The history of money is the history of our society. For as long as humans have been building fires, they’ve been exchanging goods with one another. From the Ancient world to the present moment, money is at the heart of most social dynamics: both as a metric of power and ownership, and as one of inequality.
In today’s blog, we want to take a deep dive into the history of money – how it evolved and continues to evolve, how it impacted social dynamics, and how it’s really always been about the same thing: finding a rulebook by which to organize the world.
We will cover:
- The origins of Money in systems of barter
- The development of physical currencies
- The evolution and financial logic of paper currencies
- The limits of fiat currency
- The new frontier of cryptocurrencies and how they fit into the canon of financial history
Origins of Money
It all started with products. As soon as human beings began creating things, an incentive for trade arose. For much of the beginnings of human history, those trades were direct exchanges. One human specialized in fishing, the other in making arrowheads. Both stood to gain from giving up some of what they gathered or made for themselves to someone else in return for a different product.
That much is clear and obvious. But why did we stop trading things directly? Well, say you have no need for fish because you don’t like its taste. Why would you give the fish specialist any of your things? It’s not like he has anything to give you that you need.
That simplifies the limits of the barter system, of course. But it does expose the need for currency quite clearly. If we, as consumers, want to acquire certain goods, we must have something to trade that anyone could find useful.
Endowing certain materials with great value certainly marked the first step towards institutionalizing physical currencies. Indeed, such materials became the medium of exchange in transactions around the globe.
What was considered valuable differed by culture and geographical area. Whereas precious metals, like gold and silver, remain valuable to this day, some cultures endowed other resources, like seashells or animal skins, with special value. Importantly, actual value still depended on individual negotiation, of course.
The first coins developed in China in the first millennium BCE. If someone wanted to trade in weapons or other metal goods, for instance, they might not have had the weapon with them at the time of the transaction.
Instead, in around 770 BCE, people began leaving small cast-metal icons of the goods they promised the other person in return. Those small tokens were direct antecedents of the first Chinese coins. Importantly, they had little intrinsic value and were subject to the same system of trust as promissory notes much later in monetary history.
The Supremacy of Coin
In around 600 BCE, the king of a region called Lydia, in modern-day Turkey, issued the first official currency in the world by minting his own coins and setting the value of exchange. He found an easy way to control the money supply: create money of his own and impose it on his kingdom.
The system proved so effective that it facilitated an enormous economic boom in the region. Lydia quickly became a trading hub, and soon inspired kingdoms and empires in its general vicinity to follow suit. These early coins were made from the precious metal electrum, a natural alloy of gold and silver.
It may be surprising to some that major historical forces, like the Roman Republic, did not begin minting metal coins until almost 300 years later, in around 300 BCE. Up until then, various metal bullions had been used as vague mediums of exchange.
Gold and silver coins dominated European history well into the 16th century. Whereas some other areas of the world found the rarity of metal needed to make coins to be a hindrance to a growing economy, most European nations were able to sustain metal money thanks to colonial exploits from South America, especially.
The next major transition that proved to be essential to the development of the modern financial world was the organized valuation of paper money. By removing any valuable material from the making of physical money, currencies became easier to make and manage.
It also made transactions more efficient and effective (a trend that cryptocurrencies would later reinforce as well. By being able to handle valuable transactions with paper notes, individuals were no longer forced to carry heavy collections of metal around whenever wanting to make a purchase.
Leaving silver and gold coins for the paper must seem like a big step – but it happened surprisingly early in certain areas of the globe.
When Marco Polo arrived in China in the 13th century, the Chinese Emperor already controlled an effective printed currency system around his vast empire. That system had begun to emerge only shortly after the first coins were developed in China. As early as 700 BCE, the Chinese were using an antique form of promissory notes to execute trade and transactions.
Polo was shocked by the efficiency and trust involved in the system. He wrote:
“With these pieces of paper, they can buy anything and pay for anything. And I can tell you that the papers that reckon as ten bezants do not weigh one.” (Quoted in Medium)
The Chinese Emperor kept control of his paper system by prohibiting outsiders from trading their valuables to any domestic client. Only the Emperor himself was to buy valuables from foreign traders, a rule which had to be followed on pain of death.
Though those kinds of rules now seem antiquated, they actually form the basis of modern monetary policy.
By institutionalizing a centralized banking system, governments around the world, the young United States significantly among them, were able to develop powerful paper currencies. And much of the legal system in countries like the US is designed to protect the financial system from being impacted or exploited.
Banking and Metal Standards
On December 15th, 1790, Alexander Hamilton proposed a central bank system to the US Congress. President Washington signed it into law on February 25th, 1791. And though the Federal Reserve system as we know it today did not come into being until 1914, the foundations for the United States’ impending global economic might (and modern monetary systems) were laid then and there.
