The history of money

Money, one of the earliest and most significant inventions of civilization, is essential to the development of trade. Without it, there is only barter, a relationship between two people each of whom has something which the other wants.

Money (which everybody wants) provides an intermediary substance, enabling the seller to choose when and where he wishes to become a buyer. 

All primitive societies invest certain things with a special value – particularly livestock, and items of rarity or beauty. They are presented on ceremonial occasions such as weddings. The possession of large numbers of cattle or pigs is clear evidence of wealth and prestige. 

But these objects are not money in our sense, capable of easy use in everyday transactions.

The most often quoted example of primitive money is shells – in Africa cowries and wampum in America. The small cowrie shell, deriving from the Maldive Islands in the Indian Ocean, is a treasured item in the civilizations of China and India from very early times. From India, these attractive objects are carried along the trade routes to Africa. Similarly, the American Indians use a small white cylindrical shell for ceremonial gifts, embroidered on to decorated belts or other ornaments. Europeans give the name ‘wampum’ to these precious items.

Overview

The significant evidence establishes many things were bartered in ancient markets that could be described as a medium of exchange. These included livestock and grain – things directly useful in themselves – but also merely attractive items such as cowrie shells or beads were exchanged for more useful commodities. However, such exchanges would be better described as barter, and the common bartering of a particular commodity (especially when the commodity items are not fungible) does not technically make that commodity “money” or a “commodity money” like the shekel – which was both a coin representing a specific weight of barley, and the weight of that sack of barley.

Due to the complexities of ancient history (ancient civilizations developing at different paces and not keeping accurate records or having their records destroyed), and because the ancient origins of economic systems precede written history, it is impossible to trace the true origin of the invention of money and the transition from “barter systems” to the “monetary systems”. Further, evidence in the histories supports the idea that money has taken two main forms divided into the broad categories of money of account (debits and credits on ledgers) and money of exchange (tangible media of exchange made from wood, paper, bamboo, metal, etc.), and it is debated which was created first.

Regarding money of account, the tally stick can reasonably be described as a very primitive ledger – the oldest of which dates to the Aurignacian, about 30,000 years ago. While it may not be reasonable to conclude the most ancient tally sticks were used to keep accounting records in the monetary system sense of the term, their existence does show that “accounting” – keeping a written record of things counted – is far more ancient than many people assume. David Graeber proposes that money as a unit of account was invented when the unquantifiable obligation “I owe you one” transformed into the quantifiable notion of “I owe you one unit of something”. In this view, money emerged first as credit and only later took the form of a medium of exchange.

Regarding money of exchange, the use of representative money historically pre-dates the invention of coinage. In the ancient empires of Egypt, Babylon, India, and China, the temples and palaces often had commodity warehouses which issued certificates of deposit as evidence of a claim upon a portion of the goods stored in the warehouses. Because these “claim tickets” could be redeemed at the warehouse for the commodity they represented, they were able to be bartered in the markets as if they were the commodity.

While not the oldest form of money of exchange, various metals (both common and precious metals) were also used in both barter systems and monetary systems and the historical use of metals provides some of the clearest illustrations of how the barter systems gave birth to monetary systems. The Romans’ use of bronze, while not among the more ancient examples is well documented, and it illustrates this transition clearly. First, the “aes rude” (rough bronze) was used. This was a heavyweight of unmeasured bronze used in what was properly a barter system—the barter-ability of the bronze was related exclusively to its usefulness in blacksmithing and it was bartered with the intent of being turned into tools. The next historical step was bronze in bars that had a 5-pound pre-measured weight (presumably to make barter easier and more fair), called “aes signatum” (signed bronze), which is where debate arises between if this is still the barter system or now a monetary system. Finally, there is a clear break from the use of bronze in barter into its undebatable use as money because of lighter measures of bronze not intended to be used as anything other than coinage for transactions. The aes grave (heavy bronze) (or As) is the start of the use of coins in Rome, but not the oldest known example metal coinage.

A World Without Money

Money, in some form, has been part of human history for at least the last 3,000 years. Before that time, it is assumed that a system of bartering was likely used.

