While the Western world seemed to warm up to paper currency as money in the 12th and 13th century, things were done differently on the other side of the world.
The Islamic Economic Boom
Between the 7th and 12th century, the medieval Islamic world noted significant financial and economic growth. So much even that some people speak of the region’s “golden age”.
During this period, the high-value currency – called the dinar – was both widely accepted and extremely stable. That is, after all, one of the main concepts of a currency. If its value fluctuates too much, very few people will interact with it on a regular basis.
It is also in this region that some current forms of finance found their roots. Those vehicles include loaning, cheques, savings accounts, exchange rates, and even the banking institutions we interact with today. All of those instruments were “imitated” in the Western world several centuries later.
India Remains Loyal to Coins
Ever since Ancient India introduced physical coins in the third century BC, the region remained loyal to this concept. After all, this is one of the first regions in the world to issue physical coins.
Despite several new coins and reformations along the way, physical coins remained of great interest for centuries to come. India was one of the regions to take up the concept of paper money. It borrowed the idea from the Mongols and issued it as “representative money”.
Despite some efforts into paper currency, the main focus remained on physical coins. Even in the 14th century, the Indian leaders decided to create a new coin backed by gold and silver reserves in the imperial treasury.
England Experiments With Bills of Exchange
As more of these monetary concepts were taken over from the East, the introduction of a bill of exchange was merely a matter of time. England saw merit in this concept, albeit it required significant experimentation at first.
The tally stick is one of the most intriguing concepts in this regard. During the 12th century, paper was still very expensive and not necessarily suited to issue money on a large scale. The tally stick was a viable option at the time, and remain in use until the early 1800s.
Every notch made on the stick represents an amount of taxes to be paid to the Crown. One can compare to this to a taxpayer receipt of sorts. Later on , tallies were utilized as a promise for taxpayers to make future payments after specific intervals.
Surprisingly, it appears the tally stick – as the earliest version of a bill of exchange – could also create money out of thin air. All tally receipts were viable to be used as a payment for creditors of the Crown.
The “Promise of Value” AKA Today’s Money
One could go as far as claiming how this was one of the first incidents of creating an IOU based upon a different IOU. Ever since that time, however, this practice has become a lot more common. Spending money one doesn’t have to create new debts is not necessarily the best way to handle one’s finances.
Furthermore, the tallies on a tally stick could be exchanged for gold or silver coins as a discount, based on when the tax payment was due. As such, tallies effectively become a method of exchanging value, and even a store of value.
While it was an eloquent system for its time, not all tallies were backed by a store of value. Instead, the tallies eventually became a form of money backed by public trust and confidence in the system. That system is still in place in the global financial system today.