Milossarian asks:
Six of one, half a dozen of th’other, most likely. Spices (using the term broadly) are rare (or at least difficult to get if one lives far enough away) and useful. Gold, silver, and gems are rare and beautiful. Gold and silver (also “treasure” metals such as electrum and bronze) also have the advantage of being malleable and durable. The earliest coins were lumps of gold, silver, and electrum of standard weight, stamped with the royal seal to guarantee that they were of that weight (we remember this to this day with monetary terms such as “pound” and “mark”). Try doing that with a diamond or a vanilla bean.
The idea of coinage was probably invented, as Arnold says, in Lydia, although perhaps a bit later than 700 BCE (it was one of those ideas that seems obvious after the fact). All coins were at least nominally specie (made of the treasure metal(s)) for a long time thereafter (although debasing the currency was probably invented during the tax season immediately after coinage was).
Token currency (redeemable for specie or bullion) is probably dateable to China during the Yuan Dynasty (private money orders go back at least as far as the T’ang). The first known issue of paper currency was in 1236 CE. The paper currency was nominally redeemable in specie at a slight discount. In the late XIII and XIV centuries, nominal token currency was issued by the Yuan in ruinous amounts without regard to the government’s ability to redeem it. The Ming tried to resume the use of paper currency, but found themselves unable to get it into circulation; they had to revert to the use of copper coins, and gold and bullion.
Other examples of ruinous inflation were revolutionary America, revolutionary France, and the Confederacy. Generally, governments were carried away by the possibilties of printing up gazillions of dollars (or francs), and failed to take into account the ill effects thereof.
The gold standard (as opposed to coining whatever was at hand) came into effect piecemeal in the late XIX century, and was perforce abandoned in the early 1930’s as economy after national economy came unstuck at the seams. The U.S. (to which financial mastery had passed) maintained an international (although not internal) gold standard until Nixon disavowed the redemption of dollars held by foreign governments for gold. The era of the pure fiat (one that gains its value from pure government command, not one that is backed by Fiats) currency had arrived.
No proposal has, or is likely to, gained acceptance for a backing of contemporary currencies for the reasons that:
[list=1][li]No one good is abundant and durable enough to represent the world’s economic activity, and;[/li][li]Governments, despite the fact that no one has figured out how to repeal Gresham’s Law, still view running the printing presses overtime as the economic weapon of last resort.[/list=1][/li]Quite a few governments have recently adopted the U.S. dollar as a store of value, formally or informally, but since the USD is a fiat currency itself, this just pushes the problem back one step. It’s still turtles all the way down.
“Kings die, and leave their crowns to their sons. Shmuel HaKatan took all the treasures in the world, and went away.”