Drum Money

The people of Alor, a small island close to Indonesia, used brass kettledrums and brass gongs as the principle forms of money. The drums, called mokos, played the dominant role in this monetary system, while gongs played a lesser role, and small change was made with arrows. Gongs without defects were treasured for their ceremonial value, but damaged gongs changed hands as money. Pigs also filled a niche in the monetary system of Alor, and one pig was worth a certain type of moko valued at 5 rupiah, a money of account that originated with the rupee in India. Pigs were highly valued because of their ceremonial importance in festivities.

Mokos came in a range of monetary denominations, each with its own name, and varying in value from 1 rupiah to 3,000 rupiahs. Most of these drums entered Alor from East Java, but some of the drums were reported to have been discovered buried in the ground. Although some drums were regarded as fake imitations of the real article, they nevertheless were readily accepted in exchange. Right before World War I the Dutch government sought to displace drum currency with modern money, banning the importation of drums, and purchasing hundreds of mokos for scrap.

Drums functioned as a medium of exchange, store of value, and standard of deferred payment, but seemed not be used as a unit of account for pricing other goods, aside from the fixed ratio between mokos and pigs. Most trade took the form of barter.

The accounts of debtors and creditors were composed almost exclusively of drums and gongs. Owners of drums and gongs were eager to lend them, partly to prevent their own creditors from seizing them. Ceremonial festivals were occasions for settling accounts, usually with passionate haggling and quarreling. Whenever a creditor found a debtor and demanded repayment, his own creditors crowded around the transaction, and demanded repayment of their own loans when drums and gongs passed from the first debtor to the first creditor. Subsidiary creditors of second or third degree might get involved. The islanders were enmeshed in a web of creditor-debtor relationships that focused the attention of the men while the women did much of the work. A women who got involved in financial affairs was called a man-woman and a man who gathered wood and gardened was called a woman-man.

Poetry of the Alor was known to take up the unromantic theme of quarrels between debtors and creditors on a scale that might suggest a lack of refinement to the people of the highly commercialized societies of the industrialized world. Debtors and creditors were put on a level with star-crossed lovers and tragic heroes of Western literature.

Dollar Crisis of 1971

In August 1971 the United States government suspended the convertibility of dollars into gold for foreign official holders of dollars, marking the final break with the gold standard in the world economy. Uneasiness about the dollar reached crisis levels in 1971 as the rest of the world became increasingly aware that the United States did not own enough gold to redeem all the foreign-owned dollars. The drain on its gold reserves also concerned the United States government. Before the suspension, foreign official holders of dollars (foreign central banks and foreign governments) had been able to convert dollars into gold at the rate of $35 per ounce. (Domestic holders of dollars had been unable to convert dollars into gold since the 1930s.) Gold has remained an important component of international monetary reserves, but currencies are no longer convertible in gold at a fixed, official rate.

The Bretton Woods System, created in 1944, established a world gold standard for international purposes, requiring each country to define a par value of its currency in terms of a fixed weight of gold. A shortage of world gold reserves, however, led countries to define domestic currencies in terms of United States dollars, and the United States stood ready to redeem dollars into gold at the official rate for foreign official holders. The redemption of dollars into gold drained the United States gold stock from $25 billion in 1949 to $12 billion in the early 1970s.

Largely because of worldwide military and political obligations, the United States ran what are called balance of payments deficits after World War II, infusing additional dollars into a world economy hungry for monetary reserves. A balance of payments deficit occurs when the outflow of dollars from U.S. imports and investment abroad exceeds the inflow of dollars from U.S. exports and foreign investment in the United States. The consequence in 1971 was an increase in the number of foreign-owned dollars that the United States was committed to redeeming in gold. After the mid-1960s, the U.S. balance of payments deficits grew at a faster tempo because of military involvement in Vietnam and heavy investment abroad. The rest of the world saw that the United States gold stock was insufficient to redeem all foreign-held dollars in gold. In August 1971 President Nixon announced that the United States would no longer convert dollars into gold for foreign official holders. Between August 1971 and May 1973 world governments endeavored, without success, to save the Bretton Woods System with a dollar devalued in terms of gold.

After 1973 the value of the dollar was no longer defined in terms of a fixed weight of gold, and other currencies were no longer defined in terms of dollars. The exchange rates between currencies floated freely and were based upon supply and demand. Today governments manage the floating exchange rates, but currencies are not tied to each other in fixed exchange rates.