Bartering is a direct trade of goods and services – I’ll give you a stone axe if you help me kill a mammoth – but such arrangements take time. You have to find someone who thinks an axe is a fair trade for having to face the 12-foot tusks on a beast that doesn’t take kindly to being hunted. If that didn’t work, you would have to alter the deal until someone agreed to the terms. One of the great achievements of money was increasing the speed at which business, whether mammoth slaying or monument building, could be done.

Slowly, a type of prehistoric currency involving easily traded goods like animal skins, salt and weapons developed over the centuries. These traded goods served as the medium of exchange even though the unit values were still negotiable. This system of barter and trade spread across the world, and it still survives today on some parts of the globe.

Bronze Age: commodity money, credit and debt.

Many cultures around the world developed the use of commodity money, that is, objects that have value in themselves as well as value in their use as money. Ancient China, Africa, and India used cowry shells.

The Mesopotamian civilization developed a large-scale economy based on commodity money. The shekel was the unit of weight and currency, first recorded c. 3000 BCE, referring to a specific weight of barley, and equivalent amounts of silver, bronze, copper etc. The Babylonians and their neighboring city states later developed the earliest system of economics as we think of it today, in terms of rules on debt, legal contracts and law codes relating to business practices and private property. Money was not only an emergence, but it was also a necessity.

The Code of Hammurabi, the best-preserved ancient law code, was created c. 1760 BCE (middle chronology) in ancient Babylon. It was enacted by the sixth Babylonian king, Hammurabi. Earlier collections of laws include the code of Ur-Nammu, king of Ur (c. 2050 BCE), the Code of Eshnunna (c. 1930 BCE) and the code of Lipit-Ishtar of Isin (c. 1870 BCE). These law codes formalized the role of money in civil society. They set amounts of interest on the debt, fines for “wrongdoing”, and compensation in money for various infractions of formalized law.

It has long been assumed that metals, where available, were favored for use as proto-money over such commodities as cattle, cowry shells, or salt, because metals are at once durable, portable, and easily divisible. The use of gold as proto-money has been traced back to the fourth millennium BCE when the Egyptians used gold bars of a set weight as a medium of exchange,[citation needed] as had been done earlier in Mesopotamia with silver bars.[citation needed]

Spade money from the Zhou Dynasty, c. 650–400 BCE
The first mention in the Bible of the use of money is in the Book of Genesis[31] in reference to criteria for the circumcision of a bought slave. Later, the Cave of Machpelah is purchased (with silver[32][33]) by Abraham, sometime after 1985 BCE. The currency was also in use amongst the Philistine people of the same period.

000 BCE – 400 CE
Standardized coinage

Greek drachm of Aegina. Obverse: Land turtle / Reverse: ΑΙΓ(INA) and dolphin. The oldest turtle coin dates 700 BCE; this coin: after 404 BCE

A 640 BCE one-third stater coin from Lydia, shown larger
From about 1000 BCE, money in the form of small knives and spades made of bronze was in use in China during the Zhou dynasty, with cast bronze replicas of cowrie shells in use before this. The first manufactured actual coins seem to have appeared separately in India, China, and the cities around the Aegean Sea between 700 and 500 BCE. While these Aegean coins were stamped (heated and hammered with insignia), the Indian coins (from the Ganges river valley) were punched metal disks, and Chinese coins (first developed in the Great Plain) were cast bronze with holes in the center to be strung together. The different forms and metallurgical processes imply a separate development. All modern coins, in turn, are descended from the coins that appear to have been invented in the kingdom of Lydia in Asia Minor somewhere around the year 600 BCE and that spread throughout Greece in the following centuries: disk-shaped, made of gold, silver, bronze or imitations thereof, with both sides bearing an image produced by stamping; one side is often a human head.

The first ruler in the Mediterranean known to have officially set standards of weight and money was Pheidon. Minting occurred in the late 7th century BCE amongst the Greek cities of Asia Minor, spreading to the Greek islands of the Aegean and to the south of Italy by 500 BCE. The first stamped money (having the mark of some authority in the form of a picture or words) can be seen in the Bibliothèque Nationale in Paris. It is an electrum stater of a turtle coin, coined at Aegina island. This coin dates to about 700 BCE.

Other coins made of electrum (a naturally occurring alloy of silver and gold) were manufactured on a larger scale about 650 BCE in Lydia (on the coast of what is now Turkey). Similar coinage was adopted and manufactured to their own standards in nearby cities of Ionia, including Mytilene and Phokaia (using coins of electrum) and Aegina (using silver) during the 6th century BCE, and soon became adopted in mainland Greece, and the Persian Empire (after it incorporated Lydia in 547 BCE).

