The history of money dates back several centuries, coinciding with the formation of financial relationships among people.
“Money was created many times in many places. Social development did not necessarily rely on technological breakthroughs then; rather, it sparked a profound cognitive revolution. The emergence of money is linked to establishing a new intersubjective reality that exists solely within the human mind. Money extends beyond mere coins and banknotes; it encompasses anything people are willing to employ to evaluate the value of goods and services in an exchange” (Yuval Noah Harari, Sapiens: A Brief History of Mankind, 2011).
Presumably, the origins of money can be traced back to the era of hunting and gathering, which constituted the dominant lifestyle for 90% of human history. In those ancient times, individuals possessed proficiency in various trades and acquired the necessary survival skills.
An image of an early form of trade comes to mind: a caveman attempting to exchange rabbit fur for desired goods, such as boar meat. This practice is now known as the barter system, which some experts consider an early form of monetary transaction.
However, anthropologist David Graeber argues that the widely assumed predecessor of money, barter, did not exist before the emergence of money. Even if a barter system existed, it would not have been a sustainable everyday practice akin to monetary exchange. Consider the difficulties encountered when nobody requires what you have to offer. If your sole item for barter was a deceased mammoth, how would you transport it during trade encounters?
The Bread Game: The History of Money
By the end of the Pleistocene epoch (known as the last Ice Age, which concluded 10,000 years ago), the domestication of animals and plants had begun as humans spread across the world. This led to the rise of agriculture, which brought about centralization and increased population density. With the growth of centralized populations, the need for individuals to excel in all professions diminished, as in hunting and gathering societies. Consequently, people began to focus on specialized labor.
“Barter only functions effectively when all participants can obtain what they want or need.”
Some individuals began farming, others engaged in custom production, and others pursued construction. For instance, a clothing merchant might offer several outfits to a farmer in exchange for wheat. However, since the farmer did not require new clothing daily, unlike the merchant, who needed food regularly, the tailor had to be creative in finding a suitable exchange before acquiring the bread. This situation resembles a game where the ultimate prize is bread—a game of bread, so to speak. The barter system proved insufficient to sustain a civilization where everyone possessed only one specialization.
The Ancient Rules of Making Decisions about Money
The need for a regulated transaction system paved the way for the emergence of money, which served as a means to measure value (money for accounting) and facilitate transactions (currency exchange). However, the concept of money did not begin with the paper and coins we are familiar with today. Cowry shells were one of the earliest and most widely accepted forms of money used for trade in Africa (particularly Uganda) and Asia until the 19th century (1801-1900).
Ancient banks originated in civilizations such as Mesopotamia, where individuals could store their valuables in an organized manner for trade. This new system necessitated recording all incoming and outgoing transactions, leading to the first use of ledgers to document transaction histories.
However, the introduction of money did not occur through a coordinated global agreement based on the Mesopotamian experience. Similar to today, different forms of currency existed, and Cowry shells were not a universally recognized banknote. Grains, cloth, and other items were also used as money. While they may appear distinct and be described differently, each object shares three fundamental characteristics:
- It had to possess a physical form. Ideas cannot function as money, although they can generate income.
- It needed to be stable. Mere tangibility was not sufficient. Any civilization relying on leaves as a currency could face financial ruin in the face of a strong wind. Imagine trying to carry 50 leaves in your pocket.
- It required societal agreement. Without consensus, the stability of any currency is undermined, as people would be uncertain if others would accept their money in transactions.
The currency must be stable; if it suddenly disappears, it poses a significant risk.”
While items like shells, grain, and cloth could readily meet the first two criteria, the third criterion was more complex. Without a governing body to ensure widespread acceptance of money, currency stability could not be guaranteed. This issue was resolved with the advent of coins around 600 BC.
Centralized money management through coins
There is an issue with using grains as currency—more grain can be produced on a farm, and the same applies to shells—go to the beach! How can a currency system gain trust if anyone can create more currency anytime? This dilemma was one of the primary reasons that led to the introduction of coins.
The Lydians of ancient Greece were the first known group to use coins. Five hundred years later, major cities like Athens followed suit. Citizens couldn’t find more gold and silver to melt down and craft coins with intricate stamps, unlike shells and grains. Even in our modern world, this remains a significant challenge despite the availability of various tools.
