We all think about money. But do we really think about money?
Sure, we think about it as a means to an end. What it can do for us. How much we want. How much of it we have. How much our neighbors have (“How can Larry afford Jet Skis?!”).
But let’s really think about money—its purpose, origins, and evolution—by examining the history of money, with occasional help from highly relevant song lyrics, popular sayings, and words of wisdom from Scrooge McDuck.
Why We Need Money
Money talks, but it don’t sing and dance and it don’t walk. – Neil Diamond, “Forever in Blue Jeans”
With all due respect to Mr. Neil Diamond, money does more than talk, despite its lack of mobility and musical talent. Money can be exchanged for goods and services! This is, obviously, the chief purpose of money. I don’t see how Mr. Diamond missed that.
Money is also necessary for preserving value, so that we can save money in the bank rather than, say, assorted animal pelts. (Imagine how big the ATMs would have to be.) And we also need money for measuring value and determining how much something is worth, like, for instance, your self-worth. (Ok, maybe not your self-worth, you’re great no matter how much you earn!)
The World Before Money: Bartering to Bovines
Where my money at? – Cream, “Money, Money, Money”
What was the world like before money came to govern our lives? Before money, people are thought to have relied on some type of barter system. Traditionally, these early barter systems were understood as a simple A-for-B transaction. A carpenter would offer his services to a farmer in exchange for some of the farmer’s grain or milk. This worked great if the farmer needed some woodworking done, but when he didn’t, what would the carpenter do if he wanted a muffin or a milkshake?
Many historians believe that in most, if not all, early societies, the barter system was actually augmented by an informal sort of credit-and-debt system or gift exchange. The farmer gave grain and milk to the carpenter with the understanding that the carpenter would be available to the farmer whenever needed. Tight-knit tribes and societies took care of each other, offering their services to one another without need for simultaneous exchange.
These systems worked great within communities, but didn’t help much when trade between tribes and civilizations expanded. Once people sought goods and services beyond their circle of trust, they needed some immediate form of payment. To that end, traders would exchange items of tangible value, such as spices, grains, livestock, or animal pelts.
This method of direct trade also had its shortcomings—cows don’t fit in purses. Cows, grains, and other commodities are also subject to spoilage, so they don’t preserve value. Our farmer friend would be a very rich man around harvest, but would be struggling once his produce started to turn.
Finally, sometime around 2000–1000 BCE, people started carrying small, shiny objects around as items of exchange.
Small, Shiny Objects
Money doesn’t grow on trees.
The old adage is true, but it did once grow in seabeds. Experts believe that the first small, shiny objects that acted as currency weren’t gold or silver coins, they were cowrie shells.
Cowries are small mollusks that live in the Indian and Pacific Oceans, most notably in the Maldives. Their shells were an ideal currency because they were light, durable, unique (difficult to forge), shiny, and beautiful. In fact, they were so ideal that some countries still accepted cowrie shells as commodity money well into the 1950s.
Cowrie shells were considered objects of great beauty and were highly valued in societies all over Africa, Asia, and Eurasia, but particularly in early Chinese society. It is difficult to pinpoint exactly when cowries went from valuable objects to currency, but some scholars believe this happened as early as the 1700s BCE.
Ancient Chinese inscriptions on bronze vessels mention for whom the work was commissioned and how much he paid in cowrie shells. (Yes, these are probably the world’s first receipts.) In fact, the Chinese character for money derives from a pictogram of a cowrie shell.
Not long after cowries transitioned to currency, other societies started using precious metals for the same purpose. In China, they began to make cowrie shells out of bronze, which became some of the first Chinese coins. In other parts of China they used bronze to make small knives and shovels, which served as currency.
At first these early coins were little more than small chunks of metal, but it wasn’t too long before a king decided he could literally leave his mark on this new currency fad.
The First Gold Coins
Gold can warm your heart. – Scrooge McDuck
In what is now Turkey, King Alyattes of the Kingdom of Lydia is thought to have commissioned the first official currency late in the seventh or early in the sixth century BCE. The coins, made of electrum, a silver and gold mix, were stamped with a lion, the official seal.
