Evolutions of money as unit of exchange

The section provides an overview of the emergence and development of money as a medium of exchange for commodities from ancient times to the present and its implications for the internationalization and globalization of business.
With the development of commodity exchange, primitive peoples needed things that could be exchanged for any commodity. In the beginning, these exchange items had their own value and functionality. These included cattle, fishing tools, agricultural tools, weapons, furs, silk, jewelry, feathers, animal teeth, ivory, shells, gunpowder, tobacco, tea, grain, and cocoa beans. If it was a large, expensive object (e.g., a bull), it could be compared to smaller objects and was, therefore, a measure of value. A smaller, more demanded object could be a means of payment or accounting for accumulated wealth and, thus, a circulating currency. In ancient India, China, Japan, and Korea, cowrie shells were a prevalent form of money from 2200 BCE until the 19th century in some locations. These oval porcelain-like white shells with pink or yellow edges were used as money. They usually had a hole drilled in them so that they could be worn both as a necklace and as a neck ornament.

Ex. 2‑5 Money at different points in history

 

The invention of bronze casting in China in the middle of the 2nd millennium BCE led to the development of bronze coins, replacing stone currency, which mimicked the functional objects used for barter (Exhibit 2-5). The bronze currency quickly displaced all other money from circulation. Similar coins were produced in the surrounding regions and spread throughout Southeast Asia (Sajauskas 2015). Later, coins were produced not only from bronze but also gold, silver, and copper. The value of precious metal coins was essentially linked to weight. The weight of the coin was stamped into the coins. Coins made it possible to determine their value not only by weighing them but much more simply and conveniently by counting them. Coins, therefore, also became a means of calculating and valuing wealth. Very soon, coins took primitive money out of circulation, made it possible to do away with barter, and encouraged trade between nations (Cayón, 2008).
However, it is important to note that as long as functional objects were used as a unit of exchange, which were useful, people were less dependent on the governments, rulers, or emperors of the day. Once money became standardized, the rulers had a monopoly on its production (Eagleton et al., 2007). The earliest money of the Roman Empire was heavy copper alloy coins called Assis. Their weight had not been established, but it was equivalent to the value of copper. The first copper Assis were not struck according to the weight system established by the state until the 4th century BCE.
The use of copper and bronze coins for Roman coinage is due to the abundance of copper in what is now Italy. Following the Roman conquest of silver-rich Spain and Macedonia, silver denarii were minted from year 69 BCE. In the 1st century BCE, denarii were produced in a mint in the former temple of the goddess Juno Moneta. The name of this goddess is the origin of the word “Moneda” or “Moneta” that is used by many languages today for coins.
To protect bullion coins from cropping, the most popular form of fraud, nummidentati coins with a scalloped edge, which were first produced in Rome, and coins of such form are being used till today.
In the Greek Empire, coins were usually made of pure metal, so their weight corresponded to the denomination. In the Roman Empire, civil wars for power were a constant drain on the state’s coffers, so emperors began to reduce the weight of coins or downgrade the fineness of the metals. The first to downgrade the coins of the Roman Empire was the tyrant Nero (54-68).
The Arab Caliphate was created by Arab conquerors in the 7th and 8th centuries and expanded across lands rich in silver deposits, from Hindikut in the east to Spain in the west. The Arab Caliphate was rich in minting a new type of silver coin, the dirham, which takes its name from the Greek drachma. They were widely used in Central Asia, Eastern Europe, Scandinavia, and North Africa trade routes. In the 11th century, the Arab Caliphate faced a scarcity of silver, and instead of silver coins, they began to mint copper coins coated with silver and, later, copper coins. When the silver mines in territory of current Afghanistan finally collapsed, the production of silver coins ceased, and silver became more expensive than gold.
The discovery of the silver mine at Kutna Hora in Bohemia in 1300 was a new impetus for silver coins in Europe. In the 16th century, large silver coins minted from a silver deposit found in Bohemia, in current Czech Republic became common in almost all European countries.
The discovery of the Americas (1492) and the subsequent Aztec, Inca, and Mayan conquest by Spain are special events in the history of coins. Before the conquest the natives of America implemented the trade, and salt was one of its most important and valued means of exchange. It is important to mention, that before Spanish conquest and colonization of Americas there was economical interrelation settled among local nations. Huge quantities of silver were brought from the Americas to Spain, first by plunder and later from deposits discovered in Mexico, Peru, Bolivia, and Chile. The Potosi silver mine in Peru, now Bolivia alone produced half of the world’s silver between 1545 and the mid-18th century. For several centuries after that, Mexico led the world in silver production. Silver was refined into coins in the Americas and shipped by sailing ships to Spain.
As European trade with the East intensified during the Crusades, there was a need for gold coins of a stable value, as gold was considered the most reliable currency in international trade. As early as the 13th century, Italian cities resumed minting gold coins. In the 14th century, Hungary, Germany, and the Netherlands followed suit. The discovery of America led to a breakthrough in gold coinage. Spain had a rival in Portugal, whose explorer Vasco da Gama discovered the Cape of Good Hope and the sea route to India in 1497-1498. The Portuguese discovered gold deposits on the coast of the Gulf of Guinea (present-day Ghana) before the Spanish in the Americas.
The world wars of the 20th century ended the use of precious metals for the regular payment of goods and services. Instead, they were replaced by paper money – banknotes. Today, gold is stored in bank vaults as bullion and is used only for large international settlements, to maintain exchange rates, or to mint commemorative or investment coins.
