Money History
The Modern Period

During the 19th century and till the middle of the 20th century, the fiscal structures in America as well as in Europe were basically founded on valuable metals vis-à-vis the material the coins were made from and also the typical worth for all banknotes. Contrary to this system, use of physical money not essential for transactions, as business could be done simply through accounting methods using cheques, credit and debit cards by the end of the 20th century. More recently, electronic and computer technology seems to have been even substituting the paper cheques. Similar monetary mechanisms that permitted avoiding the use of coined currency in transactions also existed in the earlier centuries. For instance, the use of bills of exchange in transaction has been discussed at different places in this series of articles on the history of money. However, such occurrences in the era before the modern period generally entailed the anticipation that in extreme situations the arrears may perhaps always be taken off the market as hard cash, i.e. gold and silver. This is primarily because the bills of exchange were merely used as an expedient and infrequent alternate for gold and silver currency.

Hence, it may be stated with confidence that during the era prior to the modern period of Western history, the perception of money continued to be firmly based on precious metals like gold and silver. Contrarily, during the modern period gold and silver are no more considered to be major representations of money or exchange value. Similarly, even cash and credit cards are no longer regarded as alternates for precise quantities of precious metals. Although even to this day the British banknotes include the inscription "I promise to pay the bearer on demand the sum of () pounds (denoting worth in gold and silver)', it is basically an obsolete practice that is simply lingering on. In effect, the historical significance of this inscription on the banknotes actually does not have any relevance even to the British! It may be said that the source of the worth of currency has subsequently transformed drastically during the past two centuries. In due course of events, currency itself has turned out to be more adaptable and possibly more controllable than ever before. However, such intense advancement has happened only after extensive hypothetical deliberations and a specific measure of disaster.

Fiduciary money and convertibility

In effect, concept of using substances apart from gold or silver is in no way novel in the Western financial custom. For instance, way back in the fourth century B.C., legendary Greek philosopher Plato had backed using currency made of a base metal that is common and not considered expensive for his model city. He had further suggested that the value of this base metal currency should be ascertained by law and it should solely be used for domestic transactions. Several hundred years later, during the 18th century, base metal coins were minted in huge amounts to be used as fiduciary money. Issuance of such large quantities of fiduciary money was balanced by the widespread use of paper currency in Europe as well as in America. For the uninitiated, fiduciary money is actually the currency whose worth is based on reliance instead of the price of the material used for making the currency.

In the beginning both these forms of token currency obtained their worth from an implied or open assumption that they may possibly be bartered or adapted to precious metal coinage made from gold or silver that constituted the foundation of the gold benchmark. These types of money, especially the banknotes, performed such an important function that on several circumstances the states or governments were just not able to afford to convert them back to gold whenever the customers demanded. Hence, a combination of factors including the demands caused by a severe scarcity of currency and the increasing logical regulation of financial and pecuniary restraints that ultimately put an end to the convention of the gold standard index as the basis of the fiscal procedure in the Western world.

In such a situation, the use of paper currency became widespread during this stage. Earlier, the bills of exchange were made use of to make payments and offer credit without the real exchange of the precious metal for an extended period. However, with the introduction of the banknotes and other notes of hand (promissory notes) gave rise to conditions that facilitated the accessibility of these notes to a greater number of people and on a larger scale. In due course, the governments as well as individuals recognized the capability of such notes to enhance the supply of currency as they permitted generation of more credit by making it possible for a depositor to lend money to a creditor with no increase in the quantity of the available precious metals. Often there would be situations when the entire value of the notes issued by a bank would surpass the value of the quantity of gold or silver held in reserve by the concerned bank. However, this was never a matter of concern as long as all depositors and creditors of that particular bank tried to convert their banknotes or other promissory notes in held by them into precious metals all at once. In case, all the depositors and creditors of the bank tried to convert their paper notes into precious metal at the same time, it may have led to the collapse of the bank or the bank would have had to provisionally hang up all cash reimbursements.

