Many items have been used for trade throughout history, including bartered goods and materials. However, currencies can be defined as a medium of exchange with extrinsic, or implied, value that is not necessarily determined by the physical characteristics or utility of the medium itself. While official currencies are those issued by central authorities such as governments, alternative currencies (sometimes called private or parallel currencies) are those normally issued beyond the official sanction of central government authorities.
Many unusual items have been used over time as currency, including grains, shells, fabric, ceramic tokens, animal skins and tools. Some of these have even been made into iconic forms of currency, such as oxhide ingots from Europe and knife currency from East Asia. The first alternative currencies, however, could be considered those that arose as an alternative to official currencies. These began to make their own appearance as part of minting activity by the Kingdom of Lydia in Central Asia around seventh-century BC.
Store Of Value: Commodity Currency
The earliest alternative currencies by the aforementioned standard were precious metals, including gold and silver. These shiny metals were valued for use in ornamentation and jewelry by ancient societies in Mesopotamia, Egypt and elsewhere. They were traded directly by weight and were issued in standard weights and sizes when the first coins were disseminated by governments using these metals.
The first precious metal that was used commonly was what is known as electrum, a naturally occurring alloy of gold and silver. Only later did metal workers develop techniques to separate the two metals into their pure forms. Even as local and national governments appeared over time to issue coin currencies through their power of "seigniorage," precious metals continued to be recognised and traded by weight for their capacity as a "store of value." They were used so commonly, in fact, that some of the first private banking operations in Europe evolved at the shops of goldsmiths, who issued paper receipts (the precursors of banknotes) to buyers and sellers of gold.
Parallel Currencies And Tokens
Among the earliest examples of parallel currencies in the form of coins appeared in Egypt. While the ancient Egyptians customarily traded mostly in barter and in commodity currency by weight, the Greeks introduced coins to the region during the rule of Alexander in fourth-century BC. From that era, the Egyptian governments issued coins in silver and bronze.
Lacking access to minting resources and authority, however, some local city governments issued lead tokens as imitations of the official currency. Token currencies were also found later in the Roman Empire, and it's believed they were used in brothels and for gambling activities.
The circulation and use of official currencies gained momentum in the Greek, Roman and Medieval periods between 500 BC and 1300 AD. The Greeks issued drachma coins as official currency and the Romans issued gold aureus and silver denarius coins. Following the fall of the Roman Empire, some rulers in Northern Europe, especially in Germany, delegated their authority to mint coins to local officials and church leaders.
From about 1100 AD onward, these currencies, known as bracteates, circulated alongside various dominant official currencies of medieval Europe, often in less populated regions away from the main centers of power. They were very thin coins that cost little to manufacture and their validity was cancelled after a period of time so that the issuer could charge users an exchange tax for re-issuance of new money. Bracteates continued to be minted and circulated until about the 16th century.
Scrip, Community Exchanges And LETS
During the Renaissance period, official and centrally issued currencies gained more prominence and alternative issuers lost strength. Still, another form of currency gained popularity over the centuries—scrip. It''s a term that etymologists say may have originated from "subscription receipt" or possibly from a variation on "scraps of paper."
Scrip was used to pay debts in the absence of official currencies, particularly by private companies in remote locations such as mining and logging camps. It was accepted by the issuer as payment for land, provisions and other material goods. Use of scrip gained special prominence in the colonisation and settlement of the United States in the 18th and 19th centuries.
With the emergence of the industrial era, new attempts at creating parallel, non-government currencies appeared. Many of these flourished in the period following the Great Depression in the 1930s.
Among the most well-known was the Worgl Experiment, which began in 1932 when Michael Unterguggenberger, mayor of the Austrian town of Worgl, began issuing local currency in an attempt to stimulate a depressed local economy. Under the scheme, which was based on a model developed by economist Silvio Gessel, the town would pay workers in local currency in exchange for work on municipal projects. It was shut down in the following year by Austria's central bank.
Since that time, many other community-based exchange systems functioning with a local currency or on a credit basis have arisen. They include the Brixton and Bristol pound systems in the U.K., and the Ithaca Hours and Salt Spring dollars systems in the U.S. and Canada. Such systems have been designated as Local Exchange Trading Systems, or LETS.
In the late 19th and 20th century, customer loyalty and credit points programs gained prominence. The first well-known program of this type was S&H Green Stamps, which appeared in 1896. Consumers received small stamps with their purchases, which they could later redeem for other goods.
With the deregulation of the airline industry in the 1970s, airlines began to offer their own type of credit points to customers in the form of mileage accumulation programs. For each mile flown, passengers would accumulate credit, which could be redeemed for further travel rewards. With the success of these programs, credit card companies followed suit by offering their own cashback rewards points in exchange for purchases with their credit cards.
National And Supranational Currency
There have been instances in which emerging or puppet states have issued money as part of their attempts to assert national sovereignty. Among others, some puppet states that appeared during World War II include the Vichy State in France and Manchukuo State in China.
In the wake of the major military conflicts of the 20th century, industrialised nations collaborated in creating supra-national organisations to administer large-scale international money transfers. Among these are the International Monetary Fund and the Bank for International Settlements, which work with what has been interpreted as a form of supra-national currency called Special Drawing Rights, or SDRs.
The value of SDRs is determined using the average values of a basket of major world currencies. The IMF itself denies that the SDR is a currency or a claim on the IMF, but it says that it is "a potential claim on the freely usable currencies of IMF members."
Cryptocurrencies: Currency Of The Future?
Following the revolution in digital communication and data storage brought by the development of the internet in the 1990s came the emergence of the first so-called cryptocurrencies. These virtual, online currencies are generated in a decentralised manner on computer networks. The cryptocurrency systems are supervised by a community of online participants known as miners, who verify and validate online transactions with ledgers.
Bitcoin was the first and most well-known cryptocurrency to appear when it launched in 2009 by a secretive developer who went by the name of Satoshi Nakamoto. Since that time, several other cryptocurrencies have appeared, such as Namecoin and Litecoin, using digital systems similar to bitcoin's.
Advocates of cryptocurrencies argue that they are superior to centrally issued forms of currency as they can't be easily seized or manipulated by government authorities, and are less susceptible to inflation. However, detractors have expressed concerns that they might be easily used for money laundering, fraud, and other criminal activities beyond the supervision of governments.
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Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…