Historically, the suspension of convertibility of paper money into precious metal has occurred during wartime—the Civil War and the War of 1812 being prime examples in the United States. The suspension of the convertibility of the dollar in 1971 occurred when the United States was engaged in an expensive cold war with the Soviet Union, coupled with a lengthy effort in Vietnam. Some observers attribute the inflation of the 1970s to the collapse of the gold standard, and the loss of the discipline that the gold standard had imposed on monetary growth. As control over monetary growth brought inflation down in the 1980s, however, a connection between the gold standard and price stability seemed less necessary.

Dollar

The dollar is the official name for the United States currency, the closest approximation to a world currency, and is also the name for numerous other national currencies.

The term dollar is apparently a variation of the term thaler, a common term for coins in Germany and Eastern Europe that may have been derived from a valley named Joachimsthal where coins were minted in the sixteenth century. The coins were called Joachimsthalergroschen, soon shortened to thaler, and later to taler. In the sixteenth century the Scots adopted the term dollar to distinguish their currency from that of the English. The Scots were not always compliant subjects of the English Crown, and from the outset the term dollar bore an anti-English and antiauthoritarian connotation. Scottish emigrants brought the term dollar to the British colonies.

Although England forbade its colonies to mint coins, Spain put no such prohibition on its colonies, which were rich in precious metals. Mexico boasted of one of he world’s largest mints. Spanish coins were the most readily accepted worldwide, including in the British colonies, but the colonists called the coins dollars rather than their Spanish names of reales and pesos. The Spanish pieces of eight coins had a face value of eight reals, and in the United States the phrase “two bits’ is still used to refer to a quarter, one-fourth of a dollar.

The most common Spanish coin circulating in the British colonies was sometimes called the pillar dollar because the obverse side bore an image of the Eastern and Western Hemispheres with a large column on each side. The columns represented the Pillars of Hercules, and the words plus ultra, meaning “more beyond,” embellished a banner hanging from one of the columns. The coin was apparently a means of publicizing the discovery of America. The dollar sign probably evolved from the pillar dollar, with the two vertical parallel lines representing the columns, and the “S” shape representing the banner.

The dollar had established itself as the primary money unit of account in the 13 colonies, and the Congress of the new republic declared on 6 July 1785 that the “money unit of the United States of America be one dollar” (Weatherford, 1997). In 1794 the United States began minting silver dollars containing 371 1/4 grains of silver, an amount based on the average weight of Spanish dollars circulating in the United States. Spanish and Mexican dollars remained legal tender during the early days of the Republic.

Popular usage made dollars, whether United States, Spanish, or Mexican, the accepted currency in the New World. Canada created an official currency, the Canadian dollar, pegged at a one to one exchange rate with the United States dollar. Among the British colonies in the Caribbean, dollars became the official currency in Anguilla, Saint Kitts and Nevis, Antigua and Barbuda, Montserrat, Dominica, Saint Lucia, Saint Vincent, Guyana, the Bahamas, Belize, Barbados, the Cayman Islands, the British Virgin Islands, Trinidad and Tobago, the Turks and Caicos Islands, and Jamaica. Most Latin American countries adopted as their official currency the peso, which shares with the dollar a common ancestor, the Spanish real.

Spain also popularized the use of dollars in the Pacific basin. In the latter nineteenth century Mexican dollars dominated Pacific basin trade but both the United States and Britain issued so-called trade dollars for foreign trade with the area. The Chinese called silver dollars yuan, meaning “round things,” and yuan became the standard currency in China and Taiwan. The Japanese shortened yuan to yen and established a yen currency. Initially 1 yen approximately equaled 1 dollar.

The term dollar became the name of the official currencies in Australia, New Zealand, Fiji, the Cook Islands, Kiribati, Brunei, Singapore, Hong Kong, the Solomon Islands, Pitcairn, Tokelau, Tuvalu, the Marshall Islands, and Western Samoa. By 1994, the term dollar denoted the official currencies in 37 countries and autonomous territories. Europe, the birthplace of the original dollar, is one of the few places in the world where dollar is not a designation for an official currency. In 1991 the newly independent country of Slovenia, part of the former Yugoslavia, adopted tolar, a variation of dollar, to denote its official currency. Zimbabwe, among the latest African countries to join the ranks of independent nations, named its official currency the dollar.

Dissolution of Monasteries (England)

Between 1534 and 1540 King Henry VIII, showing the same hasty, thoughtless stubbornness that marked his quest for a son, dissolved most of the English monasteries and confiscated their property.

