Ancients: The World's First Coins

Coinage—in the form of small metal discs, ingots or replicas of metal tools marked with information about their value or origin—first appeared in Asia Minor, India and China during the 1st millennium BC.

From these areas originated the three major monetary traditions (Greek, Indian and Chinese) that influence our modern ideas of how money should look and how it should be used. 

Coinage was invented in the ancient kingdom of Lydia during the 7th century BC, in what is today central Turkey. The idea was quickly adopted by the Greeks and soon nearly every Greek city and colony from southern France to the northern shores of the Black Sea began to produce their own coins.

The Romans adopted coinage from the Greeks during the 3rd century BC and developed the first fully monetized society. Money was used in the daily transactions of the majority of Romans, creating a huge demand for coins. 

The Romans took advantage of this demand and became masters at using coins as propaganda. They developed a "language" of abbreviations and symbols on coinage that is still used today.

Medieval: Aftermath of Rome's Fall

With the fall of the Western Roman Empire, cities and towns shrank or disappeared altogether. Long-distance trade and a sophisticated monetized economy were replaced by barter and an agricultural subsistence economy. These changes are reflected in coinage.

The Western Roman Empire was replaced by a patchwork of barbarian kingdoms, isolated domains of Roman landlords and simple chaos. Money became scarce and was increasingly limited to one of two denominations in gold, except for in Italy, where a monetized economy survived due to the proximity of the Eastern Roman Empire.

Over the course of the 7th century, conditions began to settle down as the barbarian tribes formed permanent territorial kingdoms. The economy began to revive and coinage was struck in greater numbers. 

As Western Europe recovered, limited coinages of gold fractions were replaced by silver "pennies" based on the Roman denarius—these coins became the basis for the monetary system introduced by Charlemagne.

The Eastern Roman Empire had troubles of its own. After a short military and economic revival in the 6th century, the empire was faced with a series of devastating wars with the Sassanid Persian Empire based in Iraq and Iran.

The Byzantines emerged victorious just as the Arabs under the prophet Mohammed erupted from southern Arabia with their new religion, Islam. The Arabs were able to defeat the weakened Byzantines and Sassanids, creating a new empire (the Caliphate), which spread from Spain to Afghanistan and beyond. 

The Caliphate developed its own coinage, in keeping with Islam beliefs, which replaced its Byzantine and Sassanid predecessors as the standard trade coinage of western and central Asia.

Paper Money: A Convenient Medium

Paper money was invented by the Chinese in the 7th century as way of simplifying large monetary transactions; it is a lot easier to handle than thousands of copper coins. The Chinese used paper money for centuries before Europeans began to use it during the 17th century. 

The first Europeans were the Swedes, who developed paper money for reasons similar to those of the Chinese—the Swedes had an abundance of copper coinage that was difficult to use due to its weight and bulk. 

By the end of the 18th century, paper currency was in use throughout most of Europe and its colonies. 

Paper money developed in two forms: Drafts, which are receipts for value held on account; and Bills, which were issued with a promise to convert to "real" money, i.e. coins with value based on their metallic content. 

The value of paper money before the middle of the 20th century was dependent on what it could be exchanged for—paper money had no intrinsic value of its own. 

Thus, most paper currency specified that it was exchangeable at a location such as the Treasurer's office, or a specific bank, for a specified amount of silver or gold coinage. 

Modern paper money is rarely backed in this way—most world paper money is now backed simply by the issuing government's promise to accept it in payment.

Paper money has become an increasingly important part of the money supply, moving from a poor substitute for coinage to the mainstay of modern economies over the last 150 years.

U.S. Paper Money: Economic Expansion

Paper money has a unique place in the history of the United States. The lack of bullion experienced by the British colonies in North America created an ideal setting for the first authorized government-backed issue of paper money in the western world. 

In 1690, the Massachusetts Bay Colony approved the issuance of the first paper money in North America, and the first to be issued directly by a government in the West. Other colonies followed Massachusetts' lead until paper money became common in the colonies, and was mostly successful, despite attempts by the British government to suppress its use. 

The American Revolution witnessed a vast expansion in the issue of paper money by provisional state governments as well as the new Continental Congress as they attempted to cover the costs of the war. 

Over-issuance caused the collapse of the currency so that by the end of the Revolution, the American public had lost confidence in paper money. Continental paper was eventually redeemed at one cent on the dollar, three decades after it was issued.

In 1789, the Constitution prevented the individual states from issuing paper money and the Federal government was reluctant to issue paper money due to past experience.

Thus, Federal treasury notes were only issued during emergencies such as the War of 1812 and the Mexican-American War. However, the continued lack of sufficient silver or gold coinage made paper currency necessary for the economy to grow. Banks chartered by individual states and corporations provided the answer by issuing paper money, now known as obsolete notes.

At the outbreak of the Civil War, the Federal Treasury realized that a new paper money system was needed. New methods for raising money were established, including the creation of a permanent Federal system of paper currency. 

Congress authorized the issuance of regular circulating paper money in 1861 for the first time since the Revolution. Known as "demand notes," these were redeemable in hard cash on demand. 

In 1862, demand notes were replaced by Legal Tender notes, and, in 1863, by Compound Interest Treasury notes. These notes became known as "greenbacks" due to their green color. 

In 1863, the National Banking Act was introduced to replace the obsolete state-chartered banknotes with a reliable, standardized series of notes issued by national banks backed by government bonds deposited with the Treasury. 

By the second half of the 19th century, the United States was producing the finest and most stable bank notes in the world. American paper money became the model for many countries, and American concepts of how paper money should look became the accepted standard for most of the world.