Although paper money did not finally replace coins until the 20th century, its origins go back much further. In China, the shortage of metal for copper money in the 10th and 12th centuries led to the invention of paper money instead. The idea of paper money originated from notes for goods on loan. Debt notes became standardized and were produced using special clichés. The emergence of paper money coincided with the invention in China of the printing method using prefabricated hieroglyphic characters. In Europe, paper money did not become prevalent until a few centuries later, however it gained popularity and was issued by most European banks in the 19th century. Paper money became a written guarantee issued by a bank that the note holder was entitled to the amount of gold the bank had accumulated and stored. This was very useful in international trade, as it was no longer necessary to carry gold or silver to buy goods. Because of often robberies, transporting gold and silver to pay for goods was very dangerous.
However, as paper money spread in international trade, the reliability of the money-making machines was crucial. Payments for goods in the form of gold or silver coins was a different matter as the metal itself was valuable. Paper money was only valuable to the extent that it could be exchanged for other goods later. Certain conditions were necessary for paper money to replace gold or silver coins. First, the issuer of the paper money had to guarantee, not only by authority but also by treasury, that his paper money would be exchanged for gold or silver of its value. Therefore, all printed banknotes had to be backed by an asset held by the State, which is expressed as a quantity of gold. However, history shows that the first European kings who replaced silver and gold with paper money began to produce as much of it as they needed. This caused the value of the money they made to decrease. This is called inflation. In countries where the leaders made lot of paper money, the peoples’ savings in paper money depreciated. The most notable example of inflation relates to the consequences of the World War I caused by Kaiser Germany. German paper money was made in large quantities, but inflation caused it to lose a value, leading to a financial crisis in the entire region that had used it. The economic crisis in the USA between 1929 and 1934 also led to high inflation. Banks became insolvent, and to cover their liabilities, they issued securities – credit obligations – printed on plywood sheets. Finally, it was generally understood that only stable countries, whose banks monitor and control the stability of their exchange rate against gold, could maintain confidence in the paper money issued, not only in their own country but throughout the world.
The gold standard emerged in the 19th century during the European industrial revolution. Growing production volumes required the expansion of outlets, which led to a boom in international trade. And there was a need to find a convenient instrument for mutual payment. The pegging of national currencies to a fixed quantity of gold became such an instrument: it made it easy to trace the exchange rates between any currency pairs and to determine the balance of trade, which is assumed as the ratio between the value of imports and the value of exports of each country. In 1867, this was finally formalized in the Paris Currency System. However, at the beginning of the 20th century, most countries could not cope with the costs of World War I and unpegged their currencies from gold to produce money in unlimited quantities. The only currencies that retained their gold backing were the US dollar and the British pound. At the Genoa Congress in 1922, this system became official and was called the gold-currency system. Later the Great Depression hit America, money plummeted in value, and the same well-developed countries also abandoned their currencies’ pegs to gold, England in 1931, the US in 1933. When situation went even worse, a year later, on 30 January 1934, President Roosevelt ratified the Gold Reserve Act, under which the dollar was once again pegged to gold at a fixed rate of $35 per troy ounce. In July 1944, the Bretton Woods Conference finally approved the monetary system known today as the Gold Standard. The currencies of 44 countries worldwide were pegged to the dollar at strictly fixed rates, and the dollar was pegged to gold.
The 1944 Bretton Woods Agreement established the dollar standard when countries agreed to fix their exchange rates against the United States dollar. It decided to use the United States dollar alongside gold as the international reserve currency and international means of payment. Since 1934, the United States of America has, pursued a policy of buying and selling gold at a fixed price, it was 35 United States dollars per troy ounce of gold, due to the accumulation of substantial amount of gold. The United States dollar became a substitute for gold and a reserve currency. With almost fixed exchange rates as only small deviations were allowed, the countries ‘central banks sold or bought dollars according to their reserves of dollars or other foreign currencies. Under the dollar standard, various currencies were exchanged for dollars rather than for gold. The dollar standard had its drawbacks. Countries’ domestic money supply was not dependent on the reserves of dollars held by central banks, so countries could produce as much money as they wanted and eventually had to devalue their national currency against the dollar. Once dollars were best accepted and desired currency as global market, the United States government could cover the country’s balance of payments deficit at any time by producing more dollars. As long as the United States had a small balance of payments deficit, dollar reserves in the central banks of other countries did not change much, and the money supply grew slowly. In the mid-1970s, the United States began to run a balance of payments deficit much larger than that of other countries for instance in Western Europe or Japan. It happened due to the heavy USA military spending in the Vietnam War. Foreign dollar reserves increased rapidly, with the United States’ gold reserves following suit. The United States was no longer able to maintain the dollar’s convertibility into gold, and the dollar’s importance as a reserve currency declined. In 1968, the United States stopped exchanging dollars for gold at a fixed price domestically, and in 1971, the policy was extended to international transactions. The link between the value of gold and the value of the dollar had broken, allowing their value to be determined by the market. One troy ounce of gold was worth 38 United States dollars in 1972.