Early in the sixteenth century England’s enemy was Charles V, emperor of the Holy Roman Empire, which Voltaire later described as “neither holy, nor Roman, nor an empire.” The Catholic world looked to Charles V to champion the cause of Catholicism against the impious king of England, and precious metals from the New World poured in to Charles, enlarging his vision of possibilities.

The dissolution of the monasteries occurred against the backdrop of the Reformation, the sixteenth-century religious movement that began as an effort to reform the Catholic Church, and ended with the establishment of the Protestant churches. Thus the forces of the Reformation in England made monasteries a clear and open target. In addition, expenses for public works impelled Henry VIII along a course that ended in the confiscation of vast holdings of ecclesiastical properties. Aside from extravagant court expenditures, Henry VIII financed a major enlargement of the English navy, and a significant improvement of England’s harbors and ports. Paying for these public expenditures with more taxes was not workable. Taxes were already high and any increase would have prompted tax evasion, perhaps increasing collection costs as much as revenue. Henry VIII resorted to currency debasement, the worst such episode in English history, and to the confiscation of ecclesiastical properties. Monasteries had large landholdings that generated income and were also storehouses of gold and silver candlesticks, crosses, plate, and other precious metal objects.

Legislative action began in 1534 with the Act for the Suppression of the Lesser Monasteries. This law covered all monasteries with annual incomes of less than 200 pounds, accounting for about two-thirds of all the monasteries in England. In 1538 Henry expanded the policy of dissolution to friaries, and in 1539 he expanded it to the larger monasteries.

The monasteries were stripped and sometimes destroyed. About 75,000 pounds sterling in gold and silver was sent to London from dissolved monasteries. Bells were melted down and recast as cannon, and lead from roofs and gutters was exported. By 1540 nearly all ecclesiastical orders had ceased to exist, although a few survived until Henry’s successor, Edward VI, dissolved them in 1547, thus completing Henry’s policy.

The abbots of targeted monasteries resorted to various stratagems to hide precious metals when the king’s agents came to dispose of monastery property. Some abbots placed gold and silver objects with private individuals in hopes of getting them back later. Some objects were hidden in secret vaults and walls, and some were sold for money, converting ecclesiastical property into private property. Nevertheless, the king’s agents were tenacious, and uncovered much property that had been concealed or secretly sold.

Where possible, gold and silver were coined directly, but in some cases embedded jewels, wood, or other materials had to be extracted and separated. Gold and silver either went straight to the mint or ended up at the goldsmiths.

The sanctity of religious temples, churches, and monasteries had always enabled these facilities to accumulate larger quantities of gold and silver than private individuals could safely shelter. During the Reformation the Catholic institutions lost some of their inviolability in countries destined to be predominately Protestant, and governments pressed for funds tended to expropriate the precious metals for their own use.

Deutsche Mark

The Deutsche Mark, or German mark, is the currency unit of Germany, comparable to the dollar for the United States. After the collapse of the Bretton Woods System in 1973, the U.S. dollar, no longer convertible into gold and subject to depreciation from inflation, lost some of its position as an international currency. As the U.S. dollar lost ground as an international currency, the German mark began to play the same role in the European economy as the U.S. dollar played in the world economy.

Compared to the British pound sterling, which can boast of a 1,300-year history, the history of the German mark is a bit short in light of the prestige that it now commands in international trade. In the immediate aftermath of World War II, the Reichsmark, the currency of Nazi Germany, no longer functioned as a medium of exchange. Trade took place on a black market, outside the system of German price controls, and commodities such as cigarettes and coal acted as mediums of exchange. Barter also flourished; city dwellers walked to the countryside with whatever goods they had and traded them for food.

The victorious Allies originally planned to introduce monetary reform in 1946, but an agreement between France, the Soviet Union, Britain, and the United States to treat Germany as single economic unit broke down, delaying monetary reform from May 1946 to June 1948. Part of the difficulty was that France, Britain, and the United States did not want to entrust the Soviet Union with plates to print currency, fearing that the Soviets would print up extra currency to impose an inflation tax on Germany. As the rift between the Western occupation powers and the Soviet Union widened, the decision was made to print the currency in England. The plan to replace the Reichsmark with a new currency, the Deutsche Mark, was a closely guarded military secret, given the code name Operation Bird Dog.

