Obligations

It was, however, difficult to conduct long-distance trade as long as value could only be stored in the form of commodities and coins. The Italian city states were therefore the first to introduce certificates of indebtedness (“obligations” or “bills of exchange”) as a means of payment. To reduce the risk of being robbed on their journeys, merchants took these obligations with them. Debtor and lender were mentioned in the certificates, a payment date was fixed, and the amount of gold or silver noted. Soon, merchant bankers began to trade these obligations. The first evidence of such a contract dates back to 1156.

Obligations continued to be used mostly by Italian merchants, and the bi-metal scheme remained dominant until the Thirty Years’ War. Due to the economic turmoil caused by the war, rulers such as the Swedish kings started to prefer paper money. This was subsequently introduced by the Bank of England in 1694 and the Bank in France in 1716. The advent of paper fiat money in Europe marked the beginning of a new phase in the evolution of money.

The responsibility for establishing and regulating the system of fiat money in a country remained with the governments, but other public or private institutions such as central banks and the financial system played an increasingly crucial role in the success of the national currency.