Money then and now

From cattle to coins to digi-cash: a look at our pecuniary history and a glimpse of what the future might hold.

It's the gift of choice for Gen Y: preloaded plastic gift cards. Retailers from supermarkets to clothing chains and mass merchandisers sell millions of these self-promotional cards to busy consumers frustrated by striking out with their usual presents. Introduced by Blockbuster Video in the 1990s, these cards have spawned a vast currency exchange market — consumers and businesses spending cash to buy another form of cash — worth more than $120 billion in the US and another $6 billion in Canada.

The popularity of this new medium of exchange has been a boon to retailers, who reap a multibillion-dollar wind-fall thanks to our propensity to lose (or not use) the cards. Sensing an opportunity in all that frailty and forgetfulness,, a five-year-old Toronto company, created an aftermarket with an online barter exchange that allows consumers to buy and sell unwanted gift cards.

But even this latest innovation might prove to be short lived. According to Leif Baradoy, who runs a Victoria-based gift card marketing firm, the plastic versions will soon be supplanted by digital ones. Other forms of digital currency are also emerging rapidly. Virtual gaming worlds — everything from Second Life to Club Penguin — deal in virtual currencies that can be converted to the real thing. The scandal-plagued Bitcoin (see "Why Bitcoin is the Way of the Future" and "Digging Up Digital Money") has made virtual money into a speculative investment. The Bank of Canada is studying legal digital tender. And with the growing use of smartphones, the global market for "mobile" coupons could soon be worth anywhere from $9 billion to $46 billion.

Baradoy, for his part, is looking forward to the wider adoption of the "digital wallet" — smartphones that can be used for point-of-sale purchases. In fact, AvidRetail, a Canadian firm, will launch a mobile payment app this summer that offers just such a service. "We're seeing a trend to make these things seamless and convenient. As the technology gets there, cash will continue to fall a bit more by the wayside," says Baradoy.

The rapidly changing story of money in the post-2008 period reminds us that currency is — and, in fact, always has been — a fluid confection of tender, trust and terms. Ever since the early Mesopotamian settlements began using a form of currency thousands of years ago, human societies have grappled with basic questions about the nature of this thing we call money.


At its most fundamental level, money is as elemental as mathematics, according to University of London anthropologist David Graeber, author of Debt: The First 5,000 Years. "It's a way of comparing things mathematically as proportions: of saying one of X is equivalent to six of Y. As such, it is probably as old as human thought. The moment we try to get any more specific, we discover that there are any number of different habits and practices that have converged in the stuff we now call 'money.' "

Indeed, money is so ubiquitous in contemporary society that we rarely step back to ask what exactly we're dealing with. Money fuels our economies, as well as our lifestyles, conflicts and rituals. At the same time, this commodity is always built on a leap of faith. Every currency relies on a form of collective trust that allows people to believe these tokens represent true value. Yet that trust can be fleeting: time and again throughout history, public confidence in local currency has abruptly collapsed due to hyperinflation, devaluation or counterfeiting.

Precisely because money touches so much of what any society does or aspires to do, the story of currency is also the story of how human civilization evolved from nomadic clans into modern, urbanized societies. "Money constitutes the focal point of modern world culture," says US anthropologist Jack Weatherford, author of The History of Money: From Sandstone to Cyberspace. "From virtually the moment of its invention, money became ever more important in Western society and eventually overwhelmed the feudal system and the aristocratic hierarchies of earlier civilizations."

In fact, almost every advanced society throughout history has relied on systems of hard currency and credit. The earliest forms of currency had intrinsic value, while later forms relied increasingly on social consensus and legal convention to denote value. There were, moreover, countless variations. Indeed, given that diverse forms of currency emerged independently in various parts of the world, it's clear that no one culture "invented" money. Nor is there a single historical narrative tracking the evolution of money, even though we now live at a time when almost all currencies are fully convertible.

Consequently, money has meant sharply different things to different societies: commerce, storage of value, even religious offerings. But if money has propelled human civilization forward, we should also ask where it will take us next, especially in an era in which currency has become mere strands of data zooming through digital networks at the speed of light.

Ships and castle


The first evidence of any kind of currency can be traced to 9000 BC, when agrarian societies in Africa and the Middle East used cattle and grain to facilitate the trade of other goods. As time went on, the repertoire of tradables expanded: societies that existed as early as 2000 BC used credit and "commodity money" — everything from tea and salt to tobacco, almonds, corn, rice, butter and even dried cod. The Aztecs — who ruled in Mexico from the 1300s until the arrival of the Spanish conquistadors in the 1500s — relied on cacao beans.

