Historical Background Of Money

Sovereign entities have minted coins and printed paper currency for ages. The origin of coins is commonly traced to ancient Lydia, a region of today's Turkey. Claims of alternate locations for the invention include India and China. The first coins were made of electrum. The coin was such a convenient device facilitating trade with greater ease than the previous technique of weighing precious metals, that its use spread rapidly through the world. Interesting histories of money can be found here or here.
During the Middle Ages feudal lords or rulers known as seigniors frequently minted coins. Those coins identifiably stamped by highly credible seigniors came to be recognized as more valuable than those stamped by less credible seigniors who might degrade the quality of quantity of the metal. Eventually, this premium in value attributed to the reputation of the issuing seignior became known as seigniorage. Today the term seigniorage is widely attributed to the difference between the cost of producing a currency and its accepted value.
Paper money was introduced in China around 800 ad. Stories of its use there were brought to Europe by Marco Polo upon his return in 1295. The first paper banknotes used in Europe were issued in Sweden in 1661. Soon after the Bank of England was founded in 1694 it was using paper banknotes. Early forms of paper money were representative of money that had intrinsic value as do coins. Paper was merely a convenient form to use in carrying the represented worth of silver, gold, or some commodity. Issuers of paper money quickly learned to convert it from a representative money to a fiat money. A fiat money is something decreed to be exclusive legal tender by a sovereign entity. The United States dollar became a fiat currency when President Nixon euphemistically closed the gold window and refused to continue delivering gold to foreign nationals in 1971. Earlier, in 1933 President had confiscated the gold owned by Americans with the draconian Executive Order 6102.
Since there are no constraints on the quantity of fiat money that can be issued, it is often characterized by inflation. The sovereign progressively issues more and more until eventually it becomes worthless.
$\copyright$ Arlyn R. Rubash 2011

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