August 28, 2023

A Brief History of Money

The history of money is still being written. The system of exchange has moved from swapping animal skins to minting coins to printing paper money, and today, we appear to be on the cusp of a massive shift to electronic transactions and cryptocurrencies like Bitcoin.

From bartering to banknotes to Bitcoin

Money, whether it's represented by a seashell, a metal coin, a piece of paper, or a string of code electronically mined by computer, doesn't always have value. Its total global value—currently estimated to be around $420 trillion—depends on the importance that people place on it as a medium of exchange, a unit of measurement, and a storehouse for wealth.

Money allows people to trade goods and services indirectly; it helps communicate the price of goods (prices written in dollar and cents correspond to a numerical amount in your possession—e.g., in your pocket, purse, or wallet); and it provides individuals with a way to store their wealth.

Money is valuable as a unit of account—a socially accepted standard by which things are priced and with which payment is accepted. However, throughout history, both the usage and form of money have evolved.

Though the terms "money" and "currency" are often used interchangeably, several theories suggest that they are not identical. According to some theories, money is inherently an intangible concept, while currency is the physical (tangible) manifestation of the intangible concept of money.

The Transition From Bartering to Currency

Money—in some form or another—has been part of human history for at least the past 5,000 years. Before that time, historians generally agree that a system of bartering was likely used.

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 ax 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 ax 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.

Slowly, a type of currency developed over the centuries that involved easily traded items like animal skins, salt, and weapons. These traded goods served as the medium of exchange (even though the value of each of these items was still negotiable in many cases). This system of trading spread across the world and still survives today in some parts of the globe.

One of the greatest achievements of the introduction of money was the increased speed at which business, whether it involved mammoth-slaying or monument-building, could be done.

In early August 2021, Chinese archaeologists with the State University of Zhengzhou announced that they had discovered the world’s oldest known, securely dated coin minting site. A mint is a facility where currency is created. Sometime around 640 BCE, this facility, located in Guanzhuang in Henan Province, China, began striking spade coins, likely the first standardized metal coinage.

First Official Currency Is Minted

Meanwhile, further west during this era, the sixth-century BCE Greek poet Xenophanes, quoted by the historian Herodotus, ascribed the invention of metal coinage to the Lydians. In 600 BCE, Lydia's King Alyattes minted what is believed to be the first official currency, the Lydian stater. The coins were made from electrum, a mixture of silver and gold that occurs naturally, and the coins were stamped with pictures that acted as denominations. In the streets of Sardis, in approximately 600 BCE, a clay jar might cost you two owls and a snake. Lydia's currency helped the country increase both its internal and external trading systems, making it one of the richest empires in Asia Minor. (Today, when someone says, "as rich as Croesus", they are referring to the last Lydian king who minted the first gold coin.

Transition to Paper Currency

During 1260 CE, the Yuan dynasty of China moved from coins to paper money. By the time Marco Polo—the Venetian merchant, explorer, and writer who traveled through Asia along the Silk Road between 1271 and 1295 CE—visited China in approximately 1271 CE, the emperor of China had a good handle on both the money supply and its various denominations. In fact, in the place where modern American bills say, "In God We Trust," the Chinese inscription at that time warned: "Those who are counterfeiting will be beheaded."12

Parts of Europe were still using metal coins as their sole form of currency until the 16th century. Colonial acquisitions of new territories via European conquest provided new sources of precious metals and enabled European nations to keep minting a greater quantity of coins.

However, banks eventually started using paper banknotes for depositors and borrowers to carry around in place of metal coins. These notes could be taken to the bank at any time and exchanged for their face value in metal—usually silver or gold—coins. This paper money could be used to buy goods and services. In this way, it operated much like currency does today in the modern world. However, it was issued by banks and private institutions, not the government, which is now responsible for issuing currency in most countries.

The first paper currency issued by European governments was actually issued by their colonial governments in North America. Because shipments between Europe and the North American colonies took a long time, colonies often ran out of cash. Instead of going back to a barter system, the colonial governments issued IOUs that traded as currency. The first instance was in Canada (then 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.

The Emergence of Currency Wars

The shift to paper money in Europe increased the amount of international trade that could occur. Banks and the ruling classes started buying currencies from other nations and created the first currency market. The stability of a particular monarchy or government affected the value of the country's currency, and thus, that country's ability to trade on an increasingly international market.

The competition between countries often led to currency wars, where competing countries would try to change the value of the competitor's currency by driving it up and making the enemy's goods too expensive, by driving it down and reducing the enemy's buying power (and ability to pay for a war), or by eliminating the currency completely.

Mobile Payments

The 21st century has given rise to two novel forms of currency: mobile payments and virtual currency. Mobile payments are money rendered for a product or service through a portable electronic device, such as a cellphone, smartphone, or tablet device. Mobile payment technology can also be used to send money to friends or family members. Increasingly, services like Apple Pay and Google Pay are vying for retailers to accept their platforms for point-of-sale payments.

Virtual Currency

Bitcoin​, released in 2009 by the pseudonymous Satoshi Nakamoto, quickly became the standard for virtual currencies. All of the world's bitcoin, as of June 2022, were worth just over $392 billion.Virtual currencies have no physical coinage. The appeal of virtual currency is that it offers the promise of lower transaction fees than traditional online payment mechanisms do and is operated by decentralized authorities, unlike government-issued currencies.

The Bottom Line

The history of money is still being written. The system of exchange has moved from swapping animal skins to minting coins to printing paper money, and today, we appear to be on the cusp of a massive shift to electronic transactions and cryptocurrencies like Bitcoin. Ancient transaction forms have been co-opted: for example, bartering still occurs on the margins in some markets such as the business-to-business (B2B) space and some consumer services. The monetary system will surely continue evolving as long as humans require a medium of exchange.

Summary

Money conveys the importance that people place on it; it allows trading of goods and services indirectly, communicates the price of goods, and provides a way to store wealth.
All of the money in the world is estimated to total around $420 trillion
Before money, people acquired and exchanged goods through bartering.
The world’s oldest known, securely dated coin minting site was located in Guanzhuang in Henan Province, China, which began striking spade coins sometime around 640 BCE, likely the first standardized metal coinage.
With the emergence of Bitcoin, the appeal of virtual currency is that it offers the promise of lower transaction fees than traditional online payment mechanisms do and is operated by decentralized authorities, unlike government-issued currencies.

Reference : https://www.investopedia.com

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