The Past, Present And Future Of Global Money Transfer

From Barter To Coins

In the beginning — long before wire transfers or central banks or even coins — there was barter. Tribes in Mesopotamia and Phoenicia began trading livestock as early as 6000 BCE, adding grains and vegetables as agriculture developed.

Driving cattle and hauling heavy sacks of grain was cumbersome. Around 1200 BCE, Chinese merchants began using cowrie shells and metal knives and spades as substitutes for goods they delivered later. The metal implements were rounded off, possibly to prevent accidents. They evolved into coins — the first money.

By 500 BCE, coins were circulating in Turkey, Greece, Persia and Macedonia. Later, they spread to the Roman Empire. Nonetheless, ancient Roman soldiers may have been paid at least partially in salt, a practice that — according to Pliny the Elder — explains the word “salary.”

The Bumpy Move To Paper

Paper currency first appeared in China sometime between 600 and 900 CE. Light, foldable and easy to carry, paper money made transfers easier. But in a foreshadowing of modern problems, too many bills were created, causing bouts of massive inflation.

In medieval Europe, merchants used short-term bills of exchange with foreigners, settling their accounts at trade fairs. Later, bank bills arose. They were based on gold or silver, with the premise that people could exchange them for coins. In 1816, England designated gold as the official standard of value.

Bills and coins circulated freely, but they could also be lost or stolen. In the 16th century, checks began to appear, and they eventually became the dominant means of value transfer for both businesses and individuals.

Transporting money or checks by ship or horse-delivered mail could take months. The invention of the telegraph enabled merchants to use Western Union for money transfers from 1851 on, greatly speeding the pace of transactions and bringing businesses into the modern era.

From Gold To Governments

Money began to travel faster and in large volumes. Gold worked as a value standard because so many people accepted it; currencies, however, were another matter. Bank-issued bills weren’t always reliable or universally accepted. Many countries countered this issue by establishing central banks intended to standardize and stabilize their currencies. The United States — whose founding fathers had mixed opinions on central banks — finally established one in 1913, with the creation of the Federal Reserve System.

Though central banking made currencies more stable, pegging them to gold made them inflexible. During World War I, some countries temporarily abandoned the gold standard so they could print more money to finance the war.

The Great Depression saw countless runs on banks, as frightened people rushed to exchange the bills they no longer trusted for gold. As a result, Britain dropped the gold standard in 1931, followed by the United States a couple of years later.

Today, the value of a currency depends not on gold, but on the reputation and laws of the issuing country. The U.S. dollar, backed by a stable government, forceful laws, a strong economy and plenty of Treasury notes, has long been considered the world’s reserve currency.

In Credit We Trust

To many people, the dollar is money, but Perry Mehrling — a professor of international political economy at Boston University — says that idea is wrong. All money is a system of liability and credit, he notes, and what is circulating is really a promise to pay. Without credit, money systems would be too inelastic to function.

Even back in the barter days, there was typically a time lag before goods were exchanged, he said. Otherwise, not much trading could get done.

Trust has always been essential to money transfers. The only thing that has changed is whom or what we trust.

SWIFTer And Easier

State-backed currencies remain the foundation of modern monetary systems, but the means of transfer have changed, becoming ever faster.

In the 1950s, banks began using credit cards. A person no longer needed to write out a check and separately record the amount every time he or she bought groceries or went out to dinner. A decade later, banks introduced ATMs, giving people the option to deposit checks and withdraw cash on the go.

In 1973, banks created the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a global messaging network for efficiently transmitting money transfer instructions.

The internet brought us electronic deposits and new payment systems, including PayPal and OFX (renamed from OzForex), both introduced in 1998. Digital wallets, payment apps and money transfer specialists have facilitated new levels of delivery speed and currency exchange convenience to satisfy the lifestyles and business needs of those who are defining today’s economy.

Have we reached the limits of what money transfers can do?

The New Frontier: Blockchain

Not by a long shot, blockchain advocates say. Distributed ledger technology creates an indelible, unfalsifiable record of every step of a transaction. Banks and businesses are experimenting with blockchain, and it seems a new cryptocurrency springs up every week.

Mehrling doesn’t believe cryptos will work, since they can’t expand and contract with economic conditions as credit-based currencies do.

But Jack Vonder Heide, president of Technology Briefing Centers, a firm that advises banks and credit unions on technology trends, sees a bright future for them, especially as the sharing economy develops. “All kinds of assets could be tokenized. If you have a boat, you could sell shares to others very quickly with no title or paperwork,” he said.