A Brief History of Money
The story of how the money went from trading animals to using numbers on a screen
The way transactions are done has changed so much over the history of mankind. But what has not changed, is that the transaction always involves an exchange. This exchange is often some sort of service or commodity for money.
But what really is money?
A quick google search will tell you that, but I’ll do it for you.
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context.
Money, in and of itself, has no actual value; it can be a shell, a metal coin, or a piece of paper. Its value is symbolic; it conveys the importance that people place on it. Money derives its value by virtue of its functions: as a medium of exchange, a unit of measurement, and a storehouse for wealth.
What are the roles played by money?
To understand why humans used a particular type of money, we need to understand the roles played by it.
- It’s a store of value
- It’s a unit of account — for example, ten dollars will buy you a T-shirt or one cow will you get you 2 metal spears.
- It’s a medium of exchange. Probably the most important role that money plays is that it allows the exchange of goods efficiently.
The concept of money has remained the same, but the face has changed. From using the barter system where commodities and services are used as money to hundreds of different types of currencies, we have come a long way. Let’s take a look down the road to see how we got here.
The Barter System
This is the one thing about the history of money that we all probably know. Up until about 3000 years ago, humans used the barter system for the exchange of goods and services. Bartering is a direct trade of goods and services; for example, a farmer may exchange a bushel of wheat for a pair of shoes from a shoemaker. However, these arrangements take time. If you are exchanging an axe as part of an agreement in which the other party is supposed to kill a woolly mammoth, you have to find someone who thinks an axe is a fair trade for having to face down the 12-foot tusks of a mammoth. If this doesn’t work, you would have to alter the deal until someone agreed to the terms.
Bartering is also terribly inefficient as it requires a double coincidence of wants. That is, in the case of the previous example, if you want an axe an exchange of tusks of a mammoth, you need to find someone who needs exactly the opposite trade, that is tusks of a mammoth in exchange of an axe.
Often in such cases, a few commodities would dominate trade, like wheat or if you’re in prison — cigarettes. If this commodity is widespread, it would effectively take the form of money. This idea gave rise to commodity money which later translated into using a separate set of items as a form of currency.
Collectibles/Objects
It was very tedious and inefficient to carry around axes and 12-foot tusks of mammoths to deal with people. The first observed proto-money took the form of collectibles. Collectibles were small, mostly homogenous items such as shells or beads. Collectibles tended to be durable, easy to store or hide on one’s person, difficult to find or forge, and easy to appraise in value. This made them more robust forms of money relative to many commodity forms of money like cattle.
Sometime around 770 B.C., the Chinese moved from using actual usable objects — such as tools and weapons — as a medium of exchange, to using miniature replicas of these same objects cast in bronze. Due to impracticality, nobody wanted to reach into their pocket and find their hand-cut by the sharp edge of an arrow. So, these tiny daggers, spades, and hoes were eventually abandoned for objects in the shape of a circle. These objects became some of the first coins.
Metal Coins
Although the Chinese were the first to use coins, the first region of the world to use an industrial facility to manufacture coins that could be used as currency was in Europe, in the region called Lydia (now western Turkey). Today, this type of facility is called a mint, and the process of creating currency in this way is referred to as minting.
Lydia’s King Alyattes minted the first official currency around 600BC. These coins were made of electrum a naturally-found alloy of gold and silver. This made the trade of goods very easy and quick. It also spread quickly through the Mediterranean which encouraged trade across borders. Governments also accepted this system quickly as it made the collection of taxes and maintenance of the army much easier.
Metal coins were used as a form of currency for many centuries.
Credit
As trading became easier, the financial system also grew. Banks were set up and money borrowing and lending became increasingly common. When someone lent money from a bank, instead of giving out coins, banks started giving out pieces of paper that ensured that the holder would receive a particular amount of money when he/she would produce it at the bank. These were called letters of credit.
These letters of credit were transferable, so in case of a very popular bank/moneylender (like the government), the payment for a certain service could be made using the credit paper. However, these were issued by banks and not governments. This method carried on for centuries and governments started issuing their own bonds.
Paper Currency
By 1271, when Marco Polo — the Venetian merchant, explorer, and writer who traveled through Asia along the Silk Road visited China, he found that the Chinese were already using paper currency. In fact, the emperor of China had a good handle on both the money supply and various denominations. There are records suggesting that the Chinese moved to the paper currency as early as 700 BC.
The first paper currency issued by European governments was actually issued by colonial governments in North America. Because the shipments between Europe and the North American colonies took very long, the colonists often ran out of coins as operations expanded. Instead of going back to a barter system, the colonial governments issued IOUs that traded as a currency. The first instance was in Canada which was at that time a French colony. In 1685, soldiers were issued playing cards denominated and signed by the governor to use as cash instead of coins from France.
Gold Standard
In the 19th century, the innovative concept of the gold standard came along, that combined the best aspects of both paper currency and metal currency. It allowed banks to back their currencies by gold. This meant that governments could print as much money as they wanted as long as they had the amount of gold that corresponded to that much money. This meant that the value of a particular currency, say a dollar was much more stable.
This became a universal standard for money. The conversion rates of two different currencies, say dollars to pounds, were now much better defined. Gold becomes the United States’ official standard of value. Americans were able to trade in $20.67 for an ounce of gold while one dollar was defined to be equal to the value of 23.22 grains of pure gold.
However, after the Great Depression, the United States abandoned the gold standard which would allow the government to print more money to infuse cash in the markets. Slowly, other countries followed suit and the Gold Standard was abandoned. The difference that this made was that the value of a particular currency was no longer defined by how much gold the country’s government had in its reserves.
Online Banking
As banking advanced with credit cards and other forms of currencies, the advent of chip technology and the World Wide Web allowed transactions to occur over the internet, with no form of physical money. In 1997, European banks started offering mobile banking services. Mobile commerce services were introduced when Coca-Cola set up several vending machines that could accept payments via text message. In 1998, PayPal was founded in California and it allowed its members to leverage the medium of the internet to make payments and transfer money.
Nowadays, mobile payment applications like Google Pay, Apple Pay, and other virtual wallets are increasingly replacing physical money.
Cryptocurrencies
In October 2008, a pseudonymous programmer by the name of Satoshi Nakamoto published a white paper in which he described a protocol for a decentralized digital currency. He called this protocol Bitcoin. A few years later, Satoshi disappeared without a trace, but the technology he created would go on to change the world. Bitcoin would become the world’s first virtual currency or cryptocurrency.
Virtual currencies have no physical coinage. The appeal of virtual currency is it offers the promise of lower transaction fees than traditional online payment mechanisms, and virtual currencies are operated by a decentralized authority, unlike government-issued currencies. This makes them very dangerous as there is no form of government regulating the value of one unit of currency.