On 20 June 1948 the Western powers issued to every inhabitant in the three Western zones 40 Deutsche Marks in exchange for 40 Reichsmarks. Two months later another 20 Deutsche Marks were exchanged for 20 Reichsmarks. Aside from the per capita distribution, Deutsche Marks replaced the Reichsmarks on a 1:10 basis, one Deutsche Mark equaling 10 Reichsmarks. All debts were written down at this ratio, including government debt, mortgages, bank loans, and insurance policies. Bank deposits and balance sheets of businesses were adjusted on the same basis, deflating the asset side and the liability side to one-tenth of their original amounts. The authorities decreed that all new debts had to be contracted in Deutsche Marks. A central bank, patterned somewhat after the Federal Reserve System, was created from the branches of the Reichsbank. It was called the Bank of Deutscher Länder (Bank of German States), and in 1957 it was transformed into the Deutsche Bundesbank.

All price controls were lifted on 24 June 1948. With the new currency, goods suddenly showed up at stores where shelves had been empty for years. Apparently many goods had been hiding in the underground economy.

The Soviet authorities were forced to follow the example of currency reform in order to keep the Reichs marks no longer usable in the Western zones from flooding the Soviet zone. The Soviets issued the Deutsche Mark East and for a while the western Deutsche Mark circulated side by side with the Deutsche Mark East at equal value. By the end of July 1948 the Deutsche Mark East traded at about half the value of the Deutsche Mark, a factor that contributed to the political separation of East and West Germany.

A noted economist, Charles Kindleberger (1984), wrote, “I regard the German monetary reform of 1948 as one of the great feats of social engineering of all time.” The Deutsche Mark evolved into the most prestigious currency in Europe. During the inflation-ridden 1970s West Germany kept inflation to modest levels, and in the 1980s West Germany led Europe in the disinflation process. As Europe moved toward economic integration the Deutsche Mark played a major role in the monetary affairs of Europe. In the 1990s economic turmoil from combining the two Germanys cost the Deutsche Mark a bit of its reputation for stability. Also, France began to rival Germany in reputation for price stability.

On 1 January 1999 the European System of Central Banks launched a new European currency, the euro, that will eventually replace the national currencies of participating countries. The euro will replace the Deutsche Mark, the French franc, and several other European currencies.

Deutsche Bundesbank

The Deutsche Bundesbank is the central bank of Germany, comparable to the Federal Reserve System in the United States. The youngest addition to the ranks of European central banks, the Deutsche Bundesbank gained a position of preeminence among European central banks during the post–World War II era.

The Reichsbank, the central bank of Nazi Germany, came to an end in 1948. In West Germany the allied occupation authorities established a new currency, the Deutsche Mark, and organized a regional system of autonomous central banks, called Landeszentralbanken. At the apex of this system stood the Bank Deutscher Länder. This bank had the exclusive privilege to issue bank notes and acted as a lender of last resort. It was a two-tier structure, the lower layer composed of legally independent entities, and the structure may not have been organizationally efficient.

The Bundesbank Act of 1957 reorganized West Germany’s central banking system, merging the independent Landeszentralbanken and the Bank Deutscher Länder. The act incorporated these entities as the Deutsche Bundesbank, a corporation wholly owned by the West German government. The head office remained at Frankfurt am Main, and each of the 11 Länder central banks operated its own system of branch banks. In 1990 the state banking system of East Germany was integrated with the Bundesbank, and the latter assumed the responsibility for monetary policy in the unified Germany. The system is spread out into more branches than the Federal Reserve System in the United States; one of the Länder central banks may oversee as many as 50 branch banks.

The distinguishing characteristic of the Bundesbank is its independence from government officials. The German people, having suffered through two episodes of hyperinflation in the twentieth century, were committed to establishing a central bank that would protect the integrity of its currency. The law creating the Bundesbank conspicuously ignored any economic goals other than price stability. In the words of the statute:

The Bundesbank, making use of the powers in the field of monetary policy conferred upon it under this Law, shall regulate the money circulation and the supply of credit to the economy with the aim of safeguarding the currency and shall ensure the due execution by banks of payments within the country as well as to and from foreign countries.

(Bank of International Settlements, 1963)

The supreme policy-making body of the Bundesbank is the Central Bank Council, composed of a president, vice president, up to eight additional members of a directorate, and the presidents of the 11 Länder central banks. The president of the Federal Republic of Germany appoints the members of the directorate, each serving eight-year terms. The president of the directorate is appointed for an eight-year term, and is highly secure in that appointment. The president of the Federal Republic appoints the presidents of the Länder central banks upon the recommendation of the directorate of the Central Bank Council.

