Cash or Card: Consumer Perceptions of Payment Modes - Scholarly ...

2.3: Economic Exchanges and Modes of Payment
Though trade in the domestic market was facilitated by the use of coin based tokens, in the
context of business (commercial) exchanges, the use of bills of exchange / certificates
payable to bearer has a long history. While it is difficult to identify the exact time and place
when the practice started there is some consensus that it was prevalent in the Middle Ages in
Europe and the Middle East as a method of settling accounts in international trade. Because
traders would move from place to place to trade wares and did not want to carry gold/bullion,
a network of moneychangers issued documents redeemable for the gold/bullion coins. These
documents could be cashed at different places within a country, in a different country or in
the future at the same location. Apart from establishing a method for settling accounts
without the actual transfer of coins at the time of purchase these merchant banks only dealt
with coins of full weight (non-debased) and quality and so the value of the coin token was
maintained. The document(s) was labelled ‘bank money’. By the 18 th Century such banks
were prevalent in Europe with Amsterdam, London and Hamburg the main centres. Payments
by European banks made in "bank money" were preferable to payments made in circulated
coins owing to the established value of the former. Such payments or transfers were made by
means of orders required to be presented by the payee in person, or his authorized agent, but
the payee did not receive the credit for the transfer until the following day. Gradually, laws
were enacted that enabled transfers across banks to be of a standard value, thereby giving
stability and uniformity to exchanges and encouraging foreign trade. Eventually, for
efficiency the practice was formalised and formed the basis of the modern day banking
system.
Essentially, the emergence of ‘bank money’ acted as a catalyst in the evolution of the
commodity money system into a system of representative (fiat) money. This occurred
because banks would issue a paper receipt to their depositors, indicating that the receipt was
redeemable for whatever precious goods were being stored (usually gold or silver money). In
this system, paper currency and non-precious coinage had very little intrinsic value, but
achieved significant market value by a promise to redeem it for a given weight of precious
metal, such as silver. For most of the 19 th and 20 th Centuries, many currencies were based on
representative money through use of the gold standard. In the case of paper currency and
coins trust was extended from the object/commodity to the social organization that held the
13