On 15 August 1971, US President Richard Nixon abolished the Gold Standard, and the dollar became unbacked, like all other currencies in the world. From that day on, money became just a paper, held only by the consumer’s belief that it had some value and could be paid for. Paradoxically, this revolution was hardly noticed. Washington’s abandonment of the gold standard was nothing more than a realistic response to French President Charles de Gaulle’s attempt in 1968 to sail a whole shipload of dollars and exchange them for gold. Incidentally, he managed to buy back more than 3 000 tons of this precious metal from the Americans within two years. But the real reason was different. The reason was that the suspicions that the number of dollars in circulation no longer corresponded to the amount of American gold reserves were completely justified. Although the American economy had become the largest in the world after World War II, gold was flowing out of the country. On the other hand, under the rules, Americans were not obliged to disclose the volume of their gold deposits and could therefore produce more dollars than was covered by gold deposit. And finally, thanks to the fact that many economies were so saturated with dealers that they could not even do without the gold standard, the idea of abandoning the gold standard, which would finally untie the hands of the Americans, was simply in the air. Realizing all this, the US government did not hesitate to take the unprecedented step of unilaterally announcing the total abandonment of the Gold Standard. This situation is even more striking because of the two facts. Firstly, at that time, most of the world’s gold was stored in the USA, and no one had access to it. Secondly, US dollar is not even essentially produced by a state. It is merely the financial liabilities of the 12 largest commercial banks with Federal Reserve status. However, one can understand why the US decision has not been met with serious protests from other countries. The US dollar is the official currency of the following countries: the United States of America, the British Virgin Islands, Ecuador, El Salvador, the Marshall Islands, Micronesia, Palau, Panama, Timor-Leste. The US dollar is also used to price oil and gold, it is still the most popular currency in the world, and many economic factors influence the position of the dollar. The euro/US dollar exchange rate has been officially counted since 4 January 1999 and is the world’s most important and major currency pair. Before the introduction of the euro, the exchange rate was calculated with the ECU, the derivative currency of the European Economic Community.
In general, national currencies, whether linked to gold or other currencies, are regulated, and supervised by the state. This function is carried out by the national banks of the countries, in the US by the Federal Reserve, and in the European Union by the European Central Bank. Governments influence production of more money, interest rates, and even inflation through policy decisions. Trade transactions and monetary settlements made by banks are also supervised and monitored by public and tax authorities. Of course, this scrutiny varies from country to country in terms of the degree of scrutiny, scope, and impact, and some countries still protect and keep information about the origin of money and its owners private. However, the number of such countries is decreasing, and even Swiss banks, which have long had a policy of secrecy and confidentiality, have begun to open to international pressure to provide data requested by foreign law enforcement and tax authorities. In particular, the scrutiny of bank accounts, the owners of the money, and the origin of the money has increased since the terrorist attacks of 11 September 2001 in the USA. The global banking system is under greater scrutiny to reduce organized crime and support terrorism.
The value of national currencies is crucial for international trade. If domestic production is too expensive and therefore a product is uncompetitive in foreign market, the state can intervene to make the product cheaper and exportable. This is done by devaluing own currency against the currency of the export county. This is one of the reasons why some countries seek to maintain their national currency. In the European Union, for example, not all countries belong to the euro area. Some countries, such as Denmark, Sweden, and Poland, have retained their national currencies – the Danish kroner, the Swedish kroner, and the Polish zloty. The exchange rates of these countries fluctuate in relation to the exchange rates of their main trading partners, i.e., between the dollar and the euro. China has also used the depreciation of its currency to become the world leader in production and assembly. To make labor cheaper in relation to other countries, China has depreciated the value of local currency, which significantly enhanced export from China as goods have become highly affordable in the foreign markets.
Banks played a crucial role in rise of international trade. Carrying cash for the purchase of goods over long distances was risky due to theft or robbery. Historically, there have been very large-scale robberies in which significant quantities of transported gold were stolen. When transporting money by sea, there was a risk of pirate attacks. Pirates often attacked merchant ships. Although pirate attacks on ships still occur in the 21st century, attempts to hijack ships are still being reported off the coast of Somalia. Even today, valuable cargo is guarded by armed guards. But today, at least, money is no longer transported for international payments. Banks performed the function of trade intermediaries. Further details on banking procedures for facilitating international settlements is defined in part B Chapter 3 of the book. A significant breakthrough and facilitation of international trade was the emergence of electronic banking and international money transfers. Internet worldwide penetration has accelerated international banking operations for payment of international trade transactions almost in all countries.
Liberal ideology inspires people’s desire for confidentiality, independence from governments, and technological innovations at the beginning of the 21st century led to the emergence of a new type of money – crypto currencies. Crypto currencies are digital and virtual-only currencies based on block chain technology that allows various online payments to be made anonymously without needing third-party intermediation and government supervision. This means that economic operators can pay each other for products or services without using banks and without using state-issued currencies. The crypto currency is decentralized and not supervised by any financial institution (Chohan, 2017). Some governments, central banks, and financial institutions do not recognize crypto currencies. The value of crypto currencies is determined by the principle of supply and demand, so the more people want to buy, the higher the price rises, which is why the price of crypto currencies is extremely volatile and tends to rise or fall rapidly. There is no such kind of institutional stabilization as for national currencies. Although some governments and banks do not recognize crypto currencies, they are utilized for the payment of products or services between entities that voluntarily recognize them.

