The old-fashioned logic of bartering could return if technology advance obviates the need for money's mediating role. By Alan Beattie

Money has always made the world go round, even when people thought it was flat. But as with many technological and social changes over the course of the past millennium, the development of money and currencies has markedly accelerated.

For much of the past 1,000 years, use of money in the most rapidly advancing societies in Europe showed few innovations from the coinage systems which had already been common in civilisations from earlier millennia, including ancient Greece and Rome, and China under the Han and Tang dynasties.

The royal monopoly on coinage was increasingly enforced, partly because it made taxation easier and because the imprimatur of the state gave coins a value over and above the cost of the metal made to produce them - giving the issuer a source of income. But their value was still heavily influenced by the amount of such metal in existence. When Spain colonised Mexico and Peru in the sixteenth century, for example, it shipped back vast amounts of gold and silver, which inadvertently created price inflation and sent the Spanish economy into decline.

Banking systems also became prevalent in late medieval and early modern Europe as goldsmiths recognised the possibilities of circulating promissory notes as a proxy for the underlying bullion. But Glyn Davies, author of A History of Money, points out that banking systems like this had been developed as long ago as the civilisations of ancient Mesopotamia and Egypt.

The significant developments in money and currencies came when monetary authorities started to issue their own paper money. One of the main reasons for doing this was to finance war as cheaply as possible. Paper money played a critical role helping the colonies win the American war of independence and Britain to fight the Napoleonic wars of the early nineteenth century.

But the result was a burst of inflation which devalued currencies. It also stimulated the growth of financial markets, which developed to channel private savings towards government borrowing. In the longer term, the growth of financial markets meant that the currency issued by a central bank was only a small base on which a large superstructure of assets balanced, reducing the state's monopoly power over the creation of an acceptable medium of exchange.

The reaction in Britain, and elsewhere, to war-induced inflation was to stabilise currencies by tightening the links between paper money and an underlying asset. After a fierce debate about the alternatives, this became gold. The gold standard further bound the hands of central banks or governments issuing the currency, as they were prevented from enriching themselves by embarking on a printing spree by the threat of a run on the country's gold reserves.

Some countries also tried to band together to prevent currency destabilisation, as in the Latin Monetary Union of 1861 and the Scandinavian Monetary Union formed in the 1980s, but both broke down after the strains of the first world war.
The end of the gold standard during the Depression did not reduce the demands of countries for a degree of stability in exchange rates. The Bretton Woods system of fixed exchange rates operated from the end of the second world war until the early 1970s, when the present period of free-floating exchange rates, with money in most industrialised countries created at will by unrestrained capital markets, came into existence.

But loss of control over money and exchange rates meant countries still hankered after stability, driving the sublimation of 11 European currencies into the euro a year before the millennium ended.

In the next millennium, the development of currencies is highly uncertain. For now, the trend towards fewer currencies seems likely to continue as more countries join or align themselves to the big currency blocs of the dollar, the euro and the yen.

But in the longer term, rather than gravitating towards a single world currency, some believe money itself will fade away.

Central banks' control of money supply has already become more nebulous. The increasing complexity of financial markets means that the willingness of banks, companies and individuals to borrow and lend from each other is critical in determining the amount of money in circulation. While central banks retain the power to set the price of money over the short term, supply and demand for money in the longer term depend on the market's judgements over their credibility as policymakers.

But some economists have also argued that technological developments could further emasculate the money controls of central banks and governments. To see how this could happen, it helps to examine the original reasons for the emergence of money. One of the principal motivations was that the technology of production increased at a faster rate than that of exchange: rising economic growth and cross-border trade meant that the number and complexity of goods increased to a level where barter, which requires what economists call a "coincidence of wants" to function, became too unwieldy.

But if the new information technologies that have begun to transform markets in the last decades of the millennium continue to develop at their current rate, a return to direct exchange - without the intercession of an independent monetary system administered by a central bank - may be possible. Mervyn King, the deputy governor of the Bank of England, said in a speech this year that real-time pricing and exchange of goods and services across the internet could bypass the need for traditional currencies issued by a central bank.

"Without a settlement role, central banks in their present form would no longer exist; nor would money," Mr King said. "The successors to Bill Gates could put the successors to Alan Greenspan out of business."

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