Each coin bore a tangible symbol of approval. Rulers imprinted faces or national symbols on them, guaranteeing that they and the civilizations they represented vouched for the coin’s value. In other words, as long as their civilization existed, the currency would retain its worth. The transition to using coins brought about a controlled monetary circulation governed by rulers and the currency itself, making it more comprehensible for ordinary citizens.
The Emergence of Paper Money
While the invention of coins resolved many monetary challenges, certain drawbacks persisted. Firstly, coins were minted from precious metals, including gold, which limited their circulation and supply based on the availability of these metals. Secondly, the bulky and heavy coins made their storage and transportation uncomfortable. The discomfort and scarcity of gold supplies became increasingly problematic before the introduction of paper money.
Around 100 BC, the Chinese invented the first form of paper. Shortly thereafter, its use in monetary transactions was recorded. Instead of carrying coins everywhere, individuals could deposit their valuables in a bank and, in return, receive a signed note indicating the value of the items held in the bank. This marked the inception of the first banknote. The system operated on the belief that a note could be exchanged for tangible value. Rather than constantly exchanging physical goods, people began to trade in banknotes.
When the Mongols invaded China, the Mongol Empire also embraced using paper currency. In the 13th century, Marco Polo introduced paper money to Europe for the first time. By the 17th century, Europe had caught on to this growing trend, and jewelers began adopting the practice of issuing banknotes backed by gold as a guarantee.
As people started using and holding paper notes instead of constantly exchanging them for reserve assets, European banks began issuing more banknotes, assuming that not every individual holding a banknote would immediately demand gold. This marked the initial practice of employing currency in a form resembling the modern money concept.
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Rejection of Gold
In present times, our money no longer allows us to redeem reserves of silver or gold. However, this was not the case until the 1930s. Before that period, each dollar was backed by gold, accounting for nearly half its value (approximately $0.40).
Americans and Europeans believed the population would not withdraw all their money simultaneously.
However, the early 1930s marked a challenging financial period for the United States. The stock market crash of 1929 triggered the Great Depression. To revive the U.S. economy, President Franklin D. Roosevelt implemented a money printing program to stimulate spending. Unfortunately, due to a limited gold supply, his options were restricted. He could not raise taxes during this economic crisis or print more currency as insufficient gold was available. The Great Depression transformed people into gold seekers, driven by fear for the future. This led to panic among the public, causing a run on banks and posing a threat to the economy. However, the banks held only $0.40 in gold for every dollar, which rendered them unable to fulfill the withdrawal requests of those seeking funds.
Therefore, in 1933, President Roosevelt made private ownership of gold illegal. To prevent the export of gold from banks, he ordered their closure for three days. Subsequently, he prohibited citizens from possessing gold, making it a serious crime punishable by up to 10 years in prison. Citizens were instructed to return their gold to the Federal Reserve System, which would issue paper money in exchange.
Despite the authoritarian nature of the plan, it did not achieve the desired success. The damage inflicted was significant, and in 1971, President Richard Nixon officially ended the US dollar’s gold backing. It was only in 1977 that private ownership of gold became legalized again. Interestingly, President Ford, who lifted the Gold Ban, was unaware that possessing gold had been illegal.
Today’s Monetary System
We have now arrived at the current state of monetary practice. We have observed how it all began and how the barter system evolved into a currency system based on valued items such as grain, shells, and cloth. The government guaranteed prices through coinage when coins became cumbersome, and paper replaced them.
As most transactions are now primarily conducted using paper, governments have become more flexible regarding the proportion of paper currency to available precious metals. Consequently, paper currency has transitioned away from its association with jewelry and has instead become a representation of the government’s assurance that it holds value.
Even in today’s context, paper money remains a contentious form of currency. In his book “Sapiens” (2011), anthropologist Yuval Noah Harari notes:
“Even today’s coins and banknotes represent a rare form of money. The total amount of money in the world is $60 trillion, but the value of coins and banknotes is less than $6 trillion. Over 90% of the money—over $50 trillion—exists solely as digital entries in computer servers.“
In other words, approximately 90% (and possibly even more, as this statistic was published in 2011) of the world’s currency exists in digital form. The relatively recent emergence of cryptocurrencies is worth mentioning, which can be a separate topic for discussion and article writing. Cryptocurrencies are characterized by their decentralized nature and utilization of blockchain technology.