King Alyattes was an engaging, industrious king and over the course of more than 50 years of rule, he encountered a number of neighboring kingdoms through wars, royal marriages, and trade. One of his early trading partners was the kingdom of Ionia, to whom he exchanged metal for cereal, since Lydia was often short on grains. It just might be, therefore, that one of the first foreign transactions using Alyattes’ new coinage was for the ancient equivalent of a bunch of boxes of Wheaties.
Whatever he bought first, Alyattes’ idea of using precious metal coins minted with a royal image spread—thanks mainly to Grecian traders—throughout modern-day Greece, Asia Minor, and beyond. Alyattes’ son Croesus continued the tradition of minting coins, although he preferred pure gold, and so the first gold coin became known as the Croeseid. Croeseids had obvious intrinsic value since they were made from a precious metal and could therefore be used for trade well beyond Lydia’s borders.
When Croesus and Lydia lost an epic battle to Cyrus the Great around 540 BCE, the conquering Persian also adapted the use of coinage, so the idea of coins as currency spread throughout the vast Persian empire and beyond.
The Origin of the Word Money
Honor the Lord with your wealth. – Proverbs
The Roman Republic also began using coins around this time, but at first they were just used in order to trade with their Greek neighbors. It wasn’t until several centuries later that coins became common currency throughout the Republic.
The Romans did, however, make one important contribution to the history of money as we English-speakers understand it—the name.
The word derives from Juno, a queen of the Roman gods, who was the patron goddess of the Roman Republic. The different aspects of her godly powers and responsibilities were worshiped separately in specific temples. One such temple was dedicated to Juno Moneta (Juno the Warner).
This temple, located on a hill not far from the Colosseum, became the site for minting Roman coins, and the close association between the temple and the mint worked its way into the Latin language. Many Latin-based or Latin-influenced languages picked up the term. Moneta was used in Italian and morphed into moneda in Spanish, monnaie in French, moeda in Portuguese, and, of course, money in English.
Mayan Chocolate Money
Money does grow on trees! – My three year old arguing with me about our toy budget
As the Romans were feverishly mining, melting, and minting their metals into money, the Mayans had a more enticing idea—chocolate! Mayans loved their cocoa beans and used them to make sauces, hot beverages, medicines, and more. Some time late in the Classical Mayan period (200–900 CE) it is believed that Mayans also began to use cocoa beans as a form of currency.
This belief centers on murals and mosaics painted during this era that depict Mayan kings accepting marked bags of cocoa beans as tax payments. Other evidence that cocoa was used as currency is the discovery of counterfeit cocoa. Yes, that’s right. In many market settings, archeologists have found cocoa pods stuffed with “beans” that were actually made of clay. What purpose would fake cocoa serve, if it wasn’t in use as a currency?
More than a thousand years later, chocolate is still used as a form of currency in many households, including my own—in my experience kids paid off in Twix or Snickers bars rather than modern money are particularly motivated to complete their chores.
The Silver Penny
A penny for your thoughts!
For around 1,000 years, there wasn’t a whole lot of development in ancient fintech. Coins in Asia and Europe became better minted, with more complex designs and slogans, but more or less served the same function, backed back by the intrinsic value of the precious metals from which they were made.
King Charlamagne is principally known for two things: Being quoted (or misquoted, perhaps) in Indiana Jones and the Temple of Doom and as the “father of Western Europe,” since he expanded his kingdom to cover almost all of Central and Western Europe.
For our purposes, this expansion is significant because it united much of Europe under one common currency for the first time. Charlamagne gradually replaced a patchwork of coins that harkened from Roman times and introduced a silver penny, inscribed with Charlamagne’s Latin name, Carolus.
Charlamagne’s silver penny and that of his successors remained the principal currency for Europe for more than 100 years.
The First Paper Currency
Hold on to that paper. – Talking Heads, “Paper”
The fact that paper isn’t as durable as metal coins might explain why there are some different theories as to when the first paper money appeared. There does seem to be a consensus as to the where, however: China.
