Posted by Allison on 6 April 2009, 15:14
Just as some parts of the world of currencies change remarkably as time goes on, other parts hardly seem to change at all. But where do monetary systems fit in – and what exactly is a monetary system anyway?
Put simply, a monetary system is a system of swapping something for goods which is agreed upon by whoever governs that particular country. For example, the monetary system in much of Europe is based on the Euro; the monetary system in America is the US dollar, and the monetary system in China is based on the renminbi.
By definition a monetary system has to be based on money of some kind. Nowadays that basically means coins and banknotes, but in the past it didn't always work that way. The further back you go into history the less instances of money as we understand it now come forth, which is why ancient forms of monetary systems were based on objects that were perceived to have a value of some kind.
So it can be seen then that what a monetary system is based on has changed over the centuries, progressing from such items as salt, whale's teeth and shells to the more familiar coins and banknotes of the various currencies that we know today.
But with that said, has the true nature of what lies behind a monetary system remained exactly the same over the centuries?
Perhaps intriguingly, the answer is no. You see, when ancient civilisations organised their own monetary systems, they based them around items which had some value to them. This was before the advent of 'proper' money like we have now, and so people looked around for something that was convenient and in reasonably plentiful supply. It couldn't be something that there was lots of, such as any kind of stones for example, because that would have meant that everyone could simply go out into the street and pick up 'money' off the floor. The fact that it should be something much harder to get hold of made it an ideal form of early currency, which is why ivory and certain herbs were both used to support monetary systems in ancient times.
In short, whatever commodity was used to create a monetary system in a certain area, it had an intrinsic value to it. A pound of salt was a pound of salt and that's all there was to it. Nowadays the paper used to print banknotes on has the same value throughout all the notes; the only thing that changes is the design and the amount printed on it. As you can see, there is a lot of trust placed in monetary systems nowadays, since they are often based on nothing more than this.
While it was common for a currency to be backed by gold, this has become less common and is the main difference between ancient monetary systems and modern ones.
But how vulnerable are monetary systems? Who decides how they are set up and when do changes occur?
Like anything else in life, monetary systems can indeed be vulnerable at times. They are set up largely by whoever is in charge in a particular country at a particular time, and there may be several reasons for bringing a monetary system into play.
Sometimes the effects of war can devalue or destabilise a currency to the extent where it is actually easier to do away with that currency altogether and begin again with a new one. When this happens the new monetary system is often based on a currency used elsewhere, or a different version of an existing currency. That way it is something which the country's citizens are already familiar with. While the dollar hasn't always been adopted by other countries due to reasons associated with war, it has found its way into many monetary systems, perhaps due in part to its perceived strength as the preferred currency of the United States of America.
But while a particular monetary system is restricted to use in the country or countries that adopt it, it does not mean that it is isolated from the rest of the world. Far from it in fact – even while different monetary systems are in place all over the world (which is as true today as it was many centuries ago) countries still need to exchange goods and services with each other, and by doing so they will need to work out an exchange rate at which their two different currencies can be traded.
The pages of the history books are testament to the number of times that a monetary system has gone out of control and affected the value at which a particular currency – whether ancient or new – has been traded at. So far this has only ever happened on a national scale, but what would happen if it occurred on a global scale?
Just imagine for a moment the effects it would have if the monetary systems in place all over the world started collapsing one after the other. You may say it would never happen, but surely it is only a matter of the right (or wrong) circumstances all falling into place at the precise moment?
If that was ever to happen then we would be left with the prospect of having gone full circle – and we would have to rely on bartering again to trade goods with each other. From then on we may just try to start up another monetary system, but it wouldn't be so simple as to be done overnight.
In a sense the world of currencies and monetary systems is far more fragile now than it has ever been at any point in the past. This is because we have so much more riding on its continued success – and that is what separates us from our ancestors.
One suspects that they would have found it far easier to pick up the pieces after a failed attempt at monetary union than we ever would.