This year has started with another frenzy in cryptocurrencies with Bitcoin prices crossing $50,000. Some countries such as China are close to starting their central bank digital currencies (CBDC). In India, the government is planning to issue a Bill that defines digital cryptocurrencies more clearly and the Reserve Bank of India is studying the scope of a CBDC.
To better understand these developments, a look back at history and the evolution of money is warranted — ideas, they say, go around in circles. What is seen as a novel idea today, usually has a past, and is often just packaged differently.
In the first of a three-part series, we trace how the concept of money evolved down the ages.
Money has a long history with a fair bit of disagreement over its origins. Economists often cite how the inadequacies of barter led to need for money. For a successful barter, the two parties need to have common goods or services. As goods and transactions multiply, barters become near impossible. This led to a one good/commodity becoming something which could be used to pay for goods and services. This common good became eventually known as money drawing its name from the ancient Roman Temple of Juno Moneta, which also served as mint of the Roman Empire.
Economic anthropologist and author David Graeber disagrees with this thought of barter led to money. He suggests that the credit systems led to the development of money. Humans have always dealt in debt/credit and the circulation of these debt/credit instruments led to money.
The third view comes from followers of Modern Monetary Theory. They point to the role of State in development of today’s monetary systems. One major power of State is taxation, and once a State determines which form of money should be used to pay taxes, that money becomes the official form of money.
Even on as central a thing as money, economists disagree on the origins. As the joke goes, you put 10 economists in a room and you’ll get 11 opinions. How could money be any different?
Pound, Dollar, Rupee
Let’s move from this origins-of-money debate to money as we understand today.
Over the years, money evolved from its older forms such as cowrie shells, bread, coconut, etc. to today’s money in the form of currency and coins. Coins have remained popular throughout human history, and circulated as either full gold/silver or as alloys. In fact, to figure out the metals used in a particular ancient regime archaeologists turn to the coins used during that time.
Most people equate money with currencies such as Pound, Dollar, Rupee, etc. These names have come from multiple sources. For example, the Pound has come from the weighing system, the Dollar from a currency named Joachimsthaler issued in Kingdom of Bohemia, and the Rupee means silver coin.
Overtime, money was seen as having three features: a medium of exchange, a store of value and a unit of account. For any form of money to become popular, it should serve all these three features.
The first country to print currency notes was China in the 10th century during the Song Dynasty. Marco Polo wrote about paper notes circulating in China during his travels in the 13th century. Traders found carrying coins cumbersome for large transactions. Thus, they kept coins with a select person and started issuing notes backed by these coins. These notes circulated as payments and when money was required the notes were returned to the select person for coins in return. The rulers soon saw the benefits of issuing paper notes, and established paper factories to produce these notes.
The first European country which adopted banknotes was Sweden. Just like China, Sweden had copper coins which were heavy and cumbersome to carry. In 1656, the king allowed a bank named Stockholms Banco, which started issuing banknotes in 1661 backed by copper coins. However, the Banco issued more notes than coins leading to an eventual closure. The spate of events led the king to establish a new bank in 1668, which eventually became the world’s first central bank, named Sveriges Riksbank.
Riksbank may have been the first central bank, but this whole edifice of central bank and money was created by the Bank of England (BoE). The BoE was formed in 1694 to fund wars with France, and it started issuing banknotes backed by gold to finance the wars.
At the time of its inception, these banks did not have the monopoly over issuance of currency. There were other private banks which also printed their own banknotes and competed with each other for circulation. The quality of a bank was based on whether the banknotes were adequately backed by coinage or precious commodities such as gold and silver.
Scholars refer to this period of banking as free banking, where banks could issue currency and no one was regulating them.
The Bank Charter Act 1844 gave the BoE new powers and placed restrictions on other banks to issue their own banknotes. Most countries ended up giving a government-controlled central bank monopoly for issuing currency notes, mainly because of the crisis private banks created by over-issuing banknotes.
British India Banknotes
The Indian subcontinent had multiple kingdoms issuing multiple forms of coinage. When the British came to India, they realised Rupee as a currency name was widely prevalent and stuck to it. After the Battle of Plassey in 1757, the British started establishing banks in India which issued their own currency just as it was back in England. However, these notes had limited circulation. The East India Company-promoted three presidency banks also issued their own banknotes which circulated in Bengal, Bombay and Madras.
In 1835, the Coinage Act was passed which unified coinage across India. In 1861, the British crown decided to unify and monopolise the banknotes as well. The Paper Currency Act was passed which took away issuance of banknote powers from both private and presidency banks. However, unlike their home country, the British neither gave this function to an existing bank nor set up a new entity. They managed the issuance within the government.(Part II, which will be published on March 1, will look at how the world eventually moved from gold/silver driven currency to fiat currency, and the impact it had on monetary systems. Finally, Part III will delve on the current discussions on digital currencies.)