Because of its independence from government officials, the Bundesbank could concentrate solely on controlling inflation during the post–World War II era when other central banks, less independent of government authorities, pursued policies aimed at reducing unemployment. During the 1970s when most Western countries were racked by inflation, West Germany kept inflation to modest levels, and the Bundesbank rose to become the most influential central bank in Europe. In 1993 the European Monetary Institute, the precursor to a European central bank, was set up in Frankfurt, symbolizing the European Union’s commitment to sound monetary policies.

Depository Institution Deregulation and Monetary Control Act of 1980 (United States)

In 1980 Congress passed the Depository Institutions Deregulation Monetary Control Act (DIDMCA), the most important piece of banking legislation in the United States since the Glass-Steagall Banking Act of 1933. The DIDMCA signaled a marked shift in government banking policy in the direction of a deregulated banking system. This was a sharp contrast to the banking legislation of the 1930s, which had added to the regulation of the banking industry.

One of the more important provisions of the DIDMCA authorized all depository institutions to offer negotiated order of withdrawal (NOW) accounts. These accounts are interest-bearing savings accounts with check-writing privileges that depositors basically treat as checking accounts. The banking legislation of the 1930s had forbidden banks from paying interest on checking accounts. In the 1970s thrift institutions, faced with an outflow of funds and hoping to make their savings accounts more attractive, received permission from banking regulators to let thrift depositors write checks on savings accounts. Before the DIDMCA only savings and loans (S&Ls), credit unions, and other thrift institutions offered NOW accounts. In practical terms, the DIDMCA enabled all depository institutions, including commercial banks, to pay interest on checking accounts. The DIDMCA also removed interest-bearing deposits from the restrictions of state usury laws.

A related provision of the DIDMCA made automatic transfer accounts legal, further lifting restrictions on interest-bearing checking accounts. These accounts let commercial banks automatically transfer unused checking account funds into interest-bearing savings accounts. Because checking accounts could not pay interest before the DIDMCA, the ability to switch funds from checking to savings as needed gave checking accounts some of the advantages of interest-bearing accounts.

By the mid-1970s technology had made switching an inexpensive procedure, but the courts had ruled that automatic transfer accounts violated the law against the payment of interest on checking accounts. Therefore legislation was necessary to remove the prohibition on automatic transfer accounts.

The DIDMCA called for the formation of a Depository Institutions Deregulation Committee charged with overseeing the removal of interest-rate ceilings on all deposits, except business deposits at commercial banks. This committee was composed of the heads of the Treasury Department, the Federal Reserve Board, the Federal Depository Insurance Corporation, the Federal Home Loan Bank Board, and the National Credit Union Administrator. The Comptroller of the Currency served as a nonvoting member.

The DIDMCA freed from state usury ceilings residential mortgages and agricultural and business loans in excess of $25,000 and extended partial exemption to other loans made by state-chartered banks, savings and loan institutions, and credit unions. States had the option to reinstate state usury ceilings on these loans, but action had to be taken by 1 April 1983.

The DIDMCA gave federally chartered S&Ls permission to make consumer loans, and invest in commercial paper and corporate debt securities. Up to 20 percent of a savings and loan’s assets could be committed to these uses. The DIDMCA also added credit cards, trusts, and fiduciary services to the range of services offered by S&Ls. In a nutshell, the S&Ls now compete with commercial banks in a wider range of services.

The DIDMCA authorized mutual savings banks with federal charters to enter the market for business loans. These institutions could invest up to 5 percent of their assets in these loans, and the business borrowers could not receive checking privileges associated with these loans

The DIDMCA put all federally insured depository institutions under the reserve requirements imposed by the Federal Reserve System. Before the DIDMCA the Federal Reserve System set reserve requirements of federally chartered commercial banks. (Reserve requirements set the percentage of checking and savings deposits that must be retained in the form of vault cash or a deposit at a Federal Reserve Bank.) Reserve requirements protect depositors (or the FDIC) by making bank assets more liquid and less risky, but they also leave bank assets less profitable because reserves pay no interest. State laws had invariably set lower reserve requirements, as a percentage, for state-chartered banks. The DIDMCA increased the power of reserve requirements as a tool of monetary regulation, and leveled the playing field between federally chartered institutions and state-chartered institutions.

The consumer is the clear beneficiary of competition in most industries, but when a bank fails the bank’s customers suffer as much as the bank’s owners. Depression-era legislation reduced competition between banks to stem the tide of bank failures. The DIDMCA took an important step toward restoring competition to the banking industry.

Decimal System

The decimal system, a number system based upon the number 10, became a distinguishing characteristic of currency systems during the nineteenth and twentieth centuries. The currency system of the United States offers a typical example of a decimal currency system, with one dime equal to one-tenth of a dollar, and one cent equal to one-tenth of a dime, or one-one-hundredth of a dollar.

