To understand how the crypto market operates and why Bitcoin emerged we must have some baseline knowledge on the history of money. Why did humans go from barter to commodity money, what is the gold standard, and how did we arrive at fiat and eventually cryptocurrency? In this two-part series, we will go back to the origins of trade and money, and from there recount history until the arrival of modern money as we know it, the basis of our current financial system.
A Cow for Corn: Prehistoric Money & Barter
Barter is considered the original form of trade. For barter, participants directly exchange goods or services in a transaction for other goods or services without using a medium of exchange, such as money.1
Bartering is not scalable
As an economy grows larger, individuals may become more specialised in producing certain goods, and it becomes harder to find counterparties for direct exchanges. The only way around this is through indirect exchange, in other words: a medium of exchange.
During the Neolithic Revolution, human society transited from hunting to agriculture. The booming population stimulated trade, and the need for a medium of exchange became apparent. In the earliest instances of trade with money, commodities with the greatest utility and reliability in terms of reusability and liquidity became the objects best suited for trade.2 In agricultural societies, commodities like livestock and plant products stood out as ideal medians of trade.3
However, livestock and plant products have deficits as money stand-ins.
Firstly, they are perishable. Fruits deteriorate quickly, and typically cannot be kept for more than 1 month. Secondly, they are not divisible. For example, it is impossible to divide cattle, but a head of cattle is very valuable and could be sold for multiple purposes.
As a result, humans gradually transited into more durable and divisible mediums for money, including but not limited to sea shells, crafted stones, and salts.
What Makes an Ideal Medium for Trade?
We now know that not everything is suitable to be used as a medium of trade. So, what are some key qualities that make something an ideal candidate to become a medium of trade? Modern economists have proposed the following:4
- Acceptability: Money is widely acceptable for liquidity
- Portability: Money is easy to carry
- Durability: Money is able to withstand the wear and tear
- Uniformity: Money has an interchangeable form
- Divisibility: Money is divisible into smaller denominations
- Scarcity: Scarce in nature and the supply cannot be inflated easily
- Recognisability: Money is easily distinguished
- Stable Value: Money should have a stable value for daily transactions.
Let’s compare some early mediums of payment based on their qualities within these criteria:
1000 BC: Standardised Coinage Makes an Appearance
The earliest form of metal money was created in 1000 BC in China during the Zhou dynasty. They came in the form of small knives and spades made of bronze. The first manufactured coins seem to have appeared separately in India, China, and cities around the Aegean Sea in 7th century BC.5
This represents a transition of money from other goods to the use of metal, in a standardised fashion, manufactured by the government. The use of metal provides many ideal properties over other mediums of exchange such as agriculture products or sea shells; the coinage process requires highly skilled labor of crafting, making metal coins more scarce and hence more suitable to serve the function of money.
The earliest coins from the Western world are mostly associated with Iron Age Anatolia of the late 7th century BC, and within the kingdom of Lydia.6 During the Hellenistic period, Greek culture spread across large parts of the known world, and with it, Greek traders spread Greek coins from Europe to the Middle East.
The Classical period saw Greek coinage reach a high level of technical and aesthetic quality. Larger cities now produced a range of fine silver and gold coins, most bearing a portrait of their patron god or goddess or a legendary hero on one side, and a symbol of the city on the other. The use of inscriptions on coins also began, usually the name of the issuing city.7
Banknotes are Lighter to Carry
During the Tang dynasty (618 – 907), Chinese merchants and wholesalers wanted to avoid the heavy bulk of copper coinage in large commercial transactions. They came up with a brilliant idea – issue of credit notes, where one party promised to pay to another party with the amount written in the future for some limited duration.
Paper money was introduced later in the Song dynasty (960 – 1279). However, it did not replace metal coins. Instead, they were used alongside coins. The central government soon observed the economic advantages of printing paper money, and issued monopoly rights to selected deposit shops for the issuance of these certificates of deposit.
By the early 12th century, the amount of banknotes issued in a single year amounted to an annual rate of 26 million strings of cash coins.
In the 13th century, paper money became known in Europe through the accounts of travelers, such as Marco Polo and William of Rubruck. Marco Polo’s account of paper money during the Yuan dynasty is the subject of a chapter of his book, The Travels of Marco Polo, titled “How the Great Kaan Causeth the Bark of Trees, Made into Something Like Paper, to Pass for Money All Over his Country.” In medieval Italy and Flanders, because of the insecurity and impracticality of transporting large sums of money over long distances, money traders started using promissory notes. In the beginning these were personally registered, but they soon became a written order to pay the amount to whomever had it in their possession. These notes can be seen as a predecessor to regular banknotes.