In fact, such a situation actually occurred in Britain during its war with the French Emperor Napoleon. To curb the speedy drop in the gold reserves of the Bank of England in 1797, the Privy Council instructed the directors of the bank to restrain from making any cash payments 'till the Sense of Parliament was taken'. As a result of this order, the 'Restriction Period' continued till 1821. All these actual and possible tribulations notwithstanding, the circulation of such banknotes or other promissory notes had made it possible to immensely enhance the amount of credit in the financial system. In contrast, the problems confronted by the authorities in controlling an escalation of credit of this magnitude, regardless of the enticements it offered to the governments and the individuals alike, the tendency to issue the notes in excess often aggravated several economic catastrophes.

America in the 19th century

All through the 19th century, there existed a conflict between the advocators of circulating banknotes and those who felt that there was a necessity of maintaining a foundation in gold. And this debate can obviously noticed in the assorted occurrences in North America. The Second Bank of the United States that was in existence for a very brief period between 1816 and 1836 characterized the problems best. Despite retaining just 20 per cent of coin reserve against its accountabilities, the Second Bank of the United States gave out credits on large scales and speculating gains and subsequently withdrew it disturbingly giving rise to a discouraging all financial activities. The worst part of the entire episode was that three senior bank officials endeavored to capture the management of the financial institution through deceptive measures. This incident turned the people's opinion against the centralized banking system till the Federal Reserve System was established in 1913. Despite the inception of the Federal Reserve System, till the economic reforms ushered in by Roosevelt in 1930s, the 12 banks that were issuing promissory note did not exactly function like completely national organizations.

The absence of any rational enactment or regulation during the first half of the 19th century encouraged the mushrooming growth of banks as well as banknotes and this phenomenon was directly associated with hazards such as price rise and downgrading of the paper currency's worth. Nevertheless, the unusual financial growth of the United States during the 19th century and the development of the country's western region allowed the financial system to develop so speedily that it prompted the setting up of as many as 3,000 banks near the beginning of 1860s and they consumed a major portion of the surplus currency available. It may be mentioned here that the move by the United States government to use precious metal cash for the reimbursement for public land instead with paper currency whose value has been depreciating gradually led to a sudden collapse of the country's banking system in 1837. In fact, this gave rise to a disorganized monetary system that was done away with only by the Civil War that ravaged the United States between 1861 and 1865. The colossal expenditure on the Civil War compelled the United States' government to adopt a paper currency that could not be exchanged for precious metal money. The government was forced to take such a measure as it no longer possessed any gold reserve and this system remained in effect for around 17 years.

Although the 'Greenback' (as the inconvertible paper notes issued by the government were called with a view to differentiate them from the exchangeable yellow-back notes) period once again ascertained the central authorization, ushered in a higher degree of control on issuance of notes by the state banks and also did away with the surplus circulation of notes, it failed to curb the downgrading or devaluation of the paper currency. In 1865, the value of a green-back dollar in gold was merely 49 cents. This gave rise to a pertinent question on whether the debts incurred during war and paid in this currency should be reimbursed in coins. The problem was that if coins were used to repay the war debts then it would possibly lead to a decline in the supply of currency something that had earlier led to much financial chaos. On the other hand, if the war debts were reimbursed in banknotes, it would tantamount to approximately 50 per cent denial of the debts. With a view to resolve the crisis, the United States government made an attempt to lessen the amount of Greenback notes in circulation in the market, but was compelled to discard the strategy hardly after 10 per cent of the inconvertible notes had been withdrawn from circulation. In 1873, the United States went back to the currency having its basis on gold and parity was restored to the greenback notes in 1879, but most the imperative question that prevailed during this period is whether the supply of currency needed to be decreased by withdrawing the greenback notes from circulation or not. The issue became so important in the United States at that time, that even a relatively insignificant political organization like the Greenback Labor Party that supported issuance of more such notes eventually pollen in more than a million votes in the 1878 elections.

It is clear from the above mentioned developments in North America that during the 19th century, several issues such as the arguments related to the form of currency, the regulation of the sum of money in distribution as well as the connection among gold, silver and paper had gradually progressed to the innermost political platform. Dissimilar stands adopted by the political leaders of this era on these crucial issues had an effect on the lives of millions Americans. An all-embracing growth of paper currency as well as the changed and continuously varying financial and political state of affairs of the contemporary world during this period had given rise to this new happening in the history of money.