From the ninth century until the end of the eighteenth century the Carolingian currency system held sway in Europe. Under the eighth-century Carolingian reform, instituted by Charlemagne’s father, King Pepin, 12 pence equalled 1 shilling, and 20 shillings made 1 pound.

The Carolingian reform established a new silver coinage in which 240 denarii (pennies) equaled a livre, or pound weight of silver. The Norman Conquest brought the Carolingian system to England, where it survived until 1971.

The Russians deserve credit for giving the modern world the decimal system of currency. By 1535 the Russians were trading in a Novgorod ruble, and a smaller unit, the denga, equal to one-one-hundredth of a ruble. Under Peter the Great the denga became the kopek, but otherwise Russia’s decimal currency system has remained intact up to the present day.

The Russian decimal system met with a cold reception in the courts of Europe, which had elaborated upon the Carolingian system into currency systems susceptible to manipulation because of a multiplicity of coins that could be selectively debased. Also, the royal courts of Europe were not impressed with innovations from countries such as Russia, which were mired in economic backwardness.

The American revolutionaries, eager to depart from the practice of European monarchies, found no charm in coins called crowns and sovereigns, bearing portraits of British monarchs. The Spanish milled dollar was a popular coin in the American colonies, but the Spanish dollar was subdivided into eight reales. In 1782 Robert Morris, U.S. superintendent of finance, sent a report to the Congress of Confederation recommending that the states coin their own money as a substitute for the medley of foreign coins then circulating, and that the state coinage systems uniformly follow a decimal system. The reasons for preferring the decimal system were:

that it was desirable that money should be increased in the decimal Ratio, by that means all calculations of Interest, exchange, insurance and the like are rendered much more simple and accurate, and of course, more within the power of the mass of people. Whenever such things require much labor, time and reflection, the greater number, who do not know, are made the dupes of the lessor number who do.

(Watson, 1970)

Thomas Jefferson forwarded the idea that the hundredth part of the dollar be called a cent, after the Latin word for “one hundred,” and that the tenth of the dollar be called a dime, which means “tenth’ in Latin. Alexander Hamilton incorporated these ideas into his Report on the Establishment of a Mint, and the Coinage Act of 1792 called for the adoption of a decimal currency system in the United States. Because the Russian currency system made use of coins outside the decimal system, the United States can boast of the first completely decimal currency system.

The arguments favoring the decimal system impressed the revolutionary imagination of France, and on 7 October 1793 the French revolutionary government replaced the coinage system of the Bourbon dynasty with a decimal currency system. In 1795 the French revolutionary government changed the name of the livre to the franc, which equaled the sum of 100 centimes. The conquest of Napoleon helped launch the decimal system in Europe, where it spread rapidly during the nineteenth century. England held out until 1971, becoming one of the last countries to adopt a decimal currency system. A pound now equals 100 pence, instead of 240 pence.

Debit Card

Debit cards, similar in shape and size to credit cards, substantially advanced the replacement of coins, paper money, and checks with electronic money. These plastic cards with a magnetic strip on one side enable individuals to convert bank deposits into instant cash or pay for purchases by electronically shifting money from a buyer’s bank account to a seller’s bank account. The development of the debit card may rank with coinage, printed paper money, and checks as one of the great innovations in money, creating a new monetary era that supplants the era of paper money.

The debit card burst upon the world in 1971 when a banker in Burbank, California, connected the idea of money with the idea of a vending machine. A vending machine dispensing cash would free customers from the rigor of fixed banking hours, enabling customers to withdraw cash 24 hours a day, seven days a week. Thus the automated teller machine came into being.

The next important step in debit card development occurred in 1974 when the First Federal Savings and Loan of Lincoln, Nebraska, installed debit card reading machines at the cash registers of the Hinky Dinky supermarket. Rather than withdrawing cash, these machines enabled customers to transfer funds from their own bank accounts to the supermarket’s bank accounts, abolishing the need to carry cash or a checkbook to the supermarket. Debit card transactions take less time than check transactions and eliminate the need for protection against bad checks.

Debit cards have not been an unmixed blessing. There have been numerous instances in which authorized individuals have used debit cards to empty out someone’s bank account. The use of debit cards at automatic teller machines usually requires a personal identification number, which makes unauthorized use more difficult. Some of the debit cards that double as credit cards may be used at some retail outlets without personal identification numbers, and these cards have the greatest potential for fraudulent misuse.

