Where did money actually come from?
Through centuries and millenniums, money has been accompanying humanity, enabling it to exchange value, trade, pay, and charge.
We decided to look into the origins of money and get a brief overview, from the most ancient means of exchange and storage of value to the most cutting-edge financial technologies of today and tomorrow.
What is money?
But first, we need to clarify what money actually is and what functions it has. As defined by experts and economists, money is an item, unit or verifiable record that can be accepted as payment for goods and services, or re-payment of debts.
The main functions of money include:
- Medium of exchange: when money plays an intermediate role in the exchange of goods and services
- Unit of account: money as a standard measure of trade
- Store of value: when money can be reliably saved, stored, retrieved, and represent rather stable value
Now let’s see what journey money and its functions have made throughout the millenniums of history of humankind.
People needed to exchange goods and services long before money was ever invented. They were doing so by using the barter system in which you directly exchange one type of goods for the other. ‘Please give me potatoes, and I will give you carrots’.
Naturally, people needed to keep a record of who had been paid and who had to pay whom. Different tabs and tallies were used to this end. However, there was one big problem: as the community grew, so did the exchanges and diversity of products. Keeping records got harder and harder, confusion resulted. Indeed, how should you be able to keep it straight with dozens, even hundreds of goods exchanged with a big number of people?
2. Early Money
As it was getting harder to keep the record of natural exchange, people started using IOU (I owe you) objects, for example, whale teeth that allowed everyone to trade with each other. They even represented a certain storage of purchasing power (value). People also used ‘Barley money’, that was just fixed amounts of barley grains serving as a universal measure for valuating and exchanging all goods and services.
However, this wasn’t very convenient. Whale teeth were hard to break and divide its value to pay a smaller amount, and it wasn’t quite practical to carry a sack of barley around. Even storing it wasn’t that easy. Hence, humans had to look for more convenient ways to store and measure value.
3. Metal Money
In addition to its practicality, people noticed that money awards them more power. This is why kings had the idea of minting coins from precious metals, especially silver and gold, stamping them with their emblem which guaranteed their weight and value.
This is how metal money came into existence, and it was ticking all the boxes: legitimized, hard to forge, durable, portable, and divisible. In addition, it could also be traded with other communities!
4. Paper Money
Carrying around large quantities of coins could be exhausting, so early Chinese rulers realized that they could keep heavy coins back in the palace and issue IOU certificates on paper for long-distance trading.
Even though the paper had no corresponding value, people trusted that it was worth what it said it was worth, so that they could always exchange it for gold or silver or the coins it represented.
With the growth of global trade, the idea of paper money started to catch on. Yet many traders worried that it was fairly simple to just print money. Hence, they tried to link the value of money to the value of gold. Each issued paper bill represented a certain amount of gold.
Humans have been using money for thousands of years before metal coins and paper bills ever came into existence. We need money to exchange goods and services and to have a common unit of account for our transactions and valuations.
Metal coins and paper bills simply were the most practical and easiest ways for money to be carried and transferred – and the served as IOU certificates, meaning they were backed by a commodity and could be redeemed in gold or silver.
Stay tuned for our next part 2, in which we will cover the development of the banking system, starting in 14th century Italy all the way to the establishment of a global and financial system with powerful central banks at their core.