by Kathy Miller
June 19, 2018
Fred Ebb’s famous lyrics from the musical, Cabaret, say it all:
Money makes the world go around
... The world go around
... The world go around.
Money makes the world go around
It makes the world go 'round.
A mark, a yen, a buck or a pound
... A buck or a pound
... A buck or a pound.
Is all that makes the world go around
That clinking, clanking sound...
Can make the world go 'round
©1972 ALLEY MUSIC CORPORATION and TRIO MUSIC COMPANY, INC. All Rights Reserved
But before shells, coins or even the use of livestock or grains, humans bartered for resources or services. The practice of bartering dates to 6000 BC when it was introduced by Mesopotamian tribes and adopted by the Phoenicians. Goods were exchanged for food, tea, weapons and spices and with the growth of agriculture, livestock and grain products became standard forms of barter.
The first use of shells, or cowries, as currency is traced to China where these shells were a highly valued commodity for their use as body ornamentation. Some form of shell money has been found on almost every continent: America, Asia, Africa and Australia. The cowrie has been cited as the most widely and longest used currency in history.
As the cowrie became recognized as a preferred currency, bronze and copper cowries were manufactured by China at the end of the Stone Age and are considered the earliest forms of metal coins. But outside of China, new coins were developed using precious metals such as silver, bronze and gold
and first appeared in Lydia, part of present day Syria. Coins were stamped with images of gods or emperors to authenticate their value and continued to be refined by Greek and Roman empires.
The first banknote can be traced to China’s development of leather money in 118 BC, consisting of pieces of decorated white deerskin. China also pioneered the use of paper money from the ninth through the fifteenth century but the use disappeared in 1455 when the production of paper money had grown to the point that their value plummeted, causing huge inflation and a national financial crisis. Paper money disappeared from use in China for several hundred years.
In Europe, banking was disbanded after the fall of the Roman Empire but re-emerged at the time of The Crusades to expedite payments for supplies and equipment, much like the services already in place in the Italian City-States. These written instructions became recognized “bills of exchange.”
By 1660 in England, the importance of goldsmiths’ safes for jewels and coins and subsequent exchange of receipts for deposits and payments, developed into the “banknote.” While in the English American colonies, certificates attesting to the quality and quantity of Virginia tobacco, came to be used as money and in 1727 were declared legal tender.
The Gold Standard
Britain adopted the gold standard for the pound in 1816, directly linking its currency value to that of gold to theoretically offset government overspending and hold inflation in check after the economic instability after the Napoleonic Wars. The United States officially adopted the gold standard in 1900 which helped establish a central bank. However, The Great Depression of the 1930’s marked the beginning of the end of the gold standard with Britain and most of the Commonwealth abandoning gold.
The United States kept the link to gold after World War II and abided by the international monetary system, dubbed The Bretton Woods system, after a meeting of 44 countries in Bretton Woods, New Hampshire in 1944. These countries agreed to keep their currencies fixed to the dollar, and the dollar was fixed to gold. As the US held about three-quarters of the world’s official gold reserves, the system seemed secure.
However, by 1971, US inflation was on the rise and a gold run was looming around the world, creating what has been called the “Triffin dilemma.” “This occurs when a country issues a global reserve currency (i.e. the United States) because of its global importance as a medium of exchange. The stability of that currency, however, comes into question when the country is persistently running current account deficits to fulfill that supply. As the current account deficits accumulate, the reserve currency becomes less desirable and its position as a reserve currency is threatened.”
** Ghizoni, Sandra Kollen “Nixon Ends Convertibility of US Dollars to Gold and Announces Wage/Price Controls - "Federal Reserve Bank of Atlanta, August 1971,
On the evening of August 15, 1971 Nixon enacted a plan that ended the dollar convertability and brought the gold exchange standard to an end. In 1973, the United States officially ended its adherence to the gold standard and the world reserve currency became fiat money.
As of November 30, 2015, the Chinese yuan officially became a world reserve currency and makes the yuan the third reserve currency after the US dollar and the Euro. China has been accumulating gold for many years now. Some experts speculate that China has upwards of 3,000 tonnes which would make it sixth place globally. If China were to tie the yuan to gold, this could be a game changer for the US dollar reserve currency status.