Indeed, the proposal to have a government-backed banking system proved essential in establishing the US dollar as the most important fiat currency in the modern world.
Initially, currencies like the dollar were backed by a gold standard, meaning that the full value of the currency had to exist in the government’s hands in physical gold ($20.67 got you an ounce of gold). That system was abandoned during the Great Depression, which many credits with saving the US economy.
Money as a Political Tool
The establishment of the International Monetary Fund (IMF) in 1944 facilitated a process that had already begun to unfold: countries setting the values of their currencies against the value of other global currencies.
The dollar was used to provide economic stability to various nascent postcolonial economies. To this day, 14 currencies are pegged to the US dollar, meaning they have their value set and stabilized by the American currency.
In the history of money, the dawn of a more interconnected world meant a new role for money internationally, too.
Once currencies stopped using a metal standard, exchange rates and values could be tampered with for political opportunities. So-called “Currency Wars” refers to economic altercations between nations, in which a country devalues its currency to make its own exports more attractive.
That brings us to the present day. Most of the world’s economy is based on government-regulated currencies that interact in a global financial market. We’ve seen the potential downside of a global system as recently as 2008 (or even these past few years): in this day and age, when one major market is in trouble, everyone’s in trouble.
But a global economy has created infinitely greater opportunities for wealth and investment. Because of the increasing abstraction of money, more wealth exists in the world today than ever before. Indeed, total global wealth is close to $500 trillion, or half a quadrillion as of June 2021.
The Digital Frontier
With the dawn of a new era of information exchange came the possibility of digitalizing money. Banks began moving some of their features online over 20 years ago. Applications developed that allowed a fast transfer of currency entirely in the digital space. PayPal, an online payments system was founded in 1998.
As the world began discovering the possibilities of the internet, so it began to discover its flaws and downsides. In its earliest years, the digital world was a place of exploration and growth, but it was also subject to security breaches of all kinds.
Those who wanted to store or exchange sensitive information throughout the web learned to rely on heavily fortified central servers – but even those were never impermeable to hackers. It did not seem that the internet would ever be a place where anything could be truly safe, let alone be the vessel of an entirely non-physical, virtual currency.
Cryptocurrencies and the Future
But then, of course, came Bitcoin. Backed by avant-garde blockchain technology, bitcoin became the first widespread all-digital currency. Rather than the value in physical objects (be it seashells, gold, or paper; a fiat currency), its value was based on the trustless immutability of blockchain technology. A new era dawned on the financial sector.
Blockchain arrived at a turning point in global technological development. As the first system to guarantee the safety and security of digital transactions, it has already proven itself to be more than just a smart currency-backing system.
Indeed, blockchain promises a whole new kind of access to the wealth of the coming decades. Based on a model of decentralized power and control, blockchain relies on the contributions of individuals to maintain its anonymous security, whether to guarantee the validity of a smart contract or anonymously transmit sensor data over the internet.
That kind of redistribution of financial power is a necessary part of the next phase of financial growth. And that’s exactly what companies like Emrit want to facilitate. As a distributed blockchain infrastructure company, we are not only laying the physical groundwork for blockchain networks around the globe but creating economic opportunities based on newly developing cryptocurrencies.
There is a certain kind of fairness built into the way cryptocurrencies are designed. In order to create and earn them, you have to mine them, as you might have mined gold in the West 200 years ago.
But this time, the system isn’t just for wild dreamers and death-daring adventurers. You can become part of valuing a currency by contributing to a blockchain network at little cost to yourself. You can become part of the next chapter of the history of money, by simply joining the Emrit community.
Summary: Only the Beginning?
Money runs through every facet of our daily life. From your first cup of coffee in the morning to the device you’re reading this on: everything in our society is defined and enabled by money. That’s not always a good thing. There is a dark side to a world in which money is supreme, one of defined and imposed inequality.
And yet, at the same time, few of the comforts we do get to enjoy in today’s world would exist without money. It’s the lifeblood of a creative, inventive economy, encouraging progress as much as it can hinder it.
In today’s blog we covered:
- Systems of Barter and the origins of money
- The evolution of coin and physical currencies
- The development of paper currency
- The political impact of money
- How digital currencies fit into the history of money
What makes the digital frontier so special is that it’s largely untapped as of yet. And by building the infrastructure of digital currencies ourselves, we can have a hand in distributing the power of money more equitably. Learn more about that mission and the work of Emrit as a whole by heading to our homepage. And be sure to follow our blog for more deep dives into the world of crypto.