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A brief history of world currencies: Commodities that define a civilisation
Thursday February 29 2024
Currencies have existed for thousands of years and they will continue to exert an influence upon our culture well into the foreseeable future. PHOTO | SHUTTERSTOCK
Mankind has always relied upon trade in order to obtain vital goods and services. While barter was used for millennia, the concept of currencies has come to define our civilisation. Modern currencies are vital for global trade, economic development and life as we know it would be nearly impossible to imagine otherwise.
Let us therefore take a virtual journey in order to discover the history of currencies as well as how these unique commodities have evolved over time. It will then be easier to appreciate what the not-so-distant future may have in store.
Ancient currencies
Most experts agree that the first hard currency created can be dated back to the Mesopotamian shekel created more than 5,000 years ago. However, barter was still a common practice amongst ordinary individuals. Items commonly included grain, salt (vital to preserve meat), tea, and spices. The earliest mints emerged in the Middle East around approximately 650 BCE.
These silver and gold coins were primarily used to pay soldiers at the time and yet, they represented an important paradigm shift in regard to the mass production of currency as well as the growing importance of precious metals from an economic standpoint. Some other ancient currencies include:
- The Roman denarius
- The Greek drachma
- A Chinese coin known as the yuanbao
Not only did these currencies begin to replace barter as a tool for trade, but they also allowed individuals to measure (and accrue) wealth in a different manner.
Mediaeval and renaissance currencies
An interesting economic shift began to emerge during mediaeval times.
Namely, individuals could pay for goods with a recognised currency or with a commodity (such as rice or grain). This was referred to by expressions including “quem habuero”; roughly translated to “whichever I may have”. While coins did indeed exist, there were still no large-scale monetary systems in place during this era.
However, the importance of standardisation began to truly take hold throughout the Renaissance.
Two of the major driving forces here involved expanding trade routes and how the perceived value of traditional barter goods would sometimes differ from region to region. Thus, a more standardised system was required.
Regional currencies and mints therefore began to emerge. These relied upon three types of coins when issuing new money:
- Gold
- Silver
- Billon (gold or silver mixed with a base metal such as copper)
Billion tended to be used for everyday transactions while silver and gold were reserved for larger requirements (such as when purchasing a plot of land). Due to the fact that the rarity of precious metals was widely recognised, many of the complications associated with barter were no longer concerns.
Furthermore, regional powers could influence the value of currencies through minting as well as by changing the composition of the coins themselves. This gave much greater control over the economy and populations as a whole.
Colonial Currencies
Yet, another major change occurred when European nations began expanding their reach to different portions of the world. These included North and South America, Africa and India to a large extent.
One observation involved the fact that access to precious metals gave birth to a host of powerful empires; Spain is a perfect example in this case. These nations often exploited their colonies with little concern for the inhabitants and this was a common practice.
However, colonies were often allowed a semi-autonomous form of government through the use of paper script. The issue here was that the sheer variety of paper money abounded and therefore, objective values were difficult to determine. The colonial United States is a well-known example of this trend.
Not only did overprinting lead to hyperinflation in some cases, but the delicate nature of paper currency virtually guaranteed that it would not last very long. These are both origins of the phrase “not worth a Continental” that was famous at the time.
Colonial powers therefore began to introduce their own sovereign coinage as a means to control inflationary rates and to ensure economic stability. The effects of these efforts were debatable.
While they did help to balance the fiscal markets, sovereign currencies were not always accepted by colonial populations that still preferred to recognise domestically created currencies. In other regions such as South America and Africa, currencies minted by countries such as Spain and France eventually became accepted into their domestic economies.
This is why coins including the Brazilian real (royal) and the West African franc are still in use today.
The birth of modern currencies
Most experts agree that the birth of modern currencies can be traced to the global abandonment of the gold standard. Nations began to appreciate the fact that gold prices could experience volatility on occasion; leading to dramatic swings in the value of coinage. This system would therefore be abandoned entirely by 1971.
In anticipation of such a move, a major shift in monetary policy known as the Bretton Woods Agreement emerged in 1944. This policy represented something of a compromise, as it pegged many other currencies to the value of the United States dollar. In turn, the dollar was attached to the price of gold.
Nations also agreed to adhere to fixed exchange rates, helping to ensure fair taxation as well as to limit economic volatility.
Major global currencies
There are several reasons why fiat currencies were the preferred method of trade during the post-colonial period and in many cases, well into modern times. Fiat currencies (such as the US dollar, the British pound, the Japanese yen and the Swiss franc) all allow central banks to retain greater control over domestic economies, as they can choose how much money is printed.
Another interesting result of the emergence of fiat currencies can be seen in currency exchange rates. This had (and still has) an impact upon international trade. For instance, a strong British pound will make it cheaper for domestic firms to purchase goods from abroad in the event that the value of the United States dollar begins to decrease due to inflation.
Currently, the US dollar remains the most widely used currency in the world. However, it faces a strong competitor in the markets: the euro.
