International Monetary Systems - Historical Overview

Historical Overview

Throughout history, precious metals such as gold and silver have been used for trade, termed bullion, and since early history the coins of various issuers – generally kingdoms and empires – have been traded. The earliest known records of pre - coinage use of bullion for monetary exchange are from Mesopotamia and Egypt, dating from the third millennium BC. It is believed that at this time money played a relatively minor role in the ordering of economic life for these regions, compared to barter and centralised redistribution - a process where the population surrendered their produce to ruling authorities who then redistributed it as they saw fit. Coinage is believed to have first developed in China in the late 7th century BC, and independently at around the same time in Lydia, Asia minor, from where its use spread to nearby Greek cities and later to the rest of the world.

Sometimes formal monetary systems have been imposed by regional rulers. For example scholars have tentatively suggested that the ruler Servius Tullius created a primitive monetary system in the archaic period of what was to become the Roman Republic. Tullius reigned in the sixth century BC - several centuries before Rome is believed to have developed a formal coinage system.

As with bullion, early use of coinage is believed to have been generally the preserve of the elite. But by about the 4th century BC they were widely used in Greek cities. Coins were generally supported by the city state authorities, who endeavoured to ensure they retained their values regardless of fluctuations in the availability of whatever base precious metals they were made from. From Greece the use of coins spread slowly westwards throughout Europe, and eastwards to India. Coins were in use in India from about 400BC, initially they played a greater role in religion than trade, but by the 2nd century had become central to commercial transactions. Monetary systems that were developed in India were so successful they spread through parts of Asia well into the Middle Ages.

As multiple coins became common within a region, they were exchanged by moneychangers, the predecessors of today's foreign exchange market, as famously discussed in the Biblical story of Jesus and the money changers. In Venice and the Italian city states of the early Middle Ages, money changers would often have to struggle to perform calculations involving six or more currencies. This partly led to Fibonacci writing his Liber Abaci where he popularised the use of Indo-Arabic numerals, which displaced the more difficult Roman numerals then in use by western merchants.

When a given nation or empire has achieved regional hegemony, its currency has been a basis for international trade, and hence for a de facto monetary system. In the West – Europe and the Middle East – an early such coin was the Persian daric, of the Persian empire. This was succeeded by Roman currency of the Roman empire, such as the denarius, then the Gold Dinar of the Muslim empire, and later – from the 16th to 20th centuries, during the Age of Imperialism – by the currency of European colonial powers: the Spanish dollar, the Dutch Gilder, the French Franc and the British Pound Sterling; at times one currency has been pre-eminent, at times no one dominated. With the growth of American power, the US Dollar became the basis for the international monetary system, formalized in the Bretton Woods agreement that established the post–World War II monetary order, with fixed exchange rates of currencies to the dollar, and convertibility of the dollar into gold. Since the breakdown of the Bretton Woods system, culminating in the Nixon shock of 1971, ending convertibility, the US dollar has remained the de facto basis of the world monetary system, though no longer de jure, with various European currencies and the Japanese Yen being used. Since the formation of the Euro, the Euro has gained use as a reserve currency and a unit of transactions, though the dollar has remained the primary currency.

A dominant currency may be used directly or indirectly by other nations – for example, English kings minted gold mancus, presumably to function as dinars to exchange with Islamic Spain, and more recently, a number of nations have used the US dollar as their local currency, a custom called dollarization.

Until the 19th century, the global monetary system was loosely linked at best, with Europe, the Americas, India and China (among others) having largely separate economies, and hence monetary systems were regional. European colonization of the Americas, starting with the Spanish empire, led to the integration of American and European economies and monetary systems, and European colonization of Asia led to the dominance of European currencies, notably the British pound sterling in the 19th century, succeeded by the US dollar in the 20th century. Some, such as Michael Hudson, foresee the decline of a single basis for the global monetary system, and instead the emergence of regional trade blocs, citing the emergence of the Euro as an example of this phenomenon. See also Global financial systems, world-systems approach and polarity in international relations. It was in the later half of the 19th century that a monetary system with close to universal global participation emerged, based on the gold standard.