The use and export of silver coinage, along with soldiers paid in coins, contributed to the Athenian Empire’s dominance of the region in the 5th century BCE. The silver used was mined in southern Attica at Laurium and Thorikos by a huge workforce of slave labor. A major silver vein discovery at Laurium in 483 BCE led to the huge expansion of the Athenian military fleet.

The worship of Moneta is recorded by Livy with the temple built in the time of Rome 413 (123)[clarification needed]; a temple consecrated to the same goddess was built in the earlier part of the 4th century (perhaps the same temple). For four centuries the temple contained the mint of Rome. The name of the goddess thus became the source of numerous words in English and the Romance languages, including the words “money” and “mint”.

Assaying

Assaying is analysis of the chemical composition of metals. The discovery of the touchstone[when?] for assaying helped the popularisation of metal-based commodity money and coinage.[citation needed] Any soft metal, such as gold, can be tested for purity on a touchstone. As a result, the use of gold as commodity money spread from Asia Minor, where it first gained wide usage.

A touchstone allows the amount of gold in a sample of an alloy to been estimated. In turn, this allows the alloy’s purity to be estimated. This allows coins with a uniform amount of gold to be created. Coins were typically minted by governments and then stamped with an emblem that guaranteed the weight and value of the metal. However, as well as intrinsic value coins had a face value. Sometimes governments would reduce the amount of precious metal in a coin (reducing the intrinsic value) and assert the same face value, this practice is known as debasement.

Gold and silver have been the most common forms of money throughout history. In many languages, such as Spanish, French, and Italian, the word for silver is still directly related to the word for money. Sometimes other metals were used. For instance, Ancient Sparta minted coins from iron to discourage its citizens from engaging in foreign trade. In the early 17th century Sweden lacked precious metals, and so produced “plate money”: large slabs of copper 50 cm or more in length and width, stamped with indications of their value.

Gold coins began to be minted again in Europe in the 13th century. Frederick II is credited with having reintroduced gold coins during the Crusades. During the 14th century, Europe changed from use of silver in currency to minting of gold. Vienna made this change in 1328.

Metal-based coins had the advantage of carrying their value within the coins themselves – on the other hand, they induced manipulations, such as the clipping of coins to remove some of the precious metal. A greater problem was the simultaneous co-existence of gold, silver and copper coins in Europe. The exchange rates between the metals varied with supply and demand. For instance, the gold guinea coin began to rise against the silver crown in England in the 1670s and 1680s. Consequently, silver was exported from England in exchange for gold imports. The effect was worsened with Asian traders not sharing the European appreciation of gold altogether — gold left Asia and silver left Europe in quantities European observers like Isaac Newton, Master of the Royal Mint observed with unease.

Stability came when national banks guaranteed to change silver money into gold at a fixed rate; it did, however, not come easily. The Bank of England risked a national financial catastrophe in the 1730s when customers demanded their money be changed into gold in a moment of crisis. Eventually, London’s merchants saved the bank and the nation with financial guarantees.[citation needed]

Another step in the evolution of money was the change from a coin being a unit of weight to being a unit of value. A distinction could be made between its commodity value and its specie value. The difference in these values is seigniorage.

Earliest banknote from China during the Song Dynasty which is known as “Jiaozi”
Paper money was introduced in Song Dynasty China during the 11th century. The development of the banknote began in the seventh century, with local issues of paper currency. Its roots were in merchant receipts of deposit during the Tang Dynasty (618–907), as merchants and wholesalers desired to avoid the heavy bulk of copper coinage in large commercial transactions. The issue of credit notes is often for a limited duration, and at some discount to the promised amount later. The jiaozi nevertheless did not replace coins during the Song Dynasty; paper money was used alongside the coins. The central government soon observed the economic advantages of printing paper money, issuing a monopoly right of several of the deposit shops to the issuance of these certificates of deposit. By the early 12th century, the number of banknotes issued in a single year amounted to an annual rate of 26 million strings of cash coins.

