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The History of Money


Perhaps one of the earliest forms of money was barter: the exchange of one specific good or service for another specific good or service, such as bartering a bag of rice for a bag of beans. Difficulties with this system arose when the bartering parties could not agree what something was worth in exchange, or when one party did not want what the other person had. To solve that problem, commodity money was introduced. In the past, salt, tea, tobacco, cattle, and seeds have all been used as money, because of their importance to local economies. As the world developed it was discovered that using commodities as money presented new challenges. Carrying bags of salt and other commodities was difficult. In addition, commodities might have a short shelf life, after which they perished. Around 5000 B.C .E., metal objects were introduced as money because metal was readily available, easy to work with, and could be recycled. Other countries were soon minting their own coins with specific values. Metals such as iron, copper, silver, and gold were used to make coins. The problem moneymakers had was that some metals change as they rust. Only silver and gold kept their condition; these prevailed as the two main metals used for currencies in the world. The demand for gold and silver was driven not only by their practical use, but also by their role as investments and a store of value. The Roman Empire used gold currency called the denarius (or dinar), while the Persian Empire used silver and called it dirham (or drachma in the Byzantine Empire). The Muslim state used the gold dinar and the silver dirham as the official Islamic currency beginning with the Second Caliph Omar Ibn Al-Khattab (634-644 C.E.). The dinar was defined as the weight of 22-karat gold equivalent to 4.3 grams, and the dirham as the weight of silver equivalent to 3.0 grams. At that time, the caliph established the well-known standard relationship — 7 dinars must be equivalent to 10 dirham.

  • [1] J. Laurence, The History of Bimetallism in the United States (New York: D. Appleton and Company, 1901), chapter 8.
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