The Origin of Money

The use of silver began in the sixth carbon B.C. in what is now western Turkey, when lumps of gold found in rivers were fluent and turned into pieces of uniform size imprinted with a stamp. For almost wholly of the cartridge holder since then, the common fiscal scheme has been goodness money, whereby a valuable commodity (typically a metal) is used as a widely accepted forte of exchange. Furthermore, the total of money was not under anyones control head-to-head agents, following price incentives, to a faultk actions that mulish the money supply.Today, the prevalent monetary system is that of lodge money, in which the medium of exchange consists of unbacked government liabilities, which ar claims to nothing at all. Moreover, governments have usually established a monopoly on the provision of rules of order money, and control, or potentially control, its quantity.Fiat money is a rattling recent development in monetary history it has scarce been in use for a few decade s at most. Why did this development from commodity money to revise money take place? Is fiat money better suited to the juvenile economy or was it lovable and impractical in earlier times? Were there forces that naturally and inevitably direct to the present system?Fiat money did not appear spontaneously, since government plays a aboriginal role in the perplexity of fiat specie. How did govern-ments learn well-nigh the possibility and desirability of a fiat currency? Did monetary theorizing play any role in this developing? In this article, I will argue that the evolution from commodity to fiat money was the result of a dogged exhibit of evolution and learning. trade good money systems have legitimate advantages, in particular in providing a natural anchor for the price take. But they as well have certain disadvantages, manifested in particular in the difficulty of providing multiple denominations concurrently.These problems arose early on, in the fourteenth century , in the form of money shortages. Societies tried to overcome these disadvantages, and this led them progressively closer to fiat money, not only in wrong of the actual evaluate of the object used as currency, but also in terms of the theoretical understanding of what fiat money is and how to neck it properly. In the process, societies came to envisage the use of coins that were worth less than their foodstuff value to replace the smaller denominations that were often in short supply. These coins be very similar to bank notes they are printed on base metal, rather than paper, but the economics behind their value is the same. What governments learned over time about the provision of small change is thus directly applicable to our modern system of currency.In his A Program for Monetary Stability (1960), Milton Friedman begins with the head mode Why should government intervene in monetary and banking questions? He answers by providing a quick history of money, which he describes as a process inevitably leading to a system of fiat money monopolized by the government (p. 8) These, then, are the features of money that justify government intervention the vision bell of a pure commodity currency and hence its style to become partly fiduciary the peculiar difficulty of enforcing contracts involving promises to pay that avail as medium of exchange and of preventing fraud in respect to them the technical monopoly parting of a pure fiduciary currency which put ups essential the riding horse of some external bourn on its amount and finally, the pervasive character of money which means that the issuance of money has important effect on parties other than those directly involved and gives special importance to the preceding features. The key tasks for government are also clear to set an external limit to the amount of money and to prevent counterfeiting, broadly conceived.This article will get much to validate this view. It turns out that the problem of cou nter-feiting, identified as central by Friedman, provided obstacles that were overcome only when the appropriate applied science became available. As technology changed and offered the possibility of implementing a form of fiduciary currency, various incomplete forms of currency systems were tried, with significant effects on the price aim. These experiments led to the recognition that quantity limitation was crucial to maintaining the value of the currency. The need for a government monopoly, however, does not emerge from our reading of the historical record, and we will see that the private sphere of influence also came up with its own solutions to the problem of small change, thereby presenting alternatives to the monetary arrangements we have adopted.1Among the desirable features of a monetary system, price stability has long been a priority, as far back as Aristotles word of honor of money in Ethics. In the words of the seventeenth century Italian monetary theorist Gasparo Antonio Tesauro (1609), money must be the measure of all things (rerum omnium mensura) (p. 633). Aristotle also noted that commodity money, specifically money made of cute metals, was well suited to reach that goal Money, it is true, is liable to the same variance of demand as other commodities, for its purchasing power varies at antithetic times but it tends to be comparatively constant (Aristotle, Ethics, 1943 translation).The commodity money system delivers a nominal anchor for the price level. The mechanism by which this takes place can be described in the context of a profit-maximizing mint, which was how coins were produced in the Middle Ages and later.2 Suppose there is a way to convert goods into silver and silver into goods at a constant cost (in ounces of silver per unit of goods), which can be thought of as all the extraction cost of silver and the industrial uses of the metal or the valet price of silver in a small country interpretation. coin is turned into coins by the mint the mint (which really represents the private sector) also decides when to melt slash existing coins.The governments role is express to two actions. It specifies how much silver goes into a coin, and it collects a seigniorage tax 3 on all new minting.When the mint is minting new coins, its be are the cost of the silver content, the seigniorage tax, and the production cost4 its revenues are the market value of the coins, which is the inverse of the price level. Similarly, when the mint is melting down coins, its costs are the market value of the coins, and its revenues are the value of the silver contained in them.Whether the mint will produce new coins or melt down existing coins will thus depend on how the price level relates to the parameters silver content of the coins, production costs, and seigniorage rate. The price level cannot be too low (or the purchasing power of the coins too high) or the mint could make unbounded profits by minting new coins and spending t hem. Similarly, the price level cannot be too high (or the purchasing power of the coins too low), or the mint would make profits by melting down the coins. The absence seizure of arbitrage for the mint places restrictions on the price level, which is contained in an interval determined by the minting point and the melting point