But trade was not the only function of currency. Around 3500 BC, Sumerian emperors began minting shekels, each worth a bushel of barley. One shekel could be divided into 60 units, representing two portions of food per day for each worker, per month. "It's easy to see that money in this sense is in no way the product of commercial transactions," explains Graeber. "It was actually created by bureaucrats in order to keep track of resources."

In pre-commercial societies, currency was used primarily for special functions, such as dowries and penalties. "Rather than being employed to acquire things," Graeber notes, "[money was] mainly used to rearrange relations between people. Above all, to arrange marriage and settle disputes, particularly those arising from murders or personal injury."

According to an online chronology based on A History of Money from Ancient Times to the Present Day, by Glyn Davies, the emergence of commodity money coincides with the development of written language and the keeping of accounts, thus pointing to evidence of banking activity at least as far back as 2000 BC. Indeed, the "Code of Hammurabi," written around 1790 BC by the incoming ruler of Babylon, included provisions on money, interest and banking.


The long march toward standardized units of currency may well have started at the close of the third millennium BC, when Mesopotamians began to develop uniform measures. But the earliest known coins didn't appear until about 640 to 630 BC, when the Lydians, a small kingdom located on the Anatolian peninsula, began minting stamped tokens made of an amal-gam of gold and silver. By standardizing the size and composition of their coins, the Lydians eliminated much of the uncertainty around the use of currency. Base metal coins began to appear in China around the same period.

It didn't take long for other societies to recognize the value of uniformity. The use of stamped coins spread across Greece and throughout the Roman Empire. The Romans began minting "denarii" — silver coins — in the third century BC, and Augustus introduced standard gold and silver denominations, although bronze and copper coins were also in circulation.

Despite its obvious advantages, uniformity also created new problems: the rise of debasing. Local officials throughout the empire minted coins with base metals that tended to undervalue the currency. People would pay their taxes using junk currency while hoarding the more valuable coins, according to Anthony Barrett, professor emeritus at the University of British Columbia. The practice led to successive collapses of the financial system, he says.

Woodblock of trade


Just as the Lydians can be credited with the invention of coins, it was the Chinese who invented paper money. This was a way to deal with the problem of copper shortages that prevented them from increasing the circulation of existing coins. Between 800 and 900 AD, Chinese merchants began using promissory notes to protect their cash ("cash," in fact, was the Chinese word for a common coin denomination) from highway robbers. Local bankers safeguarded coins and gold in exchange for receipts, which they allowed to circulate as currency.

During the Song dynasty (960 AD to 1279 AD), Chinese officials used printing presses to mass-produce paper notes. But faced with increased demands for currency, the Chinese emperors printed excessive quantities, triggering hyperinflation in the 1100s.

Paper money spread to Japan and India. When the Mongols launched successive invasions of China in the 1200s, its emperors, including Kublai Khan, issued their own notes, which the Venetian trader Marco Polo encountered on his travels to Asia between 1275 and 1292. But the Mongols' bills also induced runaway inflation, and the Chinese abandoned paper bills in 1455.

Ancient coins


During the Early Middle Ages in Europe, there was little international trade. Transactions were more local and based on credit. Cash was much less commonly used than during the Roman Empire. University of Toronto economic historian Lawrin Armstrong points out that hard currency had more relevance in urban areas, which attracted traders and merchants, than among the subsistence farmers in rural regions, who relied on credit.

The Crusades, however, created a new need for circulating currency. In the 1100s, the Knights Templar, an ascetic order, created a banking empire that allowed crusader knights to deposit funds with the Templars' Paris headquarters and withdraw gold coins from their office in Jerusalem. "At their maximum strength," says Weatherford, "they employed approximately 7,000 people and owned 870 castles and houses scattered across Europe and the Mediterranean."

By the 13th and 14th centuries, with the ascendency of the powerful merchant banking empires in Florence, Genoa and Venice, local governments minted their own pure gold coins, known as ducats and florins. These gold denominations were so valuable that they would only be used for international trade. Florins, Armstrong says, were issued in sealed pouches to prevent people from shaving the edges.

Continuing the practice established by the Knights Templar, Renaissance-era Italian bankers used nontransferable bills of exchange to allow merchants to finance trading expeditions without hauling around large stashes of hard currency. These contracts provided the bankers with an 8% to 12% fee. "Despite the extra cost," he explains, "a bill still proved cheaper than hiring an armed escort. Bills of exchange helped to free money from its spatial constraints."

These bills, in fact, were the precursors to the use of formal banknotes, which were first issued by a Stockholm bank in the mid-1600s and circulated by the Bank of England beginning in the early 18th century.