Paper money and revolution in the modern world

The introduction of paper currency proved to be very beneficial both for the government as well as trade since it permitted a qualitative enhancement in the sum of currency in circulation, something much ahead of what was achievable during the era of the precious metal money. This advantage notwithstanding, the extensive circulation of paper money also brought in its wake financial hazards that had greater consequences. Nevertheless, the very presence of such an instantly available and extremely nave type of currency was in itself an innovative transformation and proved to be a key aspect in all other upheavals that are responsible for setting apart the contemporary world politically as well as socially. The two prominent revolutions that took place in Europe during this era are the French Revolution and the Industrial Revolution in Great Britain. These two insurrections altered the political as well as economical scenarios at the same time in the later part of the 18th century. In addition, these occurrences encouraged the issuance and circulation of more and more paper currency.

Three specific instances help us to understand the significance of paper currency in the contemporary political upheavals. It is interesting to note that during the 18th century, the British colonies in America had issued paper currency locally, but the American Revolution against the British colonial rule was funded by huge amounts of 'Continental' bills. According to a rough estimation, between 1775 and 1779, bills worth around $240 were issued in this manner. Although the debacle of John Law's experimentations with paper money during the early phase of the 18th century had made France very familiar with the wherewithal of paper currency, the Revolutionary government in the country began to issuing paper notes in 1789 - a few years after the American Revolution. Initially these paper notes, known as 'assignats', were meant for use as treasury bonds (guarantees) with five per cent interest. The idea behind issuing the 'assignats' was to fund the exorbitant military spending necessitated by the Revolutionary Wars and were apparently backed by the earnings from the seizure of lands belonging to the Church. Contrary to the original plans, very soon these 'assignats' were in use as regular currency leading to their production in vast numbers with a view to overcome the economic emergencies confronted by the new Republic. That the new nation was plagued by unceasing absence of economic regulation is evident from the fact that in the 1790s more than four million 400-livres notes were circulated alone. As a result of such large scale and unbridled production of paper notes, the face value of the 'assignats' dropped drastically to about 1/300 of their original worth. Again, during the Russian Revolution, around another hundred years later, the continent witnessed an intense rise in issuing paper currency by several groups, including the White Russians, the Bolsheviks and some other 'powers' like the Ukrainian armed forces.

The Revolutionary Governments were generally unpopular among the investors, who considered it to be risky to invest in new ventures in the countries ruled by self-constituted authorities. In addition, these governments also failed to avail loans from abroad to meet the expenses of their wars. Despite the price one had to often pay of it, paper currency proved to be very useful in such situations as they were easily available and an interim or short-term way out of the problems faced by these governments. In fact, risk with paper money was that the governments as well as individuals like John Law of France were often lured to issue them in excess. Irrespective of the fact whether political compulsions or individual greediness were responsible for the over issuance of the paper notes, the results were always the same - they soon led to the rapid devaluation of the paper currency. Hypothetically, most of the paper notes were endorsed by gold reserves and occasionally by land, but the fact remained that recovering their face value was almost unattainable when they were issued in excess. At the same time, such a situation was also detrimental for the authorities issuing the paper currency and, as a result, the exchangeability of these paper notes with gold had to be hung up.

The Revolutionary government's lawful efforts to make it obligatory for people to recognize the American 'Continental' notwithstanding, they went through brisk devaluation. However, in 1780, the government somehow succeeded in evading renouncing the American 'Continentals' by exchanging them at a reduced price of 40 paper dollars for each silver dollar that in effect put the cancellation or repudiation ratio at 97.5 per cent. An eyewitness who recorded the occurrences of the period in 1778 observed in his writings that the face value of the paper dollars issued by the Congress (government) had depreciated to such extent that were basically being used by many as wall papers, illuminating pipes and many such utilities! The 'assignats' issued by the Revolutionary government also met with a similar fate and in the same way as the American 'Continentals', they too became quite insignificant within a few years of their circulation. Like in the case of the American 'Continentals', the efforts of the National Assembly to accord the value of legal tenders to the 'assignats' failed miserably forcing the Republic to confront insolvency in 1797.

The situation in the West those days had come to such a pass that since the Revolutionary governments were apparently having unlimited access to paper currency, issuing paper notes in excess was virtually intimidating rebellions in many states that were earlier well established and peaceful. Following the raging consequences of the World War I, many states in Central Europe that were routed in the war, especially Germany and the erstwhile Austro-Hungarian Empire gave themselves up to issuing vast amounts of paper currency. As a result of this imprudent move, the currencies of these states were rendered totally valueless, all personal investments were obliterated and they witnessed unbridled price escalations. The soaring inflation could only be curbed following the decisions of these governments to stop producing paper currency and undertake restructuring of their money during 1922-1923.