In the 13th century, paper money became known in Europe through the accounts of travelers, such as Marco Polo and William of Rubruck. Marco Polo’s account of paper money during the Yuan Dynasty is the subject of a chapter of his book, The Travels of Marco Polo, titled “How the Great Kaan Causeth the Bark of Trees, Made into Something Like Paper, to Pass for Money All Over his Country.” In medieval Italy and Flanders, because of the insecurity and impracticality of transporting large sums of money over long distances, money traders started using promissory notes. In the beginning, these were personally registered, but they soon became a written order to pay the amount to whoever had it in their possession.[63] These notes can be seen as a predecessor to regular banknotes.

Trade bills of exchange

Bills of exchange became prevalent with the expansion of European trade toward the end of the Middle Ages. A flourishing Italian wholesale trade in cloth, woolen clothing, wine, tin, and other commodities was heavily dependent on credit for its rapid expansion. Goods were supplied to a buyer against a bill of exchange, which constituted the buyer’s promise to make payment at some specified future date. Provided that the buyer was reputable or the bill was endorsed by a credible guarantor, the seller could then present the bill to a merchant banker and redeem it in money at a discounted value before it actually became due. The main purpose of these bills nevertheless was, that traveling with cash was particularly dangerous at the time. A deposit could be made with a banker in one town, in turn, a bill of exchange was handed out, that could be redeemed in another town.

These bills could also be used as a form of payment by the seller to make additional purchases from his own suppliers. Thus, the bills – an early form of credit – became both a medium of exchange and a medium for storage of value. Like the loans made by the Egyptian grain banks, this trade credit became a significant source for the creation of new money. In England, bills of exchange became an important form of credit and money during last quarter of the 18th century and the first quarter of the 19th century before banknotes, checks and cash credit lines were widely available.

Tallies

The acceptance of symbolic forms of money meant that a symbol could be used to represent something of value that was available in physical storage somewhere else in space, such as grain in the warehouse; or something of value that would be available later, such as a promissory note or bill of exchange, a document ordering someone to pay a certain sum of money to another on a specific date or when certain conditions have been fulfilled.

In the 12th century, the English monarchy introduced an early version of the bill of exchange in the form of a notched piece of wood known as a tally stick. Tallies originally came into use at a time when paper was rare and costly, but their use persisted until the early 19th century, even after paper money had become prevalent. The notches denoted various amounts of taxes payable to the Crown. Initially, tallies were simply a form of receipt to the taxpayer at the time of rendering his dues. As the revenue department became more efficient, they began issuing tallies to denote a promise of the tax assessee to make future tax payments at specified times during the year. Each tally consisted of a matching pair – one stick was given to the assessee at the time of assessment representing the amount of taxes to be paid later, and the other held by the Treasury representing the amount of taxes to be collected at a future date.

The Treasury discovered that these tallies could also be used to create money. When the Crown had exhausted its current resources, it could use the tally receipts representing future tax payments due to the Crown as a form of payment to its own creditors, who in turn could either collect the tax revenue directly from those assessed or use the same tally to pay their own taxes to the government. The tallies could also be sold to other parties in exchange for gold or silver coin at a discount reflecting the length of time remaining until the tax was due for payment. Thus, the tallies became an accepted medium of exchange for some types of transactions and an accepted store of value. Like the girobanks before it, the Treasury soon realized that it could also issue tallies that were not backed by any specific assessment of taxes. By doing so, the Treasury created new money that was backed by public trust and confidence in the monarchy rather than by specific revenue receipts.

1450-2008
Goldsmith bankers

Goldsmiths in England had been craftsmen, bullion merchants, money changers, and money lenders since the 16th century. But they were not the first to act as financial intermediates; in the early 17th century, the scriveners were the first to keep deposits for the express purpose of relending them. Merchants and traders had amassed huge hoards of gold and entrusted their wealth to the Royal Mint for storage. In 1640 King Charles I seized the private gold stored in the mint as a forced loan (which was to be paid back over time). Thereafter merchants preferred to store their gold with the goldsmiths of London, who possessed private vaults and charged a fee for that service. In exchange for each deposit of precious metal, the goldsmiths issued receipts certifying the quantity and purity of the metal they held as a bailee (i.e., in trust). These receipts could not be assigned (only the original depositor could collect the stored goods). Gradually the goldsmiths took over the function of the scriveners of relending on behalf of a depositor and also developed modern banking practices; promissory notes were issued for money deposited which by custom and/or law was a loan to the goldsmith, i.e., the depositor expressly allowed the goldsmith to use the money for any purpose including advances to his customers. The goldsmith charged no fee or even paid interest on these deposits. Since the promissory notes were payable on demand, and the advances (loans) to the goldsmith’s customers were repayable over a longer time period, this was an early form of fractional reserve banking. The promissory notes developed into an assignable instrument, which could circulate as a safe and convenient form of money backed by the goldsmith’s promise to pay. Hence goldsmiths could advance loans in the form of gold money, or in the form of promissory notes, or in the form of checking accounts. Gold deposits were relatively stable, often remaining with the goldsmith for years on end, so there was little risk of default so long as public trust in the goldsmith’s integrity and financial soundness was maintained. Thus, the goldsmiths of London became the forerunners of British banking and prominent creators of new money based on credit.