Nowadays, the euro is valued at approximately 1.08 US dollars per euro, thus, putting the European currency in a stronger situation than the dollar. Despite this competition, the US dollar continues to dominate global reserves; for instance, as of 2024 about 59 percent of all foreign bank reserves were held in US dollars, compared to approximately 20 percent in euros.
The US dollar’s status as the world’s reserve currency is rooted in the size and strength of the US economy, and the stability and reliability of its financial systems. Post-World War II arrangements, such as the Bretton Woods Agreement, solidified the dollar’s dominance. However, this might change in the future due to several factors.
These include the rising influence of other economies, like the European Union and China, shifts in international trade patterns, and potential changes in global economic policies. The increasing focus on diversifying reserve currencies among nations could also challenge the dollar’s predominance in the future.
Currency crises and reforms
There have nonetheless been several currency crises over the years and some of the most important include:
- The Great Depression: just after World War I, the world faced one of the biggest economic crises in its history, which jeopardized the fragile economies of the belligerent nations. In the US, the money supply fell over ⅓ of the pre-crisis levels. The Wall Street Crash of 1929 was the catalyst for the crisis. In the United States, the stock market crash of October 1929 marked the beginning of the Great Depression. Following the crash, the American economy contracted sharply, and by 1933, the Gross Domestic Product had fallen nearly 30 percent from its 1929 level. In the UK, the British pound was devalued by over 20 percent.
- The hyperinflation associated with Weimar Germany: After the fall of the German Empire in 1918, the Weimar Republic was established. However, the new Republic faced immense challenges on multiple fronts, including political instability and economic difficulties. Burdened with massive war debts and reparations, the country quickly fell into a hyperinflation crisis. In 1914, a dollar was worth 4.9 German marks. By late 1923, in the midst of hyperinflation, the exchange rate had soared to 4,210,500,000,000 German marks.
- The 1998 Russian Financial Crisis: Also known as the Ruble crisis, it was triggered by a combination of factors including low commodity prices, a high fiscal deficit, and a fixed exchange rate. The government’s decision to devalue the ruble on August 17, 1998, led to a 35 percent drop in its value against the US dollar within a week. Inflation skyrocketed, reaching an annual rate of 84 percent in 1998, up from 11 percent in 1997. The stock market also suffered, with the RTS stock index falling over 80 percent by the end of the year.
There are several ways in which nations have chosen to respond. For example, the United States Federal Reserve elected to lower interest rates during the Great Depression in order to increase market liquidity. However, there were also times (such as during the Russian Financial Crisis) that solutions were not so apparent. In this case, Russia defaulted on its debt and the ruble was massively devalued.
The Introduction of the Euro
The Euro was introduced on 1 January 1999 although the notion of a unified European monetary system was first proposed as far back as the 1960s. This currency has had a major impact upon the regional economy and perhaps its most profound effect involves the level of integration now experienced throughout the Eurozone.
The Euro has simplified trade, standardised exchange rates between nations and caused Europe to become highly competitive. However, some will still argue that a single monetary policy may not always be able to adapt to local economic conditions. Nowadays, the Eurozone has 20 members and is used by 26 countries, forming the largest currency union in the world.
African currencies
Traditionally, Africa was primarily associated with a barter-based economy. This all began to change during the colonial period (beginning in the 17th century) when coinage was introduced. As mentioned earlier, the fiscal ‘footprint’ of this time is still visible in several nations.
One export-related benefit involves the fact that many African currencies are often devalued when compared to their counterparts such as the euro and the British pound. For example, as of January 2024, the Zimbabwean RTGS dollar was trading at approximately 9,800 RTGS dollars to 1 US dollar, illustrating its significant devaluation. Similarly, the Tunisian dinar was valued at around 3,11 dinars to 1 US dollar in the forex trading markets, indicating a more stable but still devalued currency compared to major global currencies.
Africa nonetheless faces some challenges in terms of competitiveness. Certain currencies are not recognised on the global stage and will therefore have to be exchanged for the equivalent in benchmark currencies such as the dollar or yen. Secondly, exchange rates favouring western nations can make it more difficult for African nations to import specific goods and services.
Digital currencies and the future
The next major paradigm shift involves the rise of the digital world. Not only has the global ecosystem become intrinsically and irrevocably interconnected, but new notions such as cryptocurrencies are already being felt. What might this mean for the future?
While fiat currencies remain predominant, the trend towards digitalisation is unmistakable. Younger generations, in particular, are more inclined to use digital forms of payment such as credit cards, e-wallets, and crypto transfers. Platforms like Exness are at the forefront of this transition, providing essential services in currency exchange and financial management for both traditional and digital currencies.
While this may be beneficial for certain sectors (particularly the massive e-commerce marketplace), some are worried that a lack of centralised regulation may result in unforeseen circumstances (such as the drastic devaluation of a cryptocurrency due to a massive number of tokens being suddenly sold). Experts are therefore debating whether or not some type of central bank may be needed in order to proactively monitor this digital ecosystem.
Currencies have existed for thousands of years, and they will continue to exert an influence upon our culture well into the foreseeable future. Whether referring to the shekel, the drachma, the dollar, or Bitcoin, there is little doubt that our culture has been at least partially defined by the monetary policies that we choose to adopt.
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