Debit card transactions require an intricate telecommunications network that is only cost effective in grocery stores, department stores, and other large retail outlets that handle large volumes of sales. Small transactions that take place at small retail stores and even vending machines still depend heavily on coins and paper money. A new debit card, sometimes called the smart card, removes the need for an expensive telecommunication network, making it feasible for use with vending machines and small retailers. The smart card has an embedded computer chip that allows the card to be programmed for a fixed amount of money. The smart card can be used to make purchases up to a fixed or approved amount without a telecommunication network that connects a card-reading machine with a bank computer. The smart card can be used at isolated retail sites, or at vending machines, without the necessity for correct change.

The latest development in the smart card is an electronic payment system called Mondex. Under the Mondex system, a machine transfers money from a customer’s card to a merchant’s card, without going through the intermediary of a bank. The merchant can then pass on the electronic money from his or her card to the card of another person. The Mondex system, still in the testing stage in the last years of the twentieth century, allows blips of electronic money to change hands without going through the intermediary of a bank, holding the greatest promise of revolutionizing the currency system and ending the use of coins and paper money.

De a Ocho Reales (Pieces-of-Eight)

Toward the end of the sixteenth century, Spanish coins, particularly the de a ocho reales, had become the international currency and held that position until eclipsed by the pound sterling in the nineteenth century. The pieces of eight was the immediate forerunner of the United States dollar.

The pieces of eight, called the Spanish dollar in the United States, was equal to eight reales, a Spanish monetary unit. Reales was a word for “royal” in Spanish. Today the monetary unit of account in Saudi Arabia is called the riyal, and in Oman and Yemen the monetary unit is the rial, both derivatives of the real. Spanish coins dominated Far Eastern trade, Mediterranean trade, and trade with the New World.

The Spanish real, a silver coin, came into existence in 1497 with the monetary reform of Ferdinand and Isabella, the Spanish monarchs who financed Columbus’s voyage to the New World. Originally, the real consisted of one-sixty-seventh of a mark of silver and was coined in multiples, quadruples, and octuples (the piece of eight reals), and in fractions of a real. The real was sometimes called a bit. The pieces of eight were eight bits. A fourth of a real equaled two bits, a half a real equaled four bits, and three-fourths of a real equaled six bits. The division of the dollar into bits lives on in the cheer-leading yell that can be heard at any high school football game, “Two bits, four bits, six bits, a dollar, all for the [name of team] stand up and holler.” Ferdinand’s and Isabella’s monetary reform set out to provide Spain with a unified coinage system. Charles V popularized the pieces of eight, equal to the Bohemian or Saxon thaler, which gave its name to the United States dollar.

Mints in Mexico City and Peru turned out vast quantities of Spanish reals. Mexico City boasted of the largest mint in the world, and minted a pieces-of-eight coin called the pillar dollar, because of its symbol on the obverse side denoting the Pillars of Hercules, the strait that opens the Mediterranean into the Atlantic Ocean. The dollar sign “$” may have originated from this symbol of the Pillars of Hercules with the “S” portion a reference to a banner hanging from one pillar.

Mexico, after winning independence from Spain in 1821, minted its own peso with a bit more silver than the old Spanish pieces of eight. The new Mexican peso was called the Mexican dollar in Far Eastern trade, where it was the most popular coin throughout the nineteenth century, competing with the U.S. silver trade dollar and a British silver trade dollar. Spanish pieces of eight and Mexican pesos were legal tender in the United State in much of the pre-Civil War era. Mexico remained on a silver standard while most of the world adopted the gold standard, and Mexican silver pesos remained important in Far Eastern trade. During the Great Depression of the 1930s Mexico abandoned the silver standard, just as the United States abandoned the gold standard.

With the loss of Mexican silver, and the European shift toward the gold standard after 1875, Spanish coinage receded into the background as international currency.

Daric

The daric was a monetary unit and royal gold coin of ancient Persia, first struck during the reign of Darius I, king of Persia from 521 to 485 b.c. According to the Greek historian, Herodotus, Darius regarded his coinage as no laughing matter, as revealed in the following anecdote taken from Herodotus’s History:

Now Aryandes had been made governor of Egypt by Cambyses. He it was who in after times was punished with death by Darius for seeking to rival him. Aware, by report and also by his own eyesight, that Darius wished to leave a memorial of himself, such as no king had ever left before, Aryandes resolved to follow his example and did so, till he got his reward. Darius had refined gold to the last perfection of purity in order to have coins struck of it: Aryandes, in his Egyptian government, did the very same with silver, so that to this day there is no such pure silver anywhere as the Aryandic. Darius, when this came to his ears, brought another charge of rebellion, against Aryandes, and put him to death. (Bk. IV)

(Herodotus, 1952)

Soldiers received 1 daric per month as pay. Xenophon’s Anabasis makes a reference to Cyrus agreeing to pay his soldiers 1 1/2 daric per month. The daric is mentioned in the Bible, in Ezra 2.69: “according to their ability they gave to the treasury of the work sixty-one thousand darics of gold.”

