They say that money makes the world go round. But how does it work, and how has it changed over time? While developing the ECO Coin, we've been thinking a great deal of money, past and present. From the origins of civilization up to present day, economy has gone through countless shakeups, and yet we tend to take our current way of thinking about money for granted. Welcome to the fourth part of The Story of Money: Paper.
When paper money was first introduced in China, it was conceptualized quite differently from its modern incarnation. Like gold coins, paper bank notes have a prehistory. Bank notes had existed much earlier, but were made of leather. The advent of block printing opened up the possibility of paper money.
Merchants around this time were struggling to transport metal money across long distances, owing to its weight. Paper money was first introduced as a sort of IOU; rather than transporting metal currency themselves, merchants could bring a paper certificate officially granting ownership to whomever they were trading with. Eventually, the idea caught on that as long as everyone recognized the legitimacy of paper currency, there was no need for it to be tied to precious metals at all. This had the added benefit of freeing up iron and copper for more practical uses.
This raises a question: where did the legitimacy of this money come from? We have seen how the UK and other nations tried for some time to tie their money to a gold standard. But outside of this era, the value of paper money is simply something that is declared by the issuing government. Paper money works not because of any innate preciousness, but because governments, banks and businesses promise to accept it.
This requires a certain level of trust, and at various times in history governments have taken harsh action against counterfeiters. The Chinese at one time cut out the hearts of criminals caught faking the Emperor’s currency, and the British in 1817 hanged 313 people for producing or using phony bank notes. Flooding an enemy nation’s economy with fake money is even a well-known tactic in war.
Today, paper money is steadily being supplanted by other forms of currency - but for now, it is very much still with us.
Next week: Plastic
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