Long-read: History of Money
From Barter to Bitcoin and Beyond
The concept of money has come a long way since the dawn of time. From trading physical commodities, to paper currency, and now to digital assets, the value of money has taken all sorts of shapes and forms as time has passed. In fact, you may actually be quite surprised by some of the oldest forms of money which have evolved considerably over the past three thousand years. Let’s take a trip down memory lane, revisit some history, and recall the journey that money has taken from bartering to Bitcoin and beyond.
This is not financial investment advice.
This article will discuss the history of money and its evolution over time.
In this article
- The Beginning of Bartering (9000–1200 BCE)
- The Emergence of Coins (1200 BCE — 400 AD)
- Paper Money (400 AD — Present)
- The “Golden” Standard (1816–1933)
- Digital Currencies Arrive (1860–2007)
- Modern-Day Cryptocurrency (2007 — Present)
- Where Are We Headed?
The Beginning of Bartering
Starting as early as 9000 BCE, humans began bartering as a form of early trade for physical commodities. First recorded in Egypt, bartering was used mainly for grain, wheat, and cattle which were common commodities used by farmers and other kinds of agricultural professionals of the time. Non-monetary exchanges were the first kind of “money” to exist, and as ironic as it may sound, more commodity-based trading emerged before physical money ever existed.
Some of the earliest agrarian societies made use of bartering while other hunter-gatherer societies employed gift economies. These were a type of economic system in which goods and services were given without any explicit agreement for immediate or future quid pro quo. A gift economy emphasizes social or intangible rewards, such as karma, honor, or loyalty for giving. In some cases simultaneous or recursive giving serves to circulate and redistribute valuables within a community.
There are several historical examples of early communities utilizing a gift economy within their society, including the sharing of food by a hunter-gatherer society and potlatch rituals held by Native Americans. A potlatch is essentially a ceremony where possessions are given away or destroyed in order to display wealth, generosity and enhance one’s prestige. Commodity money emerged in 3000 BCE, when the Mesopotamians developed a large-scale economy based on the shekel, which represented a specific weight of barley grain.
The Emergence of Coins
As time went on, people began to develop other forms of money which still had inherent value, this time in the form of coins. Before we saw the emergence of coins, other physical objects were used which served as precursors to them. In 1200 BCE, coastal regions around the Indian Ocean began to see cowrie shells appear in trade. The first official currency was minted by King Alyattes of Lydia which is in modern day Turkey. For many years to follow, the coin developed and changed into a rounder and smoother design, mainly for practical reasons.
The mining and exporting of silver coinage also had a large impact on the development of money in the form of coins. It is certain that when Lydia was conquered by the Persians in 546 BCE, coins were introduced to Persia. The Phoenicians did not mint any coins until the middle of the fifth century BCE, which quickly spread to the Carthaginians who minted coins in Sicily. The Romans didn’t begin the practice of minting coins until 326 BCE.
In China, gold coins were first standardized during the Qin dynasty (221–207 BCE). After the fall of the Qin dynasty, the Han emperors added two other legal tenders: silver coins and deerskin notes, a predecessor of paper currency which was invented in China. Gold and silver have been the most common forms of money throughout time, and although other metals were also used to mint coins, these kinds of metal-based coins did not emerge until much later. This is due to the fact that gold has held inherent value since the very beginning of time, leading humans to stick with the gold standard for their coins instead of other metals moving forward.
It wasn’t until the 11th century that paper money became an actual form of accepted monetary value, first introduced during the Song Dynasty. Marco polo’s travels to Eastern Asia — specifically China — brought the idea of paper currency back to the Europeans. Until then, the Florin; a gold coin minted in Florence, Italy, was widely used and accepted throughout Europe allowing for trade and international exchange to flourish in the area.
The development of the banknote began in the seventh century though, with its roots coming from merchant receipts of deposit during the Tang Dynasty (618–907). Merchants and wholesalers sought to avoid the heavy bulk of copper coinage in large commercial transactions, so they turned to issuing, for lack of better words, ancient IOUs which acknowledged that a person had received money or property in return for another sale.
If you want to, you can read all about Marco Polo’s experience with paper money in his book The Travels of Marco Polo. This book popularized the idea of paper currency through Europe, as many merchants wanted to replicate the promissory notes that were being used in China. The theme of using inherently valueless commodities to represent valuable money is important here, as these IOUs are generally viewed as a predecessor to banknotes.
It wasn’t until 1661 that the first banknote was issued in Sweden. Much debate accompanied the issue, with some officials and merchants predicting paper money would herald the downfall of the country’s monetary system. However, they were an immediate success, replacing the necessity to carry large, heavy, easily stolen quantities of gold or silver. With the brand new concept of paper money, most countries at the time lacked laws governing who could print money. Counterfeiting laws which made it illegal to copy existing coins were updated to cover paper money, but few countries had prohibitions against anyone issuing their own currency. As such, just about anyone with access to a printing press started churning out banknotes.