Evidence of smaller coins is scanty but it seems that the Persians accepted the duodecimal system common in ancient Asiatic monetary systems. Under the duodecimal system, fractional coins came in amounts of one-third, one-sixth, and one-twelfth of the gold unit, the daric in the case of Persia. The largest silver unit was usually one-tenth of the gold unit, but in the case of Persia the shekel was apparently equal to one-twentieth of the gold unit. The silver unit usually followed similar subdivisions as the gold unit. The only known subdivisions of the daric represent one-twelfth and one-fourth pieces, and the only known subdivisions of the shekel represent one-third and one-sixth pieces. The Persians seemed to have preferred simplicity in monetary affairs, and may have shunned a proliferation of fractional coins.

The daric consisted of 130 grains of gold, comparable to the 123 grains of gold for the sovereign, the famous British gold coin of the classic gold standard era from 1875 to 1914.

For 200 years darics were the only gold coins of the Greek world, circulating alongside the silver coinage of the Greek city-states. To the Persian kings the supremacy of their gold coins reflected their own personal supremacy. The Persian system was bimetallic, based on official silver to gold ratio of 13 1/3 to 1. This unvarying ratio was preserved until the invasions of Alexander the Great, accounting for some of the stability of the system. Toward the end of the empire, silver rose in value relative to gold and was exported, effectively leaving Persia on a gold standard. The daric never suffered the debasement that many currencies suffer in the declining phases of societies.

Da Vinci, Leonardo

The modern methods of coinage that surfaced in fifteenth-century Italy probably owe their origin to Leonardo da Vinci, who spent time at the papal mint during a stay in Rome. In The Notebooks of Leonardo Da Vinci can be found the following references to the coinage of money:

All coins which do not have the rim complete, are not to be accepted as good; and to secure the perfection of their rim it is requisite that, in the first place, all the coins should be a perfect circle; and to do this a coin must before all be made perfect in weight, and size, and thickness. Therefore have several plates of metal made of the same size and thickness, all drawn through the same gauge so as to come out in strips. And out of these strips you will stamp coins, quite round, as sieves are made for sorting chestnuts; and these coins can be stamped in the way indicated above; &c. The hollow of the die must be uniformly wider than the lower, but imperceptibly. This cuts the coins perfectly round and the exact thickness, and weight; and saves the man who cuts and weighs, and the man who makes the coins round. Hence it passes only through the hands of the gauger and of the stamper, and the coins are very superior.

(Richter, 1883)

Leonardo’s technique brought a measure of precision to the coinage of money that had eluded even the best goldsmiths and silversmiths before the time of the Renaissance. The old method produced irregularly shaped coins that easily fell prey to clippers who could remove a bit of the precious metal without leaving any tell-tale signs. It began by casting precious metal in sand to form ingots roughly equal to the desired thickness of the coins. The ingots were reheated and hammered closer to the desired thickness. Then they were cut into squares, trimmed and weighed, and reheated. The squares were then hammered into a circular shape. Rolls of these blank coins were hammered into some degree of uniformity, making it possible to stack the coins. A hammer and a die struck the desired design on these blank coins to complete the finished product. The lack of uniformity in the coins made it easier for forgers to pass off inferior coins, and the whole process was a slow method for striking coins.

Leonardo’s contribution to coinage was the work of Leonardo the mechanical engineer, rather than Leonardo the artist. During the Italian Renaissance, however, the minting of coins engaged the talents of the best artists of the age. Some of the coins, minted by famous artists and distinguished for their beauty, became collectors’ items and sold for high prices. The famous Renaissance artist, Benvenuto Cellini, perhaps the most celebrated goldsmith in history, wrote a chapter in a treatise on goldsmithing and sculpture entitled “How to Make Steel Dies for Stamping Coins.” With respect to one coin he struck for Pope Clement VII, Cellini wrote: “This coin brought me much honor, for I put great labor into it.” The methods perfected by the Renaissance artists spread to France, and from France to Germany and Spain.