What makes banknotes valuable?
The modern banknote rests on the assumption that money is determined by a social and legal consensus.
A gold coin’s value is simply a reflection of the supply and demand mechanism of a society exchanging goods in a free market, as opposed to stemming from any intrinsic property of the metal. By the late 17th century, this new conceptual outlook helped to stimulate the issue of banknotes. The economist Nicholas Barbon wrote that money “was an imaginary value made by a law for the convenience of exchange.”
The first bank to initiate the permanent issuance of banknotes was the Bank of England. Established in 1694 to raise money for the funding of the war against France, the bank began issuing notes in 1695 with the promise to pay the bearer the value of the note on demand. They were initially handwritten to a precise amount and issued on deposit or as a loan. There was a gradual move toward the issuance of fixed denomination notes, and by 1745, standardized printed notes ranging from £20 to £1,000 were being printed. Fully printed notes that did not require the name of the payee and the cashier’s signature first appeared in 1855.8
From Barter to Bitcoin
Now that you learnt the history of trade from barter to current day money, jump into a more modern-day lesson: learn how money evolved from gold-pegged to fiat and now crypto currency and what the financial crises have to do with the emergence of bitcoin. Part two of our series on the history of money explains the evolution from fiat to cryptocurrency.
1. Barter. (2020, January 21). Retrieved from https://en.wikipedia.org/wiki/Barter
2. History of money. (2020, January 24). Retrieved from https://en.wikipedia.org/wiki/History_of_money
3. Davies, R., & Davies, G. (n.d.). Chronology of Monetary History 9,000 – 1 BC. Retrieved from http://projects.exeter.ac.uk/RDavies/arian/amser/chrono1.html
4. Singh, J. (2015, August 18). Top 8 Qualities of an Ideal Money Material. Retrieved from http://www.economicsdiscussion.net/money/top-8-qualities-of-an-ideal-money-material/609
5. History of money. (2020, January 24). Retrieved from https://en.wikipedia.org/wiki/History_of_money
6. M. Kroll, review of G. Le Rider’s La naissance de la monnaie, Schweizerische Numismatische Rundschau 80 (2001), p. 526. D. Sear, Greek Coins and Their Values Vol. 2, Seaby, London, 1979, p. 317.
7. Ancient Greek coinage. (2019, December 16). Retrieved from https://en.wikipedia.org/wiki/Ancient_Greek_coinage
8. Banknote. (2020, January 29). Retrieved from https://en.wikipedia.org/wiki/Banknote
9. Commodity money. (2020, January 28). Retrieved from https://en.wikipedia.org/wiki/Commodity_money
10. Representative money. (2019, June 20). Retrieved from https://en.wikipedia.org/wiki/Representative_money
11. Fiat money. (2019, December 25). Retrieved from https://en.wikipedia.org/wiki/Fiat_money
12. Gold standard. (2020, January 4). Retrieved from https://en.wikipedia.org/wiki/Gold_standard
13. Feenstra, R. C., & Taylor, A. M. (2017). International macroeconomics. New York: Worth Publishers: Macmillan Learning.
14. Impossible trinity. (2020, January 30). Retrieved from https://en.wikipedia.org/wiki/Impossible_trinity
15. Fiat money. (2019, December 25). Retrieved from https://en.wikipedia.org/wiki/Fiat_money
16. Subprime mortgage crisis. (2020, January 25). Retrieved from https://en.wikipedia.org/wiki/Subprime_mortgage_crisis
17. Quantitative easing. (2020, January 16). Retrieved from https://en.wikipedia.org/wiki/Quantitative_easing
18. (n.d.). Retrieved from https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
19. John Rentoul @JohnRentoul. (2016, July 12). This is what Theresa May said about the kind of Prime Minister she’ll be – and what she really meant. Retrieved from https://www.independent.co.uk/voices/theresa-may-what-kind-of-prime-minister-policies-what-she-really-meant-a7130911.html
20. Nakamoto, S. (2009, February 11). Bitcoin open source implementation of P2P currency. Retrieved from http://p2pfoundation.ning.com/forum/topics/bitcoin-open-source
21. Ammous, S. (2018). The Bitcoin Standard : The Decentralized Alternative to Central Banking. New York: John Wiley & Sons Inc.