Ex. 2‑6 Major capitalisation (2023) cryptocurrencies

Holders of crypto currency units usually store them on their digital devices using various virtual wallets. Without a central registry, it is impossible to retrieve crypto currencies in the event of loss or damage to the device holding them. Also, the number of crypto currency units is limited, and their supply is regulated by the network. The crypto currency is produced by so called electronic mining: special computer programmes carry out mathematical calculations to create new crypto currency units – unique sequence of codes. The word mining describes the production of new crypto currency units, which is analogous to gold mining. The overall number of crypto currency units, like the total amount of gold circulated in the market, increases when a new piece is mined.
There are many types of crypto currencies available in the market recently, but the most popular ones have been Bitcoin – BTC and Ethereum – ETH for some time (Exhibit 2-6). Although they are both similar in principle and often complement each other, several differences can be found. For example, Bitcoin is commonly perceived and used as a broad alternative to the traditional monetary system, whereas Ethereum is designed to work in conjunction with the Ethereum smart contract and platform.
Bitcoin was the first cryptocurrency, so it has the longest price history, stretching from 2009 to the present, with an initial value of much less than 0.01 US dollar. Many cryptocurrencies launched since then have been based on Bitcoin’s model, and some have even been developed through stable and robust copies of Bitcoin’s code.
Bitcoin’s first big surge in popularity came at the end of 2013, and most other cryptocurrencies that existed at the time did the same at the same time or a little later. Crypto prices fell again in 2014. Four years later, at the end of 2017, the global crypto market share, which reflects the total market capitalization of all listed cryptocurrencies, increased by approximately 360 percent from 180 billion US dollars in early November to 830 billion US dollars in January 2018. This was followed by a downward slide again, with most cryptocurrencies losing a large part of their value in the following weeks and months. The most significant upswing in the cryptocurrency market occurred in 2021. Crypto prices started to rise in late 2020, and by January 2021, the market had reached a low level. The global crypto market share surpassed 1 trillion of US dollars for the first time. This share was mostly up for the rest of the first quarter and was worth more than 2 trillion of US dollars by May. The combined market cap of BTC and ETH reached value of 430 billion US dollars at the beginning of 2023. Most cryptocurrencies tend to follow an up and down cycle. This is a pattern whereby a period of increasing optimism and buying leads to an increase in price before a period of doubt and disappointment leads to a sharp drop in the price of the cryptocurrency (Milutinović, 2018).

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