The history of money
The invention of money dates back over 7,000 years.
However, money was not always available in the form of paper, coins or online banking.
Among other things, we will highlight what is meant by the term ‘value’, learn about the history of money, point out problems with our current value reserves and explain the introduction of blockchain technology.
As early as 9000 BC, people began bartering in the form of physical goods. The barter trade was mentioned for the first time in ancient Egypt and served above all the then usual trade goods grain, wheat and cattle. So a raw material-based barter trade of goods developed before physical money, as we know it today, even existed.
The beginning of bartering
Some of the earliest agricultural societies used barter while hunter-gatherer societies used the economy of giving. Here, goods and services are offered without any required consideration. The economy of giving places value on social or immaterial rewards such as karma, honour or loyalty. In some cases, this serves to disseminate and pass on valuables within a society.
There are many examples of early communities that used the economy of giving to do this, including sharing food by a hunter-gatherer society or potlatch rituals held by Native Americans. A potlatch is essentially a ceremony in which possessions are given away or destroyed to demonstrate prosperity, generosity, and prestige. Commodity money originated in 3000 BC, when the Mesopotamians developed a shekel-based economy. The shekel stood for a certain weight based on barley grain.
The first coins
Over time, people began to develop other forms of money in the form of coins. Other physical objects served as precursors of coins. For example, around 1200 BC coastal regions around the Indian Ocean began to use cowrie shells as a means of payment. The first official currency was introduced by King Alyattes of Lydia. Lydia is located in present-day Turkey. In the following years the coin got a rounder and smoother design, mainly for practical reasons.
The mining and export of silver coins also had a great influence on the development of money. It is proven that after Lydia was conquered by the Persians in 546 BC, coins were introduced into Persia. The Phoenicians did not introduce coins until the middle of the 5th century BC. This spread rapidly to the Carthaginians, who introduced coins into Sicily. The Romans did not begin to use coins until 326 BC.
In China, gold coins were first used in a standardized way during the Qin Dynasty (221 – 207 BC). After the fall of the Qin Dynasty, the Han Emperors added two additional means of payment: silver coins and deerskin banknotes. A predecessor of the paper money invented in China. Gold and silver are the most commonly used means of payment in the history of mankind. Although other metals were also used to mint coins, these types of coins appeared much later. This is due to the fact that gold has had an intrinsic value since the beginning and has caused people to maintain the gold standard for coins instead of advancing other types of metals.
It took until the 11th century until paper money became an accepted form of money. It was first introduced during the Song Dynasty. With the return of Marco Polos’ travels from East Asia – especially China – the idea of paper money came to Europe. Until then, the florin, a gold coin from Italy, was used. The coin was widespread throughout Europe and was accepted as a means of payment. This promoted the international exchange and trade of goods.
The development of the banknote began in the 7th century. Its roots go back to trading documents during the Tang Dynasty (618 – 907). Traders and wholesalers tried to avoid the large quantities of copper coins in trading transactions. For lack of alternatives, they began to write promissory notes confirming that a person had received money or property in return for a purchase.
If you like, you can read all about his experiences with paper money in Marco Polo’s book ‘The Travels of Marco Polo’. This book spread the idea of the paper currency in Europe. Many European traders wanted to copy the promissory notes used in China. The theme of using paper that is actually worthless to represent valuable money is important here, as these debt notes are considered to be the precursors of today’s banknotes.
The first banknote was issued in Sweden in 1661. Many debates were held at the time and some officials and merchants had already predicted that paper money would herald the collapse of the country’s monetary system. Despite all the prophecies of doom, the introduction of banknotes was a rapid success as they replaced the large, heavy and easy to steal gold and silver coins.
With the then brand-new concept of paper money, most countries lacked laws regulating who could print money at all. Laws punishing the counterfeiting of coins were updated and the counterfeiting of banknotes banned. Only a few countries punished the issuance of their own currency by foreigners and so almost everyone who had access to a printing machine began to issue banknotes.
As a result, the value of many banknotes became almost meaningless. The value of a banknote was determined by the reputation of the issuer and the number of coins it was worth. Some notes were not accepted because they were considered worthless. Others were only accepted at a discount to the value of the banknote. A few banknotes were actually traded at a higher value than the actual value, especially when the issuer indicated that it would reward the exchange of the banknote with certain amounts of gold and silver.
