In the beginning.. bartering (trading) poses the problem of having goods that aren't equal value. So we invent a default currency that can be used to purchase other things. Commodity money are items like gold that have value themselves and can be used for money. Example: Cigarettes in prisons become used for trading since outside currency is useless. Then some crap about various metals being used, but then they each were valued differently by different groups. Stability came about when a promised rate for changing money into gold.
Then came along bills of exchange, so a person can promise to pay for an item at a later date when presented by the bill. So they don't actually pay at the time, but can use their goods to make profit. Form of credit. Talies were issued by government denoting a payment for something like taxes. Government started using them when they ran out of money, so their creditors get the tallies and can then get the taxes as the date to be collected.
First banks - Goldsmith banks. Merchants started storing their gold with goldsmiths in london in the 17th century. Goldsmith banks issue notes that promise to pay Gold, circulation occurs. Banks can then loan out notes and earn. Primary business of early banks was to get deposits from people and also to issue loans. They started creating their own bank notes, backed by both gold/silver and public confidence in those banks. Then various banks started issuing bank notes. All of these offered different bank notes. Local banks were used by locals, more widespread national ones used more. The bank notes denoted a value of gold that could be redeemed from banks. However banks issued more notes than they had in value of gold. So could go bankrupt if everyone wanted to exchange notes for gold. Eventually governments started issuing the bank notes. 1964 for england, 1913, USA. These currencies were representative till recently (backed by the value of gold/silver). In the late 19th century/20th century, the bank notes were still representative to gold, however the governments would only have a fraction of the gold in reserve to the equivalent amounts of bank notes. Eventually they stopped being backed by gold.
Fiat money is current money, where the money is not backed by any commodities and is given value by governments.
Is there anything anyone would correct/change/add? Also if anyone can point out any developments of banks to lead to the current system of trade, that would be great. This info is mainly from wiki, I'm simply trying to understand the whole system better. Any important principles related to economics would be great too.
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Development of money through time.. watch
- Thread Starter
- 20-03-2011 18:16