“mind over matter, money over all…” — Lil Wayne
Everyone likes money. Some people, like rappers, really like money. But wherever you lie on this spectrum, you will agree that money is a very important part of our lives. You use it to buy food, pay rent and purchase your Netflix subscription. You would also use it to pay the government for traffic violations and as a gift for a cousin or friend, when you don’t know what to get them on their birthday.
Today our notion of money has two basic forms — the cash in our wallets and the numbers representing balance in our digital bank accounts. The rise of the Internet has made electronic currency more important than ever before. We shop for stuff online with the funds drawn directly from our accounts, where the money was originally deposited electronically. We are earning and spending money without even touching it! Indeed, historian and author Y.N. Harari notes in his book Sapiens that the total value of money in the world is about $60 trillion, of which only $6 trillion is in cash or coins — a mere 10%! The rest exists only on computer hard drives, in electronic bank accounts around the world.
However, this was not always the case. Throughout the course of history people have used many different objects (or accounting systems) to represent something of value that can be traded — there was cattle and grain in prehistoric communities, gold and silver in the middle ages, and today we have banknotes and digital money (and cryptocurrencies!).
We all agree that more money is always good, but what does cash or bank balance mean today? Where does this money gets its value from? How did it come to be this way? Will this kind of money always remain valuable? In fact money is so ingrained in our lives that we don’t stop to think about what it represents, where it comes from and why other people accept it in exchange for their goods or services.
To answer all of these questions and more, we will take a closer look at the history of money and banking. Indeed this history is rich (no pun intended), complex and not always linear! It spans many civilizations and empires from the ancient to the modern world.
Before we begin, it is helpful to understand what we mean by money. For this, we look to the description provided by economist William Stanley Jevons , who claimed that the function of money is threefold:
- As a unit of account
- As a medium of exchange
- As a store of value
Jevons defines money in terms of its function, and we will see these notions of money appearing several times over the course of this story. Here’s a short timeline of everything we will cover over two articles (the second one will release next week):
We’ve all heard the story that money was invented to replace the inconvenient primordial barter system — where for example, I’d trade you my cow for 25 of your home-fattened chickens. This myth has been around since its description by the greek philosopher Plato in his famous work The Republic. It was popularized in Adam Smith’s 1776 treatise on The Wealth of Nations, widely considered the founding textbook of economics.
Actually, there is no evidence of pure barter economies ever existing, as anthropologists Caroline Humphrey and David Graeber have pointed out. Instead, David argues in his book Debt: The first 5000 years, that most prehistoric communities and tribes were fairly small, and that these small societies functioned in an implicit credit system — since everyone knew everyone else in the community, they were happy to exchange goods and services in the form of gifts or favors. Everyone was confident (due to social pressures for reciprocation) that they would be repaid at a future date. Barter was only used for exchange between strangers. For example, barter might be used between members of different tribes, where transactions necessarily needed to be settled immediately because the participants may never see each other again.
We see examples of gifting cultures even today. If you have ever sent your neighbors or cousins cookies, and they’ve returned your container with cakes or another kind of food, then you’ve participated in the gift economy!
As Graeber argues, the concept of money first emerges as a unit of account, allowing people to track the debts owed. Only later does money become a medium of exchange and a store of value. During the later years (9000–6000 BC) of the Neolithic period, livestock and plant products were considered money, but this doesn’t mean that cattle and grain were directly exchanged for other goods. Just that the value of other goods was determined in relation to these high-utility commodities.
Writing and early Currency
Around 3400 BC, writing was invented in ancient Sumer. It is likely that writing was developed mainly in order to keep accounts, since the earliest artifacts of written history are clay tablets that record specific amounts of cattle and grain. Sumer also presents the first documented account of anything representing currency in history. Here, the value of 1 silver shekel (a unit of weight) was set equivalent to one gur (about 300 bowls) of barley. These equivalent quantities of silver and barley are the earliest forms of currency, called commodity money — useful items that are so ubiquitous and convenient that they become widely accepted as a medium of exchange. In some societies, objects of religious or ornamental value such as beads and cowrie shells came to be used as commodity money.
But civilizations fall and pave the way for empires. The fall of Sumer gave rise to the Akkadian empire, and from the ashes of the Akkadian empire rose Babylonia. The Code of Hammurabi, named after the sixth king of Babylonia and dated approximately 1754 BC, is the best preserved record of ancient law codes. It contains a detailed account of one of the earliest legal frameworks that formalizes the role of money in society, by publishing things like the amount of interest on debt and fines for various infractions of the law.
This time period also coincides with the flourishing of another major civilization in south-east Asia — the Harappan or Indus Valley Civilization. Archaeological evidence suggests that there were extensive trade relations between the Harappan cities and Mesopotomia. Unfortunately, not much more is known about this ancient society, since the Indus script remains largely undeciphered even today.
Around 700 BC, when Europe was entering the classical ages, state-issued and standardized coins were being introduced in different parts of the world. The first manufactured coins appeared separately in regions of India, China and in Lydia (modern day Turkey). 
The use of coins spread from Lydia to the Persian and Athenian empires, and coincided with the growing dominance of Greece in the 5th century BC. Around 300 BC coinage in republican (self-governed) Rome is first recorded, where the temple of goddess Juno — or Moneta — served as a mint.
The words ‘money’, ‘monetary’ and ‘mint’ all trace their origins to the name of the Roman goddess Moneta.
In 27 BC, when Rome moved to autocratic rule under Augustus Caesar, Roman coins changed forever — from depicting gods and mythological figures to side-profiles of the emperors of the time. The practice of stamping coinage with prominent state figures is widely seen even today.
