England in 1694. The Bank of England succeeded in raising money for the government at relatively low rates. [7]
The Bank of England was founded in 1694 by raising 1.2 million pounds from the public to finance the monarchy. The creditors were incorporated in the Governor and Company of the Bank of England.
Banknotes
Inspired by the example set by the London goldsmiths, banks began issuing paper notes termed banknotes, which circulated in the same way that government-issued currency circulates today. In England this practice continued up to 1694, after which the Bank of England was given the privilege of being the only joint-stock company to issue banknotes. These rights were amended to be stronger and almost exclusive to the BoE by the Bank Charter Act of 1844. In the United States, the Federal Reserve was given similar rights upon its incorporation in 1913.
Development of Central Banks
The Bank of England was originally incorporated as a private institution on the back of a loan that was given to the crown in 1694, but overtime it morphed into an institution of the state. The 1844 Charter Act in Britain is probably the most important development in modern central banking. It institutionalized bullionism and fixed the amount of banknotes that the BoE could issue — equal to the value of the gold and silver bullion that it possessed plus a fixed amount of government debt. [7] This set the example of a gold standard which was widely adopted and used in the 19th and early 20th centuries, along with the formation of central banks across Europe and America, notably the Bank of France in 1800 by Napoleon and the Federal Reserve in the US in 1913.
The Reserve Bank of India was created by the RBI Act of 1934, which gave the Reserve Bank sole rights to create promissory notes and bills of exchange that were payable on demand. It also made them the sole issuer of banknotes in India. [8]
Fun fact: Banknotes in India have a promissory clause on them — “I promise to pay the bearer the sum of X rupees”. However, these are not promissory notes because the bank’s obligation to pay the value of the banknote does not arise out of a contract but out of statutory (legal) provisions. [9]
Rise and Fall of the Gold Standard
The Bank Charter Act officially put Britain on the gold standard, a notion that all money in circulation is — directly or indirectly — gold.
In a pure gold standard, gold itself would be used in all transactions. This has many problems, including potential debasing and the need to assay the gold in every transaction. In practice, the gold standard represents a convertibility between gold and paper money, the commitment (usually by the central bank of a country) to convert the notes into a specified amount and purity of gold on demand. The paper money in this representative gold system is called representative money.
The United States government, after flirting with a dual gold and silver standard for most of the 1800’s, settled on a pure gold standard in the year 1900 with the passage of the Gold Standard Act. This declared gold the unit of account, and all government issued money was maintained in parity with gold. A gold reserve for government issued paper notes was also established. [10]
Many countries in Europe, Asia and America in the 19th and early 20th centuries pegged (fixed the conversion ratio of) their currencies to the U.S. dollar or the British pound sterling. This fixed exchange rate indirectly put them on to the gold standard, and was called the gold exchange standard. [11]
With the shortage of liquidity brought about by World War I and exacerbated by the Great Depression of the 1930’s, several countries abandoned the gold standard, most notably Great Britain in 1931. The United States maintained the gold standard until 1933, when a series of bank runs forced the government to suspend all trading in gold bullion or coin in the country.
Then in 1944, the Bretton Woods agreement was signed between the Allied nations. This maintained that the gold standard was to be upheld internationally but all countries suspended domestic convertibility. The Bretton Woods agreement held true for nearly 3 decades until the United States officially came off the gold standard in 1971, rendering the US Dollar a fiat currency.
Contemporary Money and Payment Systems
Fiat Money
Since the decoupling of the US Dollar from the gold standard by Richard Nixon in 1971, a system of national fiat currencies has been used globally. Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.
The value of a fiat currency is not tied to any commodity, but is instead derived from the supply and demand of the currency, and the stability of the government that issues it. [12] Most modern currencies today are fiat currencies including the US Dollar, the Pound Sterling and the Indian Rupee.
Electronic Money & ATMs
With the rise of computer technology in the latter half of the 20th century, money came to be represented digitally. Since the 2000s, most money in circulation exists only in bank’s databases. Online payments allow this money to be transferred between banks, accounts and nations.
In the 1960s, ATMs (Automatic Teller Machines) that allowed people to withdraw cash from their electronic bank accounts were first introduced in the United States and the UK. Since then, their use has grown rapidly and today there are over 3 million ATMs in the world. [13]
Electronic Cards
Electronic credit & debit cards were first introduced in the 1950s by Bank of America in the US, and propagated in the 1960s by a group of banks that went on to form MasterCard. By the 1970s these had consolidated into two major card networks — MasterCard and Visa, which together still account for the majority of card payments today.
In 2011, NPCI (National Payments Corporation of India) introduced the RuPay card scheme to facilitate electronic payments in India. This card scheme offers lower fees (than Visa and MasterCard) for merchants and banks to participate in the network.
Cryptocurrency
In 2008, the pseudonymous author Satoshi Nakamoto proposed Bitcoin, a decentralized digital currency that was not controlled by any government entity. It was designed to function as a medium of exchange and its value is solely determined by this utility. It became the world’s first widely used cryptocurrency, so named because transactions with such digital assets are secured and proved using strong cryptographic functions.
Since then, several different cryptocurrencies have been introduced with varying degrees of success, including Ethereum and Zcash. As of 2020, Bitcoin remains the most ubiquitous and valuable, with a market capitalization of $170 billion.
That’s it… we’re at the end! Over these past two articles, we have discussed the history of money and banking systems across the world, from prehistoric villages and early civilizations to modern fiat and cryptocurrency. Here’s a brief timeline recap of the history of money.
Next Time…
In the next article (next Wednesday), we will talk about the rise of Digital Payments in India. We will also take a look at the various payment schemes available today and the important regulatory and industry players.
About DICE India
DICE (Digital India Collective for Empowerment) is an industry body focused on the Indian Digital Payments ecosystem. DICE takes an India first approach to creating collaborative industry regulator relationships in the thriving ecosystem. Follow us at @indiadice on Twitter.
Citations and Further Reading
- Modern Capitalism, Its Origin and Evolution, Henri See 2004.
- History of the Weksel, Bill of Exchange and Promissory Note, Sergii Moshenskyii 2008
- History revisited: How Tughlaq’s currency change led to chaos in 14th century India 2016
- Mughal Coinage, RBI Monetary Museum
- The Big Problem of Large Bills: The Bank of Amsterdam and the Origins of Central Banking, S. Quinn and W. Roberds 2005
- How modern banking originated: The London goldsmith-bankers’ Institutionalisation of trust, Jongchul Kim 2011
- Lombard Street, A Description of the Money Market, W Bagehot 1873
- Introduction to Banking, Vijayaragavan Iyengar 2007
- RBI, Contemporary Currency FAQ
- Brief History of the Gold Standard in the United States, Craig K. Elwell 2011
- Gold and the Gold Standard, Edwin Walter Kemmerer 2009
- Fiat Money, Investopedia
- RBR Press Release, 2015