The ‘gold standard
As already mentioned, gold has always been one of the most widespread forms of payment worldwide in the development of money. After paper money became the most popular form of payment, gold finally returned when countries began to establish the gold standard.
The gold standard is a monetary system where a country’s currency or paper money has a value directly linked to the physical value of gold. With the gold standard, countries agreed to convert a fixed amount of paper money into a fixed amount of gold. A country that applies the gold standard sets a fixed price for gold and buys or sells the precious metal at that price. The fixed price is used to determine the default value of the currency.
In 1816 gold became the official value standard in England when the one pound gold coin called ‘Sovereign’ was minted. The USA followed shortly after by making gold its value standard in 1879. Today the gold standard is not used by any country. In fact, Britain stopped using the gold standard in 1931 and the USA in 1933. The gold standard was replaced by fiat money. Fiat money is a term used to describe the currency used by the state and means that the currency must be accepted as legal tender.
The arrival of digital currencies
You may think that you are familiar with the arrival of digital currencies, but did you know that the idea of the digital currency goes back to 1860? Western Union carried out the first electronic fund transfer (EFT) as early as 1860 and introduced the world to the possibilities of digital or electronic money. For the next decades, an improved infrastructure and technology led to the development of the first credit card, then made of cardboard, the Diners’ Club Card, in 1950.
As credit cards became more popular and portable electronic devices such as mobile phones became more common, mobile banking was introduced in Europe in 1999. Of course, there were no Samsung iPhones or smartphones like today, but mobile banking was done with primitive smartphones and the help of a personal digital assistant (PDA). A form of digital currency called ‘ecash’ was developed in 1982, but never really used. Nevertheless, ‘ecash’ has laid the foundation for future digital currencies like ‘hashcash’.
One of the earliest predecessors of today’s most popular crypto currency Bitcoin (BTC) is B-money. It was developed in 1998 by computer scientist Wie Dai with the aim of serving as an ‘anonymous, distributed money system’. However, B-money was never introduced and remains an equivalent to today’s White Paper. However, it was significantly involved in the development and creation of BTC. Bit Gold was another early idea for digital money proposed by Nick Szabo. Although Szabo was already talking about Bit Gold in 1998, it wasn’t until 2005 that he fully described the system on his blog.
Modern crypto currencies
Crypto currencies have gained popularity in recent years and the industry has exploded in terms of the number of users and companies dealing with them. Although Bitcoin’s concept dates back to 2007, it took until 2009 for the first BTC transaction to take place.
BTC has made great changes and progress in the following years to become a usable crypto currency. In 2010, BTC made its first purchase in the real world. A programmer from Florida called Laszlo Hanyecz offered to buy a pizza for 10,000 BTC. At the time of purchase, the 10,000 BTC was worth about US$25, but imagine how much money he would have made if he had kept the money! US$ 60 million. A pretty expensive pizza, then.
Countless new crypto currencies have been created since then and have spread on the ever growing market. Today the Internet is teeming with rumors about blockchain technology and crypto currencies. It seems to be one of the hottest trends of our time. In recent years, many industries have been taken by surprise by the introduction of crypto currencies.
Where are we going?
The recent rise in the popularity of crypto currencies has shown the world that it is very possible to disrupt a long-established industry, the financial sector. The next chapter in the history of money takes place right in front of our eyes and it is up to us whether we help shape it or let the opportunity pass. Given what has changed over the last five years or so, it is difficult to predict where the journey will take us and what form of money will be most widely accepted in the future.
The so-called ‘war on cash’ has accelerated in recent years and central banks and governments have called for the removal of high-value banknotes. While these anti-cash initiatives are also taking place in Western countries, the most vivid example is found in India.
In 2016, Indian Prime Minister Narendra Modi eliminated 86% of 500 and 1,000 rupee banknotes virtually overnight. While the ‘demonisation’ of money in India got off to a bad start, many still believe they will succeed in the long run. Nevertheless, the War on Cash maintains an incredible global momentum and is likely to be another important chapter in the history of money.
From real to digital gold, money has changed dramatically over time. Money is global and one of the oldest objects in human history. It has taken on many shapes, sizes and colours and has changed over time. Nowadays money continues to change as crypto currencies emerge in many industries.
As a result, physical money and high-value banknotes are declining, paving the way for digital currencies that will play a greater role in the global economy in the future. Who knows, maybe in fifty years’ time we will be talking about the good old days when we talk about the history of money.
A brief history of money – From gold to bitcoin and cryptocurrencies
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