As a result, the face value of many banknotes became almost meaningless. A banknote’s value was determined by the reputation of the issuer and the amount of coins backing it. Some notes were not accepted at all, rendering them worthless; while others were accepted only at a discount from face value. A few rare banknotes actually circulated at greater worth than face value, especially if the issuers specified that they would honor the banknote’s exchange for specific amounts of gold or silver.
The “Golden” Standard
As mentioned previously, gold has been prevalent throughout the evolution of money and has been one of the most widely accepted forms of money for centuries. As paper money became the most popular form of consolidating value, gold eventually made a return when countries began establishing the gold standard.
The gold standard is a monetary system where a country’s currency or paper money has a value directly linked to physical gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells the precious metal at that price. The fixed price is used to determine the standard value of the currency.
In 1816, gold became England’s official standard of value when they minted the one pound gold coin called the Sovereign. The United States relatively quickly followed suit by making gold the US standard of value in 1879. Today, the gold standard is not currently used by any government. In fact, Britain stopped using the gold standard in 1931 and the U.S. stopped in 1933. The gold standard was completely replaced by fiat money, a term to describe currency that is used because of a government’s order, or fiat, that the currency must be accepted as a legal means of debt payment.
Digital Currencies Arrive
You may consider yourself to be relatively knowledgeable about the novelty of digital money, but did you ever know that the idea of digital money actually dates back to 1860? Western Union conducted the first electronic fund transfer (EFT) in 1860, introducing the world to the possibility of digital or electronic money. For the next century, developments in infrastructure and technology led to the development of the first credit card, the cardboard Diners’ Club card in 1950.
As credit cards continued to grow in popularity and portable electronic devices such as cellular telephones became common, mobile banking was introduced in Europe in 1999. Of course, there were no iPhones or Samsung phones which are commonly referred to today as smartphones, but mobile banking was still achieved by using primitive smartphones and personal digital assistants (PDAs) at the time. A form of digital currency called ecash was developed in 1982 but was never fully adopted, still serving as a crucial component for future creations such as hashcash.
One of the earliest predecessors of today’s most popular cryptocurrency Bitcoin (BTC) is B-money. This was created in 1998 by computer scientist Wei Dei and aimed to serve as an “anonymous, distributed electronic cash system.” However, B-money never actually launched and remained an equivalent to today’s white paper, but was instrumental in BTC’s development and creation. Bit Gold was another early idea for digital money proposed by Nick Szabo. Although first speaking about Bit Gold in 1998, Szabo fully described the system in 2005 on his blog.
Cryptocurrency has taken off over the past few years and the industry has exploded in terms of the amount of active users and companies involved in the space. Although the concept of Bitcoin dates back to 2007, it wasn’t until 2009 that the first BTC transaction took place. As BTC underwent major changes and progressions in the following years to grow into a usable cryptocurrency, it wasn’t until 2010 that BTC was actually used to make a real world purchase. In this case, a programmer from Florida named Laszlo Hanyecz offered to purchase one pizza for 10,000 BTC! At the time of the purchase, the 10,000 BTC was worth close to $25, but imagine how much more money he would have made if he’d kept that! $60 million is a pretty expensive pizza.
Thousands of new cryptocurrencies have emerged and diversified the ever-expanding cryptocurrency market. Today, the internet runs rampant with talk about blockchain technology and crypto. It seems to be among the hottest trends of the modern era. Over the last several years, many industries have been disrupted by the introduction of cryptocurrencies as a means of transferable value.
Where Are We Headed?
The recent rise in popularity of cryptocurrency has shown the world that it is very possible for a new asset class to emerge and disrupt many long-standing industries — namely finance. The next chapter of the history of money is taking place right before our very eyes, and it’s up to us to get involved early or let the opportunity pass. Considering all that has changed over the past five years or so, it’s difficult to accurately predict where we are heading in terms of which form of money will be most widely accepted.
The “War on Cash” has been accelerating in recent years, as governments and central banks have called for the elimination of high denomination banknotes. While these anti-cash initiatives have also been made in many Western countries, the most vivid example of today’s demonetization is currently taking place in India.
In 2016, Indian Prime Minister Narendra Modi demonetized 500 and 1000 rupee notes, eliminating 86% of the country’s notes overnight. While demonetization in India is off to a rough start, some believe it can still be ultimately successful in the long-term. Regardless, the War on Cash maintains incredible global momentum and will likely form another important chapter in the history of money.
From actual gold to digital gold, money has made quite the evolution over time. One of the oldest and most prevalent things in history, money has stood the test of time and taken on many shapes and sizes which have evolved as time progressed. Today, money is continuing to change as we are witnessing the emergence of cryptocurrency in many existing industries. As such, physical money and large notes are on the decline, paving the way for digital currency to take on a much stronger role in the global economy.
Who knows… maybe we’ll be talking about these good ol’ days fifty years from now while discussing the updated history of money. Until then, happy investing!
What do you think is going to be the next chapter in the evolution of money? Let us know why in the comments!