But why did we move from the credit and commodity systems of the ancient civilizations to coinage? In his book , Graeber argues that this came about with the rise of imperial empires. They needed to direct economic activity towards maintaining armies. This could be done through a system of taxation. The state paid their soldiers in standardized coins and imposed a nationwide tax on its citizens that was payable through these coins. As a result, people joined the war effort by exchanging their goods and services for the soldiers’ coin, which they then used to pay their taxes. Indeed there is archaeological evidence that ancient coins are found predominantly in sites that historically held standing armies, in Italy and around the borders of the Roman empire, for example .
Early Banking and Payments
From the 4th century BC onwards, the cultural and administrative advances of Rome spurred the development of banking activities.
- Rudimentary public banks were formed, that offered loans from the state treasury to the populace in exchange for collateral.
- There were exchanges that converted Roman coins to foreign ones and vice versa.
- There were private banks that maintained accounts of their clients and, for the first time in recorded history, gave people the ability to make payments via cheques — a monetary instrument still widely used today.
However, with the fall of the roman empire in the 5th century AD, banking practices were abandoned to a large extent and did not appear again in Western Europe until the Crusades. 
Meanwhile in Asia, Chanakya composed the Arthashastra — a treatise on statecraft, economics and public policy — around 200 BC. In this, he refers to a bill of exchange called Ādesha which was an order (indeed, order is the literal translation of the term) to a third person to pay up a sum of money on behalf of the sender of that Ādesha. He notes considerable use of such instruments, including promissory notes and letters of credit in large towns. All of these instruments are still used today in various forms!
Promissory Note — A financial instrument that contains a written promise by one party (the note’s issuer or maker) to pay another party (the note’s payee) a definite sum of money, either on demand or at a specified future date.
Bill of Exchange — A written order used primarily in international trade that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date.
Letter of Credit — (in International Trade) A letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount.
Paper Money & Tally Sticks
As we have seen in the previous section, early records of banking make references to paper transactions through bills of exchange and cheques. Between the 7th and 8th century AD, formal paper money first appeared in China. It was preceded by merchant receipts of deposit, as traders wanted to avoid the heavy bulk of copper coinage (commodity currency in China) in large commercial transactions.  The printing of paper money became widely used by the administration in China over the next few centuries, and continued after the Mongolian invasion in the 13th century. The practice of printing paper money became known in Europe through travelers to the east like William of Rubruck and Marco Polo.
Around the same time in Europe, the English monarchy began issuing tallies as a form of credit. These were wooden sticks originally used as receipts. Notches representing sums of money would be cut into the stick, which would be split down the middle to create two copies (one for the debtor and one for the creditor).
In addition to using these as a means of keeping account, the monarchy realized that it could issue tallies as payment. Implicitly, these tallies acted as loans to the state and would remain valuable as long as people had faith in the regime. Tallies continued to be used in England until the early 19th century. Although they are not still used today, their development is important. It highlights the ability of the government to raise money through forwarding instruments representing government debt to the people. Tally sticks are a precursor to government bonds!
In the 12th century AD, the Roman Catholic Church initiated and supported a series of religious wars to reclaim the Holy Land (Jerusalem) from Islamic rule. The need to transfer large sums of money to finance these wars stimulated the re-emergence of banking in western Europe. Catholic orders like the Knights Templar and the Hospitallers were created to support the crusades and protect the lands of Jerusalem. But they were also instrumental in financing and supporting the crusades between the 12th to 14th centuries.
Based on a mix of donations and business dealings, the Templars acquired large tracts of land and established financial networks across the whole of Christendom. They also created many innovative financial instruments. For example, the order began accepting local currency from pilgrims and crusaders in exchange for a deposit note that they could redeem in exchange for treasure of equal value once they arrived in the Holy Land. The Templars also promoted the use of cheques and letters of credit. 
In this post, we have seen the evolution of money from a unit of account in prehistoric societies, to commodity money in the Sumerian and Babylonian empires, and then to state-issued currency in imperial empires such as Rome. We also saw the first instances of paper money being issued, along with the first uses of various payment instruments like bills of exchange and cheques.
But we still have an interesting story ahead, to be continued in the next article. Banking institutions are beginning to reappear in Europe, which will culminate in the rise of national central banks. We will see how goldsmiths in London gave rise to the concept of fractional reserve banking and how the money supply is controlled by the gold standard from the 1800s onwards. Finally, we will end the second article with a look at a recent, novel form of money — Cryptocurrency!
Here’s the link to Part II.
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References & Further Reading
- Sapiens: A Brief History of Mankind, Y.N. Harari 2014
- Money and the Mechanism of Exchange, Jevons 1875 [Ch. 3]
- Barter and Economic Disintegration, Caroline Humphrey 1985
- Debt: The first 5000 years, David Graeber 2011
- A History of Money, Glen Davies 2016
- The Ancient Near East. p. 25., W. Hallo; W. Simpson (1971)
- The Future of Money: Beyond Greed and Scarcity Toward a Sustainable Capitalism, Bernard Lietaer (2001)
- The Structure of Prices in the Neo-Sumerian Economy (I), Eric L. Cripps
- Ancient Mesopotamian Units of Measurement (Wiki)
- The Historical Evidence of Greek and Roman Coins, C. H. V. Sutherland 1940
- The Roman Army: A Social and Institutional History, Pat Southern
- The Theory and Practice of Banking, Vol. I, Henry Dunning Mcleod
- Law Relating to Cheques, Ram Naresh Chaudhary 2009
- East Asia: A Cultural, Social, and Political History, Volume I, Ebrey, Walthall and Palais, 2009
- History of the Weksel: Bill of Exchange and Promissory Note, Sergii Moshenskyi, 2008
- Knights Templar Encyclopedia, Karen Ralls 2007