The Canadian Bank of Commerce


After the European conquest of North America, western currency entered a new era because of the logistical challenges posed by circulating a currency across a large colonial empire. In the 1500s, the Spanish conquistadors plundered gold from the indigenous populations of the Americas, shipping it back to Europe on galleons to sate that continent's appetite for precious metals.

The proliferation of gold and silver coins, writes Weatherford, "opened the modern commercial era," as merchants increasingly demanded payment in hard currency. European silver production also took off, with Czech mines and local mints producing silver coins known as "talers." These coins were adopted by the Scots, who wanted their own currency instead of the British pound, and then found their way to the Americas, where they came to be known as dollars — a derivative of the Czech word taler (or toler).

In 1670, French colonialists introduced special currency minted specifically for the Americas. But shipping the coins across the Atlantic proved dangerous, so in 1685 the colonial administrators approved the use of playing cards, inscribed with a value and an official signature, as legal tender — an early clue as to the role that paper money would later have in the colonies. "While the authorities in France worried about the risk of counterfeiting and a loss of budgetary control, the colonial authorities successfully argued that the cards served as money in Canada just as coins did in France," according to the Bank of Canada's A History of the Canadian Dollar, by James Powell.



In 1729, Benjamin Franklin published a short pamphlet entitled, "A Modest Enquiry into the Nature and Necessity of a Paper Currency." In it, he argued that the colonies, whose residents suffered from a chronic shortage of pounds, should print their own money as a means of boosting commerce. The British opposed the idea, but Franklin travelled to London to change their view, says Weatherford. "The foundation of the United States of America offered the chance to put many of Franklin's ideas about paper money into practice. The newly forming nation provided the first modern experiment with paper money on a national scale."

As with coins, however, counterfeiting was a constant threat. In the wake of the US Civil War, all sorts of fake denominations were circulating in the US, some of which found their way across the border. Sir Byron Edmund Walker, who built the Canadian Bank of Commerce, got his start in a Hamilton currency exchange office, working as a clerk with a talent for spotting phoney bills.

Counterfeits weren't the only problem afflicting the monetary system. Currencies work best when the underlying value is formally guaranteed. The Bank of England, established in 1694, took on responsibility for printing currency and backing it with gold. In the late 18th and 19th centuries, US Treasury officials issued dollar coins with specified ratios of silver and gold.

By the late 19th century, the US and other nations, including Canada, had further solidified their currencies by adopting the gold standard, which provided an assurance that state treasuries would redeem any note for gold. But Ottawa suspended the promise on the eve of the First World War for fear of a run on gold holdings. In 1926, Canada returned to the gold standard, but the policy didn't last because of insufficient quantities of gold in treasury reserves.

After the Second World War, and with the growing understanding of the science of economics, monetary policy emerged as the central tool for managing the value of currency in the West. Central bankers used monetary policy to stabilize domestic currencies by constantly monitoring the changes in the overall money supply — not just hard currency, but also chequing accounts, term deposits, insurance annuities, T-bills and other pools of liquidity. In recent decades, the promise of a cashless society has gained currency. The growing public acceptance of point-of-sale payment technology, e-commerce, direct deposit payments, online banking and other forms of electronic transactions have made bills and coins less necessary in daily life.

Despite those trends, governments have had to protect their currencies from counterfeiters. Over the past three years, the Bank of Canada has introduced slippery bills — fives, 10s, 20s, 50s and 100s — made of a very thin polymer film. The Bank ordered the $300-million facelift in the wake of an RCMP investigation into a highly successful counterfeiting operation, based in Windsor, Ont., which had used digital scanning technology to put millions of dollars of phoney 20s into circulation.

That defensive move has brought greater confidence in the loonie's reputation. According to a recent analysis by the Belgium-based Society of Worldwide Interbank Financial Telecommunications, the Canadian dollar as of 2014 ranks as the fifth most-used currency for world payments, up from seventh place last year.

If confidence is the hallmark of any stable currency, what happens in the future as money becomes an almost entirely abstract commodity, with most people rarely bothering to exchange coins and bills, even for the most minor purchase? And how will we know that digital cash is capable of holding its value?

Today, institutions such as central banks, which are the lenders of last resort, and bank regulators provide those assurances by maintaining the stability of currency, as measured by purchasing power, international convertibility and inflation. But McGill University economist Tom Velk predicts that as electronic transactions replace all hard currency in almost all exchanges, the conventional form of central bank-backed cash may become obsolete. Velk, in fact, foresees a period when all transactions will evolve into a form of electronic barter, with buyer and seller trading tiny slices of their digital equity in exchange for a product or service. "Some of my wealth is transferred electronically from my account to your account," Velk explains. "All that's really terribly important is that accurate records be kept and contracts [be] enforced across time."

He calls it Barter 2.0.

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