Demand deposits

Demand deposits are funds that are deposited in bank accounts and are available for withdrawal at the discretion of the depositor. The withdrawal of funds from the account does not require contacting or making any type of prior arrangements with the bank or credit union. As long as the account balance is sufficient to cover the amount of the withdrawal, and the withdrawal takes place in accordance with procedures set in place by the financial institution, the funds may be withdrawn on demand.

Banknotes

100 USD banknote
The first European banknotes were issued by Stockholms Banco, a predecessor of Sweden’s central bank Sveriges Riksbank, in 1661. These replaced the copper-plates being used instead as a means of payment, although in 1664 the bank ran out of coins to redeem notes and ceased operating in the same year.

Inspired by the success of the London goldsmiths, some of whom became the forerunners of great English banks, banks began issuing paper notes quite properly termed “banknotes”, which circulated in the same way that government-issued currency circulates today. In England, this practice continued up to 1694. Scottish banks continued issuing notes until 1850, and still do issue banknotes backed by Bank of England notes. In the United States, this practice continued through the 19th century; at one time there were more than 5,000 different types of banknotes issued by various commercial banks in America. Only the notes issued by the largest, most creditworthy banks were widely accepted. The scrip of smaller, lesser-known institutions circulated locally. Farther from home it was only accepted at a discounted rate, if at all. The proliferation of types of money went hand in hand with a multiplication in the number of financial institutions.

These banknotes were a form of representative money which could be converted into gold or silver by the application at the bank. Since banks issued notes far in excess of the gold and silver they kept on deposit, sudden loss of public confidence in a bank could precipitate mass redemption of banknotes and result in bankruptcy.

The use of banknotes issued by private commercial banks as legal tender has gradually been replaced by the issuance of banknotes authorized and controlled by national governments. The Bank of England was granted sole rights to issue banknotes in England after 1694. In the United States, the Federal Reserve Bank was granted similar rights after its establishment in 1913. Until recently, these government-authorized currencies were forms of representative money, since they were partially backed by gold or silver and were theoretically convertible into gold or silver.

1990 – present
The development of computer technology in the second part of the twentieth century allowed money to be represented digitally. By 1990, in the United States, all money transferred between its central bank and commercial banks was in electronic form. By the 2000s most money existed as a digital currency in banks databases. In 2012, by a number of transaction, 20 to 58 percent of transactions were electronic (dependant on country).

Cryptocurrencies

In 2008, Bitcoin was proposed by an unknown author/s under the pseudonym of Satoshi Nakamoto, it was implemented the same year. Its use of cryptography allowed the currency to have a trustless, fungible and tamper resistant distributed ledger called a blockchain. It became the first widely used decentralized, peer-to-peer, cryptocurrency. Other comparable systems had been proposed since the 1980s. The protocol proposed by Nakamoto solved what is known as the double-spending problem without the need of a trusted third-party.

Since Bitcoin’s inception, thousands of other cryptocurrencies have been introduced, many of which use the symbology of former metallic currencies, such as silver for Litecoin.

Money plays a crucial part in society today as the history of money itself is dates back further than what we thought, respect currency as everything has a history behind them. It is amazing how much it has developed and i believe it will continue developing as the year’s pass but as of what we know now and how society has adopted new ways to implement currency as a whole it is a never-ending advancement of the old age. 

For more information about the history of money, please refer to:

Origin and evolution of money
The history of money
HistoryWorld
From Barter to Banknotes
Wikipedia – The Free Encyclopedia

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