Going back to the extensive social and financial revolutions that basically distinguish the history of the contemporary world one would find that the function of paper currency in this era has probably been of even more enduring importance when compared to the precisely political upheavals witnessed previously. Following the Industrial Revolution that commenced in Great Britain from around the middle of the 18th century led to fresh demands or requirements on the economic institutions. With the Industrial Revolution arose the need for reallocation of funds from agricultural activities to industrial ventures as well as from older industries to new enterprises. At the same time, it prompted an increase in credit to fund industrial activities and new dealings. It is interesting to note that such emergent financial activities not only led to the setting up of new banks, but, on their part, the banks also equally encouraged the growth of the economic pursuits. On the one hand, the banks assisted the process of flow of funds; on the other hand, they offered loans to endorse industrial development, trade and even community utility services like transportation. On several occasions, the bank themselves proved to be valuable consequences for many enterprises, particularly mining, industries related to iron, textiles, or their accomplishments. Very often, the banks were also responsible for the failure of these industries owing to the common business atmosphere or else the fortunes of a solitary venture. In those days, it was very natural that one instance of bankruptcy often led to many other cases of insolvency. Nevertheless, it needs to be mentioned that these banks were responsible for the widespread circulation of paper currencies and also enabled the common people to take part in the more intricate exploitation of money.

Intellectual changes

That the sudden spurt in credit during the 18th century as well as the societal transformations ushered in by the Industrial Revolution in Britain collectively threw up new thoughts regarding money and the society as well as the link between the two does not come as a revelation. In fact, this era witnessed the dawn of the study or analysis of the relationship between money and the society, which is now known as 'economics', but was called 'political economy' during the 18th century and initial stages of the 19th century. The mounting instability of money owing to its increasing vagueness provoked people to become conscious of the fact that any move to maneuver it may perhaps lead to vast upshots on the basic structure of the monetary system as well as the temperament of the general public. Since it is not feasible to discuss these important issues in details here, we will just be making a passing reference about them. However, it is possible to distinguish the nature of deliberation that keeps on even to this day through the distinctions of the two most prominent personalities of this debate - Karl Marx and Adam Smith. The fundamental dissimilarities in their opinions formed the scholarly basis of the two most noteworthy financial and societal arrangements of the contemporary world - socialism and capitalism respectively.

During the commencement of the Industrial Revolution in Great Britain in 1776, Adam Smith (1723-1790) published his work the 'Nature and Causes of the Wealth of Nations' that is generally considered to be the earliest literature of contemporary economics. The book discusses the various features of the economic system and ways and manners the governments utilize to manipulate it. However, the most significant aspect of 'Nature and Causes of the Wealth of Nations' is Adam Smith's handling of the perception of value. Smith's opinion on the topic widely recognized as the 'Labor Theory of Value' states that the value or worth of any thing is calculated by the sum of effort or work needed to exchange it. In Smith's opinion labor is essentially the actual evaluation of the redeemable value of all objects or goods. Adam Smith discarded the old concept that the affluence of a nation could be calculated on the basis of its gold and silver reserves. On the contrary, he opined that the wealth of a nation could primarily be computed on the basis of the ability, agility and prudence through which it normally employs or relates its labor. The secondary way by with the wealth of a nation can be calculated is by finding the ratio between the percentage of people who are utilized as constructive labor and the proportion of people who are not engaged as purposeful labor.

The growth of capital can be ensured by engaging the labor in such a way that they are able to function in the utmost proficient manner feasible. And to achieve this, it was essential to discard the restraining trading systems followed previously and setting up of a liberated global trade policy. Establishing a free international trade system would enable the labor to function in a larger market presenting them with more prospects to operate with utmost efficiency. In fact, Adam Smith's hypothesis also included a moral element for he was of the opinion that the progression of competition among individuals and a 'normal freedom' in financial dealings would give rise to synchronization in the society by means of support of an 'invisible hand' that would eventually prove to be more efficient than any action initiated by the state.

