- To understand how cryptocurrency came to be, it is essential to delve into the evolution of money throughout history.
- Barter is the original form of trade, where goods and services are directly swapped without a medium of exchange.
- Commodities with great utility and reliability like livestock and plant products were the earliest forms of money.
- An ideal medium of trade must have qualities like acceptability, portability, durability, uniformity, divisibility, scarcity, recognisability, and value stability.
- Modern banknotes rely on a social and legal consensus for their value.
Understanding the emergence of Bitcoin and how the crypto market operates requires knowledge of 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? This two-part series explores the origins of money and recounts history until the arrival of modern currency, the basis of our current financial system.
A Cow for Corn: Prehistoric Money and Barter
Barter is considered the original form of trade. In this system, participants directly exchange goods or services for other goods or services without using a medium of exchange, such as money.
Bartering is not scalable.
As an economy grows, individuals become more specialised in producing certain goods, and finding counterparties for direct exchanges becomes harder. 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. Commodities with the greatest reusability and liquidity became the objects best suited for trade. In agricultural societies, commodities like livestock and plant products stood out as ideal medians of trade.
However, livestock and plant products have deficits as money stand-ins.
Firstly, agricultural products are perishable. Fruits can only be kept for up to a month, for example. Secondly, they are not divisible. It is impossible to divide cattle, for instance; but a head of cattle is valuable and could be traded for multiple items.
As a result, humans gradually adopted more durable and divisible mediums for money, including, but not limited to, seashells, crafted stones, and salts.
What Makes an Ideal Medium for Trade?
Modern economists have proposed the following qualities to be ideal for mediums of trade:
- Acceptability: Widely acceptable for liquidity
- Portability: Easy to carry
- Durability: Able to withstand wear and tear
- Uniformity: Has an interchangeable form
- Divisibility: Divisible into smaller denominations
- Scarcity: Scarce, and the supply cannot be easily inflated
- Recognisability: Easily distinguished
- Stable Value: Stable value for daily transactions
Let’s compare early examples based on the above criteria:
1000 BC: Standardised Coinage Makes an Appearance
The earliest form of metal money was created around 1000 BC in China during the Zhou dynasty. It came in the form of small knives and spades made of bronze. The first coins manufactured by a government seem to have appeared separately in India, China, and cities around the Aegean Sea during the seventh century BC.
Metal provides many ideal properties over other mediums of exchange, such as agricultural products or seashells. The coinage process requires highly skilled labour of crafting, which makes metal coins more scarce and thus more suitable to serve the function of money.
The earliest coins from the Western world are primarily associated with Iron Age Anatolia of the late seventh century BC, within the Kingdom of Lydia. During the Hellenistic period, Greek culture spread across large parts of the known world. With it, traders spread Greek coins from Europe to the Middle East.
The Classical period saw Greek coinage reach a high level of technical and aesthetic qualities. Larger cities produced a range of fine silver and gold coins, usually bearing a portrait of their patron god or goddess on one side and a symbol of the city on the other. Inscriptions, typically detailing the city’s name, also began appearing.
Banknotes: Lighter to Carry
During the Tang dynasty (618–907 AD), Chinese merchants and wholesalers wanted to avoid the bulk of copper coinage in large commercial transactions. They came up with a brilliant idea of issuing credit notes, where one party promised to pay another within a set time frame.
Paper money was introduced during the Song dynasty (960–1279 AD) and used alongside coins. The government soon observed the economic advantages of printing paper money and issued monopoly rights to selected deposit shops to issue these certificates of deposit. By the early 12th century, the number 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 travellers, such as Marco Polo and William of Rubruck. The use of paper money during the Yuan dynasty was the subject of a chapter in 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, money traders started using promissory notes due to the insecurity and impracticality of transporting large sums of money over long distances. The notes were personally registered initially but soon became a written order to pay the amount to whoever had it in their possession. These notes can be seen as a predecessor to regular banknotes.
What Makes Banknotes Valuable?
The validity of the modern banknote rests on 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 instead of stemming from any intrinsic property of the metal. By the late 17th century, this new conceptual outlook led to the issuance of banknotes. 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 to fund the war against France, the bank began issuing notes in 1695 with the promise to pay the bearer the note’s value on demand. They were initially handwritten to a precise amount and given on deposit or as a loan. There was a gradual move towards issuing fixed denomination notes, and by 1745, standardised 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.
From Barter to Bitcoin
The next phase in money’s evolution involves the rise of gold-pegged fiat currency and emergence of cryptocurrency. Learn about the events that spurred this transition and more in Part 2 of our series on the History of Money.
Due Diligence and Do Your Own Research
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