Economy is the form in which we produce, distribute, and consume goods and services. In order to understand the way the system works, it is best to understand how our current monetary system came about. Currency is the tender in which we exchange and deem as a form of value.
For thousands of years commodities were gained through bartering. People would trade crops and livestock for equal values. Thereby gaining something useful for their trade. As time progressed, value was sought from much more exotic items. Beautiful cowrie shells were accepted as the most valuable items and stood as the currency for a considerable amount of time.
It wasn’t until about 1,000 BC when people began recognizing the worth of metal coins. At the end of the Stone Age, Cowrie replicas were made from copper and bronze. Knives and spade monies were also traded until finally – coins were created. 500 years later precious metals such as gold and silver emerged as being significantly more valuable than any other metal. The images of gods/emperors were imprinted on the coins to authenticate their value. Lydia (present day, Turkey) was the first to produce these coins.
Medieval Europe was the first to create interest. Citizens would store their precious metals with a goldsmith. In return they would receive a paper receipt, which was lighter and easier to carry and track their gold/silver. Depositors rarely withdrew the gold, so the greedy goldsmiths began forging receipts for non existent gold/silver and then charging interest.
~This practice was later used in banking. It came to be known as “Fractional Reserve Banking”. A system in which banks lend out more money than they have on deposit. (More on this later, as I promised this would be brief)
China was the first to experiment with paper notes as currency. For 500 years they produced paper notes. Eventually the notes grew so swiftly that the value of the notes depleted ultimately leading to inflation. (hmmmm sounds familiar.. when will we learn from our mistakes? Apparently not the first time…)
While China used paper currency, King Henry I of England implemented a tally stick system. Polished pieces of wood were created into sticks with a designated number of nods, then split in half to legitimate its authenticity and track the economy. Because these were used for paying taxes, people accepted them as money. For 700 years Britain’s citizens willfully believed that sticks were valuable pieces of currency, this proves that money is only as valuable as we believe it to be.
In it’s infancy, the American colonies struggled in determining a valid form of currency. Commodity money was used when cash/coins were scarce. By utilizing nails, tobacco, and fur, they attempted to measure their value to the currency by integrating an already existing system. For a short time, Wampum led as the favorable currency. Wampum was a string of beads made of beautiful clam shells. However this was short lived due to a reoccurring issue: oversupply and counter-fitting.
The value of currency varied in accordance to region. Circulation of currency from Britain, Spain and Portugal caused confusion causing colonies to print their own money. The main push for this was the crown’s need to fund its militia. These were not true forms of currency, rather debt-free “bills of credit”. This fiat currency had no value in accordance to any gold/silver and were merely promises to pay debts. The money had absolutely no value. Essentially, they were IOUs.
The currency was deemed Colonial Script. Benjamin Franklin believed it was an effective system for the colonies – he said; “We issue it in proper proportion to the demands of trade and industry to make the products pass easily from the producers to the consumers.
In this manner, creating for ourselves our own paper money, we control its purchasing power, and we have no interest to pay to no one.”
Not borrowing debts no longer required the colonies to depend on the Bank of England. Outraged, the British Parliament passed the Currency act of 1764. This act required colonists to pay British taxes back in gold/silver and decreed it was illegal for colonies to print their own money. The prosperity of the colonies came to a screeching hault. Unemployment grew and a depression ensued.
In his autobiography, Benjamin Franklin said, “The inability of the colonists to get power to issue their own money permanently out of the hands of George III and the international bankers was the PRIME reason for the Revolutionary War.”
In part 2, learn about how the currency in America was born and how it evolved into what it is today.