Although Adam Smith's theory on the wealth of nations has been regarded highly by all, his focus on the importance of labor has led to widespread repercussions as people began to ask how the worth of any object should be shared out by different groups that have had a role in its manufacture. In fact, the dilemma was how each of the parties - the workers who provided their labor for their survival and in exchange of wages, the landlord who offered his lands in exchange of rent and the employer who provided the finance and equipment for production in return for profits should share the value of the product. Financial writers who subsequently propagated Adam Smith's revelation of the balance between the different groups in a manner that allocated them diverse rewards also had to confront this question at different times. In fact, Ricardo disputed that the salaries should correspond to what was essential to allow the employees, in reciprocation with one another, to manage to survive as well as be responsible for their people with no increase or decrease. Hence, wages that ensured provisions for survival were rationalized were vital for profit as well as capital. In the instance of the profits taking a plunge owing to large-scale production or severe completion, the salaries were also bound to go down.

It needs to be mentioned here that despite the transformations in the coinage system, during the latter part of the 18th century and early phase of the 19th century, several people were not pleased and disapproved of the all-encompassing function of money in the changed industrial arrangement of the society. Thomas Carlyle (1795-1881) was one such writer and critic of money's new role in the changed scenario. Referring to the socio-economic transformation ushered in by the Industrial Revolution; Thomas Carlyle has commented in his writings that in simple words, making cash payments had not developed to become the widespread link between one man and another. He further observed that the ultimate success of currency had resulted to changed times. However, such detractors of the role of currency were unable to cause any elementary amendment to the hypothesis put forth by Adam Smith and his followers like Ricardo as this vision had been acknowledged by the masses as well as the experts. Nevertheless, later the writings of Karl Marx (1818-1883) and Friedrich Angles (1820-1895) ultimately recommend a more far-reaching experiment vis-à-vis the role of money in the society.

In the same vein as Thomas Carlyle, Carl Marx also observed the manner in which the entrepreneurs or industrialists who played a vital role in the Industrial Revolution reforming the earlier arrangement of the society, but was more harsh in his appraisal of the new social order. Marx condemned the theory backed by Ricardo regarding the allocation of money earned from any productive work among different parties alleging that was tantamount to an unequal distribution of wealth among the worker, entrepreneur and the landlord. According to Karl Marx, this imbalanced allocation of money was an upshot of the capitalist arrangement of production that was the reason for unfair share of political power among the different political organizations. He further predicted that an uprising by the socialist forces would eventually rectify such discriminations and reverse the catastrophic influences on the society caused by the industrialists' passion for money. Everyone is now aware of the historical consequences of Karl Marx's political visions. However, their significance for our objective is to demonstrate the ascendance of an economic and financial hypothesis that prevailed during the 18th and 19th centuries. During this period people became increasingly conscious of the intricate consequences of currency on the social arrangement in the perspective of the altered circumstances ushered in by the Industrial Revolution.

World wars and keynesian economics

When the World War I (1914-1918) started, the main role of the central banks set up by the prominent European states that had huge store of gold seemed to be a way of upholding the international worth of their money in the wake of any instability arising out of trade deficit or excesses. The function of the gold benchmark denoted that in the event of a trade deficit, gold would be released to replenish the shortfall leading to a drop in the prices of commodities. The fall in prices would sequentially fuel an increase in exports and this would not only result to a trade excess, but also the influx of gold making the reserves healthier. Hypothetically, this meant that the cycle would carry on for an indefinite period and hence, function as a mechanical controller. However, the onset of the World War I inflicted such massive damages that they led to the subsidence of the arrangement and as a result of this the exchangeability of paper currency to gold was shelved. For instance, the huge gold reserves built up by countries like France and Germany prior to the First World War shrunk quickly owing to the necessity to reimburse for provisions and equipments in gold. This was owing to the fact that the suppliers or third parties who were not engaged in the war refused to accept payments in the paper currencies of these countries.

