Let's review our basic economics:
Money serves three purposes, the first two mostly subservient to the third:
- A unit of account;
- A store of value; and
- A medium of exchange.
Gold was useful for
money, as opposed to being a valuable good in its own right and therefore a useful item for barter, because of its metallurgical properties: It was malleable, and therefore could easily be transformed into coin; and it was very heavy, which meant that watering it down, so to speak, could easily be detected. The fact that it was also a store of value was important when there was no such thing as a central bank. Thus, gold coins gave their own assurance of value (rather than the backing of a central bank), were a good candidate for uniformity (the malleability part), and offered protection against counterfeit (the weight part).
When economies were mainly command and control (the King did both), gold coins were useful. But as trade grew, both in volume and distance, they and other monies based on metal became a pain in the rear end. A gold coin's value was limited to the worth of the gold itself. You couldn't just strike a coin and call it a Million Dollar coin. That meant that long distance traders had to transport huge amounts of coin to strike deals in distant lands. That was both inefficient and dangerous, as thieves had an easier time striking caravans weighed down with heavy metals.
To counter this disadvantage, merchants began using Bills of Exchange, essentially an IOU, as a form of money (a medium of exchange and a store of value). ""[T]he necessity and commodiousnesse of [a Bill of Exchange] is seen, in that it . . . prevents the danger and adventure of carriage of monies from one City or Country to another (J. Marius, Advice Concerning Bils of Exchange, London, 1654)." A Bill of Exchange was a promissory note from one trader to another. It could take on the function of money if the trader holding the Bill could then exchange it with a third trader for other goods. Thus, Trader A gives Trader B a Bill in exchange for roll of silk cloth. Trader B then gives the Bill to Trader C for a cistern of wine. The IOU has passed from Trader A, the originator, to Trader B to Trader C, which means that Trader A now owes Trader C the amount of the Bill.
When trades were infrequent, this system didn't work very well because merchants in the position of Trader C would heavily discount the Bill or not accept it at all, because Trader C might not know Trader A and thus fear the possibility that Trader A would not pay the IOU. But as trading volumes increased and traders engaged in repeat transactions, reputations arose based in part on a trader's credit worthiness. And even if Trader C did not know Trader A, Trader C probably knew someone who knew Trader A, and so would be willing to accept Trader A's Bill: "Heereupon all such Bills as are of knowne persons are soone accepted of, and of the unknowne person, either himself that is the Seller, or the Broker, will inquire of their sufficiencie, and then likewise accept their Bills in paiment (G. Malynes, Lex Mercatoria, 1622)."
This system was widely used in medieval times as trade expanded to encompass the globe. Eventually, nations adopted the advantages of the Bills of Exchange, creating the system of a central (or at least, somewhat centralized) banking. Paper money had obvious advantages as a unit of account (paper was easier to standardize and could have different denominations) and as a medium of exchange (you could transport a huge amount of trading value at low cost). The key feature that had to be ensured was the store of value. For Bills of Exchange, the assurance came from merchants' reputations. A trader who reneged on a Bill was in big trouble: "Such is the sinceritie and Candor Animi amongst Merchants of all nations beyond the seas, in the observation of plaine dealing concerning the said Bills Obligatorie betweene man and man, that no man dare presume to question his owne hand; for if he be stayned therewith, he is not only utterly discredited, but also detested of all Merchants (G. Malynes, Lex Mercatoria, 1622)." For central banks, the problem is trickier, as the hyperinflation in Germany in the 1920s and Zimbabwe today evidence. Nevertheless, central banking soon become the norm, and although the money supply was (in theory) tied to things like gold reserves, that system (Bretton Woods) also went to the wayside in the 1970s.
All of this to say: I really doubt that a society as long-lived as D'ni would be using metal coins for serious money. Given the existence of a Guild of Bankers, I have little doubt they would have the basic paper or other form of money that no longer was tied to the preciousness of the medium itself.
You will be tested on all this, of course . . .
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Posted: Thu Jul 24, 2008 12:38 am — Post subject: 
