Roman coins from the Dark Ages were already a primitive form of fiat or fiduciary money. Counting coins instead of weighing them was a common practice during the Roman Empire. This meant that the face value of a coin was more important than the value represented by the materials (gold, silver, bronze) used to mint the coins.

Rome had no central banking system, and the banking regulations were minimal. The banks of the Roman Empire were also allowed to keep less in reserves than the full total of deposits. This practice is today known as fractional-reserve banking, and it enables the banks to borrow more money than they actually have in reserves. Banks can “print” more money than they hold which creates a risk of eventually being unable to pay their clients’ deposits if a withdrawal is requested.

Later Roman coins were easily distinguishable by their unified “design.” The front page of these coins carried an image of the reigning emperor together with his name and honorary titles, while the reverse was usually depicting Roman virtues and symbolism. Almost all of the coins produced during the Early Middle Ages, regardless of the region, carried the imagery of reigning authority combined with some religious or traditional symbolism. The custom of depicting famous and influential people on our currencies remains in place to this day as observable on US dollars or Chinese yuan.

During this period, Europe was divided into two monetary zones — the rich Western and Southern zone in which coins were minted and circulated as a vital part of the economy, and the Eastern and Northern zone, which had no coins of its own. All of the circulating coins in this region were just sporadically imported as a result of trading between the two areas. It wasn’t until the late 9th and early 10th centuries when these regions started to mint their own coins required to monetize the economy.

Early coins of Western Europe

Some of the oldest coins of the Early Middle Ages found in Europe that do not belong to Roman coinage are the ones minted by early Germanic, Frank, and Visigothic rulers. Most of the coins made between the fifth and seventh centuries were made of pure gold and thus unsuitable for everyday use in the retail economy.

Early Visigothic solidus depicting an unknown king, Gaul, 417–507. Credit: CNG Coins

However, this changed as the previously centrally-controlled regions split into smaller parts, and local rulers came to power. Decentralized and locally-operated mints started appearing over Europe, mainly Francia, and little mints started producing rare silver and copper coins primarily used as a tax payment.

The discoveries of golden Byzantine solidi, which were still in circulation and minted in the Eastern Roman Empire (Byzantine Empire), indicate that trading between the early European kingdoms and old empires of the East and South occurred regularly. Some of the golden solidi of the Byzantine Empire was even discovered as far away as Frisia (modern-day Netherlands).

The demise of gold as a currency

The medieval period in Europe was marked by shortages of precious metals, specifically gold. This was, to some extent, caused by the invasions of the Magyars from the East, Vikings from the North, and Muslims from the South. Gold was becoming rarer and more difficult to mine compared to silver.

Anglo-Saxon England and Merovingian Francia switched from gold to silver in the early 8th century, and the rest of the continent followed, with the last pure-gold coins being minted in the region of Benevento in the ninth century. From this part of history onwards, there were no more gold coins used as a regular national currency.

This progress was mainly driven by the King of the Franks, Pepin the Short, who introduced several reforms, including a financial reform introducing a new currency called French denier — a penny. Pepin standardized the coinage, its denominations, and created new monetary rules.

The Anglo-Saxon kingdoms followed the Franks and quickly adopted these new small, silver-based coins. At this time in history, almost all coins carried a face value, with only a tiny portion of its value being represented by the materials used to mint the coin. I.e., The silver used to mint one penny coin was worth much less than the same penny coin.

Our society slowly started to abandon “good money” in the form of gold which naturally carried highly-appreciated characteristics such as aesthetics, corrosion resistance, resistance to oxidation, but most importantly, its scarcity. Silver or copper are not even remotely as scarce as gold, and they also do not carry the same chemical and physical properties which make gold so valuable.

The Islamic golden age

As Europe was slowly recovering and new kingdoms were forming, a new world power arose in the East. The third Islamic Caliphate led by Harun al-Rashid (786 to 809) was entering the Islamic golden age. A period of intense economic, military, and cultural growth demanded that new methods of payment be created. Money that wasn’t merely a method of tax payment or means of exchange.

The Caliphate developed many concepts and principles of money and economics that we use even today. Many of these concepts, such as riba (usury, charging interest) and zakat (tax-like obligement used to help the needy), are very closely tied to the religious beliefs and principles of Islam.

The Islamic Caliphate had a far-reaching trading network extending from the Atlantic Ocean as far as the South China Sea. The main currency of the Caliphate was a silver Dirham coin, often used in the exchange of goods and slaves. The Dirham, just like the other coins, was regularly hoarded in an effort to protect one’s wealth and influence.

A map of the territories controlled by the Abbasid Caliphate from 750 to 1258. Credits: Arab Hafez

The first experiments with paper money

While the rest of the world was still just learning how to create and use money, the Chinese were already using leather promissory notes as early as 118 BC. Still, they were very impractical and unusable in everyday life. A promissory note is a document carrying a specific promise to pay along with the steps and timeline required to fulfill the payment promise.

For the first time in history, paper appeared in some form of money during the Tang and Song dynasties between the years 618 and 907. The “flying cash” was a paper document recording a deposit of cash, invented by merchants, and adopted by the government. The central government quickly discovered the advantages of paper money and developed a money issuing monopoly.

The government allowed only specific deposit shops to issue “receipts of strings of cash.” The cash coins which we talked about in the second part of our series were made of copper. They were heavy, and transporting them required a lot of effort. The issuance of “cash receipts” allowed merchants and traders to store their strings of cash at a deposit shop, which issued them with a receipt representing the value of the deposited money. This enabled long-distance transfers of money, thus the nickname “flying cash.”

Modern-day replica of the “flying cash” from the Tang Dynasty.

However, these were still not paper banknotes, which we know and use today. Flying cash was only a receipt confirming that its holder possesses a specific amount of cash coins that are deposited at a deposit shop. Promissory notes never replaced coins and were used side by side.

The first paper banknotes didn’t appear in China until the late 12th century, and in Europe even later, thanks to explorers such as Marco Polo, but let’s keep that for the next part.

End of Part III.