The nations that emerged victorious after the four-year-long war had now resolved to recover their loss of gold reserves by enforcing several compensations on Germany, which was vanquished during the First World War. This tendency is obvious from the fact that during 1921, the British Prime Minister David Lloyd George raised an anti-German slogan saying 'hang the Kaiser and let Germany pay the cost of the war'. Following the calculation of the war compensations imposed on Germany in 1921, it was found to be a mammoth amount - 132,000 million marks in gold! The situation worsened when the Allies or Allied Forces threatened to invade the Ruhr, the prime industrial belt of Germany, if the country failed to make a payment of at least 1,000 gold marks right away. This put Germany in an ironical situation as it had to borrow the amount from London to pay the part compensation imposed on it by the Allied Forces. However, eventually the currency of Germany caved in following repeated demands for payment of more compensations or reparations supported by armed force, especially from France. The collapse of the German currency is considered to be an unavoidable consequence as it is said to be a result of a conscious attempt by the German authorities to over issue their currency. Interestingly, resultant failure of France to recover its war losses by obtaining gold marks from Germany eventually led to the downgrading and disintegration of the French money too.

It needs to be mentioned here that the political impacts of the consequences of the World War I strikes us even to this day. In fact, the impacts of the war were equally important on the monetary system. Soon after the war ended, more and more countries reverted to the currency system based on the gold standard. While Britain's Chancellor of the Exchequer Winston Churchill brought back the system in his country in 1925, the other European currencies adopted the gold standard again by 1928. However, the United States that witnessed a huge inflow of gold from Europe during the war was the only country that was able to deal with the situation with some accomplishment. For instance, Britain's return to the currency based on the gold standard highlighted the noncompetitive prices of British commodities in the global market place. Consequently, this led to a decrease in the wages of the employees leading to the General Strike by the employees in 1926.

Going back to the gold standard was not only necessary for reverting to the conventional form of security for currency, but also essential because it was somewhat indispensible for once again setting up of a steady and secure international trade that had taken a beating owing to the commotions caused by the war. It may be mentioned here that the British gold stocks served as a pivot ensuing the stability of international trade and money prior to the First World War in 1914. However, the war robbed London of its position and the balance of international trade shifted to New York as it was no longer possible for Britain to cover foreign currencies by making payments in gold like before. Eventually, the shift in the balance of international trade proved to be an unsustainable situation.

Although the currency structure based on the gold standard eventually proved to be unsuccessful, but the fact remains that till the time the gold standard was flourishing it had in any case offered some amount of control and certainty in the arena of international money. In addition, various currencies in circulation in different regions of the world were linked to the gold standard and this not only enabled exchange of one form of money with another, but also ensured free international trade. With free trade and economic liberalization no more regarded as advantageous ends in them, the gold standard was disapproved comprehensively. The difficulties related to currency were clear indications of the extended economic problems confronted by people worldwide and the structure founded on gold was obviously different from the new financial perspective prevailing during the war period. In such a situation required a fresh application and some economists like Keynes provided a solution to the problems by recommending greater government regulation over the entire financial system. In fact, the proposals put forward by Keynes and other economists were an altogether new perception. These economists suggested that gold and paper currency should be separated and while paper money should be used in all transactions, gold was downgraded as a planned reserve. In addition, the vision of economists also assured a new and refined system to deal with the financial and economic dealings that to enable the state or government to prevail over the fiscal and economic disorder that apparently distinguished the initial decades of the 20th century. For the first time, the different government started the practice of creating statistics regarding the produce and proceeds of their respective national financial systems. This was an all-inclusive summary of data that was supposed to enable the government agencies to work out advantageous or helpful guidelines by implementing the economic theory.

It may be noted here that amidst such a historical and scholarly environment Keynes put down the basis of contemporary economic notion and financial management. In 1936, Keynes published his most significant masterpiece titled 'The General Theory of Employment, Interest and Money'. The concept of the book was derived from Keynes' understanding of the Great Depression and the failure of the then political leaders and economists to offer a way out of the effects caused by it. In this book, Keynes visualized a significant transformation in the monetary system and that was affirmation of political or government authority over the entire financial developments as well as currency. His hypothesis envisaged that once the government assumed complete charge of the monetary system, the states would not have to depend on the occurrence of economic transformations to help them overcome or pull through from the effects of recession. For instance, a situation of high rate of unemployment would not be necessary any more to bring down the salaries of the employees.

