About 1100 AD, a unique form of money was created. Made of wood, the currency was called "Tally Sticks." They were given a state mandate to be used for the payment of taxes. In fact, they were used as money by England until 1854.
The issue of tally sticks is an important one because it goes to the heart of what money is. Those who want to make a case for government money often used tally sticks as an example of the superiority of government-created fiat. The idea in particular is that money came of age via the so-called "temple" system of ancient Sumer.
In fact, given the discovery of very ancient cities such as Dwarka, off the coast of India, it is probable that money is a lot older than 5,000 years. And since almost everything else comes from the private sector and is then adopted by the state, we figure that goes for money, too.
These days, counter-tally stick arguments are available throughout the Internet. One cogent explanation is available on Mish Shedlock's globaleconomicanalysis.blogspot.com – written by "Trotsky" and edited by Mish. Here's a telling excerpt:
The other historical development that can be seen as an ancestor of the modern day fiat money system is England's application of the medieval 'tally stick' method of recording debt payments.
Taxes in the largely agricultural economy of the Middle Ages were usually paid in the form of goods, and these payments were recorded with notches on wooden sticks that were then split length-wise (one half remained with the tax payer serf, as proof of payment). This was an ingenious method of avoiding counterfeiting.
In AD 1100, King Henry the First ascended the English throne, and adopted the tally stick method of recording tax payments. By the time of Henry II, taxes were paid twice a year, and the tally sticks recording the partial tax payment made at Easter soon began to circulate in a secondary discount market – i.e., they began to be accepted as payment for goods and services at a discount , since they could be later presented to the treasury as proof of taxes paid.
It didn't take long for the King and his treasurer to realize that they could actually issue tally sticks in advance, in order to finance 'emergency spending' (not surprisingly, such emergencies often involved war – after the extortion of tax money the second big hobby of governments).
The selling of these claims to future tax revenue created the market for government debt – an essential part of today's fiat money system as well.
By 1660, the English monarchy, after a brief hiatus of experimentation with a pseudo-republican government under Cromwell, was reinstated and Charles II began his reign but with vastly reduced powers, especially in the realm of taxation.
Since Charles had to beg for tax money from the parliament, he struggled mightily with paying his vast pile of bills. Whenever Charles wrangled permission to raise taxes from parliament, he immediately went to cash in the future tax receipts by selling tally sticks to the goldsmiths at a discount. This necessitated the introduction of previously referred to method of making such debt payable to the bearer, which allowed the goldsmiths to sell it in the secondary market to raise funds for more lending to the King.
They also began to pay interest to depositors, in order to attract still more funds. At that stage of the game, the goldsmiths had a good thing going for them, since the King was the equivalent of a triple A rated sovereign borrower, who could always be relied upon to cover his debt with future tax receipts. No one thought it problematic that the vaults soon contained more wooden sticks than gold. There was an active market in this government debt, and the goldsmiths profited handsomely.
The King meanwhile decided to circumvent parliament and began to issue tally sticks as he pleased (as an aside, one half of such a stick, which originally remained with the treasury had a handle and was called the 'stock' - the term that has evolved to describe shares in publicly listed corporations today) .
Naturally, Charles was more than happy to exchange wooden sticks for gold, and not surprisingly, soon kicked off a veritable credit boom by upping his wooden sticks production ...
So what does a king do with all that gold he received for sticks? During his 25 year reign, he waged 3 losing wars (2 against the Dutch, one against France); he survived 4 different parliaments (only the first of which wasn't hostile to him); he helped to establish the East India Company, made shady deals with Louis XIV of France (his cousin), sired a horde of illegitimate children of which he acknowledged 14, and was renown for his hedonistic court. That's a lot of "merry".
Of course, there was a natural limit to this debt expansion. Once all the money attracted from depositors had been transferred to the King, additional deposits could only be acquired by means of offering higher interest rates than previously.
By 1671 the annual discount on the King's debt had reached 10% and due to redemptions nearly overwhelming funds raised by new debt issues, things clearly had ceased to work for him. Charles suddenly and conveniently remembered that there was a law against usury on the books, and lo and behold, interest rates in excess of 6% were not permissible.
With all his recent loans carrying a far bigger discount, he simply declared the debt illegal, and stopped payments on it (with a few judiciously selected exceptions). Overnight, the King's tally sticks reverted back to what they had really always been – worthless sticks of wood.
The King's creditors, chiefly the goldsmiths and their customers, had, quite literally, "drawn the short end of the stick" (if you ever wondered where this expression came from, this is it).
Although tally sticks were still used until the early 19th century, and even formed part of the capital of the Bank of England when it was founded in 1694, the secondary market never truly recovered from this blow. Charles had, with the stroke of a pen, killed the better part of London's budding banking system, and transformed countless of his creditors into destitute involuntary tax payers.
This narrative destroys at one stroke the idea that evil moneychangers were responsible for the demise of the tally stick system and it also shows quite clearly how government will take any monetary system and pervert it for war-making. War, after all, is the health of the state. And money is best left in the hands of the free market.