The history of money

by Theodoros Alogogiannis, Member of the Financial Affairs Research Team

Introduction

Money. It seems impossible to imagine how life would be without it. Indeed, some form of currency exists in virtually every corner of the world, while the vast majority of daily activities involves some kind of financial transaction as well. Money goes around the globe with incomparable ease and appears to come in all forms, ranging from tangible coins to completely virtual cryptocurrencies. However, this has not always been the case.

Overview

This research attempts to explore the history of money itself by dividing the course of its existence into three separate sections: Past, Present, and Future. Initially, the emphasis will be placed on the roots of the very concept of currency and its historical evolution. Then, the importance of money in our modern world is to be briefly highlighted, before prospects, concerning the emergence of digital coins and cryptocurrencies, will also be concisely presented.

Past

Since the dawn of human civilization, individuals have been looking for a convenient way to obtain goods. For this reason, one of the very first trade systems to be devised was bartering, or the direct trade of goods and services (Beattie, 2021). For example, a farmer may exchange a dozen of apples for an axe from a blacksmith, or they might offer the same amount of apples to anyone who would lend a hand during the harvest season (in the second case good is exchanged for a service). However, it is not difficult to conclude that the practice of bartering presents a series of challenges, with the main one being the difficulty in both parties agreeing over the terms of the exchange or even worse, finding someone willing to negotiate in the first place.

For this reason, around 6000 B.C., humans decided that they would be better off using livestock and plant products as a means of representing value (Public Broadcasting Service 1996). In the following millennia, a variety of both natural objects and handcrafted creations were made use of, when it came to exchanging goods and services. Parts of animals, such as cowrie shells or whale’s teeth as a kind of IOU [1], proved to be very popular and even permitted individuals to store up purchasing power (Encyclopaedia Britannica n.d.). Equally important were also certain man-made creations, such as miniature replicas of weapons, which the Chinese used for their transactions, according to Beattie (2021). Albeit, the aforementioned items were neither scarce nor divisible, two fundamental characteristics of a proper currency.

Fortunately, this issue could be easily resolved with the introduction of coins made out of precious metals (Public Broadcasting Service 1996). Hence, the first official currency was minted in Lydia (now western Turkey) in 600 B.C. Although coins were much more convenient in terms of trading ease, their weight in large quantities still posed increased difficulty. As a consequence, early Chinese rulers hit on the idea of storing their coins in a particular place, while issuing IOU certificates for long-distance trading. In this way, paper money was born.

Initially, the value of money (incl. paper money) was linked to the value of gold, in an attempt to restrict the possible excessive print of money, which would make it lose its value, causing inflation. On the other hand, the need for flexible exchange rates over a fixed gold standard continually gained ground, thus prompting a shift in the definition of value in the 1970s. Since then, the value of banknotes has been based on nothing more than trust. What is more, the introduction of paper money heavily increased the amount of international trade and encouraged banks to start buying currencies from other nations, creating the first currency market in the process (Beattie 2021). As a matter of fact, this was the beginning of currency wars too: competing countries endeavored to change the value of the competitor’s currency by driving it up and rendering their goods too expensive or by causing it to plummet, thus reducing the enemy’s purchasing power.

Present

In the modern-day world, money circulates in all forms imaginable, from solid coins and banknotes to tradeable bonds and IOUs. Furthermore, online transactions have tremendously gained in popularity, to the point that 89% of American bank account holders use some kind of mobile banking for account management (Mitic 2021). This tendency is bound to continue as more and more people discover the innumerable benefits of online banking services. In addition, another tendency worth mentioning is the large increase in the users of trading platforms. Nova (2020) reports that visits to websites offering trading advice quadrupled in just nine months, as a multitude of individuals searches for alternative ways to earn money.

Future

Arguably, cryptocurrencies and digital currencies, in general, constitute the next big thing in the field of money. To put it briefly, cryptocurrencies are not issued by a central authority -such as a central bank- but get minted by a network of computers in a process called “crypto-mining” (Hong 2021). Other than that, they can be used just like any other regular currency, to purchase goods, buy other currencies, etc. (Royal & Voigt 2021). The reason for them being so popular mainly lies in the belief that future payments will mostly be made by using cryptocurrencies and the fact that no central body governs the money supply in the market; thus, the effect of inflation is significantly reduced (What is inflation? n.d.). However, a neat solution that combines the benefits of cryptocurrencies with the safety that central bank money offers, can be found in digital currencies. As Dollar (2021) underlines, more than 50 central banks worldwide are already exploring the possibility of issuing digital money. From the standpoint of Europe, for instance, the European Central Bank (n.d.) has revealed its plans on issuing a digital euro, in order not only to support the digitalization of the European economy but also to facilitate payments in the Eurosystem as a whole.

Conclusion

Taking everything into consideration, money has been accompanying us even before the beginning of history itself, playing a fundamental part in the evolution of our civilization along the way. At first, humans turned to nature to obtain their first means of trade. Nevertheless, they soon realized that it would be much more advantageous to issue a currency, in the form of durable and easily exchangeable coins and notes. Since then, and thanks to the rapid expansion of the internet, trade has reached a whole new level, while transactions can now take place anywhere on earth in the blink of an eye. As for the future of money, digital currencies and crypto coins will in all likelihood constitute the main means of payment in the years to come, thus facilitating the purchase of goods like never before. Only one thing is certain: money is here to stay.

Footnotes

[1] In case you are not familiar with IOUs, this article by Investopedia explains the term in detail.

Bibliography

Beattie, A., 2021, “The History of Money”, Investopedia, Available here.

Coinbase, What is inflation?, n.d., Available here.

Dollar, D. & Prasad, E., 2021, “Digital currencies are transforming the future of money”, Brookings, 21 June, podcast, Available here.

Encyclopaedia Britannica, n.d., Explore the history of money from the use of objects to future money such as Linden dollars, Bitcoin, and other cryptocurrencies, online video, Available here.

European Central Bank, n.d., A digital euro, Available here.

Hong, E., 2021, “How Does Bitcoin Mining Work?”, Investopedia, Available here.

Mitic, I., 2021, “Everything You Need To Know About Online Banking: Statistics and Facts”, Fortunly, Available here.

Nova, A., 2020, “Many are chasing the stock market by day trading in the pandemic. It could end badly”, CNBC, 21 September, Available here.

Public Broadcasting Service, 1996, The History of Money, 26 October, Available here.

Royal, J. & Voigt, K., 2021, “What Is Cryptocurrency? Here’s What You Should Know”, NerdWallet, Available here.


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