In his book 'The General Theory of Employment, Interest and Money', Keynes further predicted that once the new order came into effect it would be feasible to fuel economic growth, offer employment and even facilitate a country to set up a war-free condition following enhancement of demand by a conscious, but controlled deficit in the government's budget. It may be mentioned here that inspired by Keynes' thoughts to some extent, Roosevelt's New Deal pioneered deficit spending during the 1930s America. However, the Great Depression was eventually wrapped up in the United States as well as in other industrially developed nations of the world following the escalation of the American economy for the duration of the World War II. While industrial produce escalated, unemployment dropped during this period owing to which America, Europe as well as Japan witnessed unmatched economic development for the next 25 years.

The post-war world and monetarism

It is significant to note that the affluence experienced by the industrially developed countries following the World War II had drastically dissimilar consequence on several 'Third World' or under-developed nations in Latin America as well as many of the Asian and African nations after they were liberated from colonial subjugation. Most of these nations were not competent enough to play any significant role in the international monetary arena as they entrée to the economic expertise and technical superiority, the two essential factors necessary for financial accomplishments during the later part of the 20th century, was very restricted. In such a situation the 'Third World' countries were virtually trapped in a vicious circle formed by the prosperous Western powers. The wealthy Western nations not only manipulated the natural resources and raw materials of these countries, but also compelled them to sell their produce at exceptionally poor prices so that these poor and under-developed nations could earn whatever little money in the form of the more reliable foreign currency. The stumpy or little money earned through this process was again spent on repaying their escalating liabilities to the banks in the West.

In due course, the dollar of the United States turned out to be the international money for most 'Third World' countries. This was something similar to the developments in the East European countries following the collapse of Communist rule. It is interesting to note that some of these erstwhile Communist nations in this part of the world witnessed the growth of dual domestic economies soon after the fall of communism. While one of the two financial systems only served people who had entrée to their respective country's currency that already had led to inflation and was used to purchase a limited variety of manufactured items and services. On the other hand, the second financial system was meant for people who were able to bring in American dollars or German marks and enabled them to avail a whole lot of novel commodities imported from the Western market. In fact, most people in these 'Third World' or economically backward Asian and African nations and the erstwhile Communist countries of Eastern Europe had to endure incessant volatility of their money and their respective government's efforts to limit the supply of currencies and reduction in expenditure by the state. However, China was a rare exception in the Communist world. Although the Communist powers in East Europe fell one after another, the Communist government in China not only managed to survive the so-called anti-Communist wave, but even its financial system and the state currency, the 'yuan', continued to flourish. However, the 'yuan' was not a convertible currency as it could not be purchased or sold in the global markets. What is more significant is the fact that by the 1990s, China seemed to emerge as one of the most rapidly developing economies in the world.

Gradually, the use of currency was substituted with different types of credit provisions and bank cheques in extensive business and monetary operations in a number of Western nations. Evolution of such a practice also had an effect on the utility of currency in day-to-day life of the people because bank accounts turned out to be more widespread for a large percentage of the populace. At the same time, the convenience of loans and advance payments from banks and retail outlets now develop into a common practice among the people. As technology advanced, it ushered in several innovations such as credit and debit cards, nicknamed 'plastic money' that made it possible for people to undertake majority of the transactions, barring those in the nominal amount, without the use of real money or currency. While the tempo of this transformation varied in different countries, the comparative degree of this development could in no way be considered to be an indication of a nation's affluence or financial superiority. For example, while the inhabitants of the United States and Great Britain were fast in adopting the bank cheques for purchases and making an assortment of payments by the middle of the 20th century, during the period after the World War II, the Germans and citizens of different nations in continental Europe mostly continued using cash for daily transactions.

The globalization of money notwithstanding, it became imperative for all governments and their citizens to preserve their respective national currency as a mark of autonomous sovereignty. The debate over the institution of a general currency for the European Union is an ideal example the pressure that prevailed in some nations over their desire to keep hold of their independent authority over financial strategy and production of money. At the same time, many countries also witnessed tension over the manifestation and name of the common currency of the European Union. In addition, the common currency also exposed the new demands created by the impact of the money markets as well as the prerequisites of the international financial system for global trade liberated by the limitations of the currency. A similar situation was witnessed in the East European countries that gained political independence from Communist rule and those that were liberated from the subjugation of the erstwhile Soviet Union in the 1990s. As a symbol of their independence, these nations needed to sett up their respective central banks and currencies regardless of the possibility of a few of these currencies having any prospect of upholding their worth in the international markets in the intermediate period.

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