Some scholars consider the banknotes written during the Tang dynasty sometime around the ninth century to be the first paper money, but some consider these to be more IOUs than actual printed currency. Basically, merchants and traders during this time got sick of lugging around shiny metals, so they just wrote each other promissory notes. They could then exchange these notes as methods of payment, so long as they trusted that the other merchants did indeed have the shiny metals.
The first undisputed record of a government printing paper money was during the Song Dynasty, which ruled much of China from 960–1279. The first notes originated in Szechuan, which, not coincidentally, is where China first started printing. These paper notes were widely circulated and could be redeemed by the holder for metal currency at any time.
Paper money had a lot of advantages, particularly in terms of its portability, and when famed vagabond Marco Polo visited China in the late 1200s, paper money, along with gunpowder, were amongst the fascinating Chinese advances that he described in his incredibly popular writings.
Paper Money in Europe
“Mo Money Mo Problems” – The Notorious B.I.G.
Guns caught on pretty quickly, but it wasn’t until 1661 that Sweden became the first European country to issue paper currency. They were extremely conscientious about the endeavor, and these first notes had the signatures of 16 different officials attesting to the fact that the paper money was, in fact, backed by real coinage.
The notes were, initially, a tremendous success. So tremendous, in fact, that other nations immediately tried to follow suit, albeit without such high standards of accountability. Banks, royals, individuals, and just about anyone who could print started issuing bank notes. If they wanted more money, they simply printed more. Further shenanigans ensued. Some issuers purposely printed their banknotes on very poor quality paper, with the hopes that the paper would disintegrate before it was redeemed. Counterfeiters ran rampant.
It was chaos. Turns out the high standards of accountability are what gives paper money its value.
The Gold Standard
I believe in the golden rule: The man with the gold rules. – Mr. T
One way to eliminate such disorder was for a central bank to adopt a gold standard. The gold standard directly based a country’s currency on a fixed amount of gold. At any time, the country’s bank notes could be redeemed for this amount of gold. Sound familiar? Yes, after more than 150 years of chaos, countries went back to what made Sweden’s initial notes so successful.
Starting in the 1870s, the gold standard was adopted by most of the countries in Europe as well as the US, Canada, Mexico, Japan, and others. Having a set system that allowed currencies to be easily valued against one another allowed trade and international investment to flourish.
Not all countries adhered to the gold standard as strictly as others, but things ran relatively smoothly until the onset of World War I. The Great War caused massive financial disruptions, due to suspended trade, plummeting tax revenues, war-time spending, and bank runs.
The gold standard was reinstated in many countries once the war was over, but the Great Depression proved its ultimate downfall just a little more than a decade later.
Money for Nothing – Dire Straits
At the onset of the Great Depression, bank runs were becoming increasingly common, and too many people were cashing out their paper for gold. England was nearly running out of gold in 1931, and after the head of the Bank of England suffered a panic attack, his subordinates did away with the gold standard.
The US soon followed suit, but only after FDR consulted his—I’m not making this up—groundskeeper, who was also an “agricultural economist.” FDR’s other financial advisors, those who had not devised ways to get chickens to lay more eggs, thought the decision to end the gold standard might destroy Western Civilization as we know it.
For better or worse, it didn’t.
Instead of money tied to gold, the world soon operated with fiat money, or money that has value because a government says it has value.
The Foreign Exchange Market
Money makes the world go round.
With the break from the gold standard, money became much more malleable. Interest rates could be manipulated, the money supply could be altered, and economies became things to tweak and manipulate. Some intrepid governments even started currency wars to boost their own exports and diminish the value of imports.
Currencies moved much more freely in relation to one another, and an entire market was born. The foreign exchange, or forex, market soon became the largest financial market in the world, with more than $6.7 trillion now changing hands on a daily basis.
Although the major players in the forex market are multinational corporations, banks, and governments, in the modern world anyone with a connection to the World Wide Web can choose a forex broker and trade currencies. People are making money by selling one currency in relation to another currency… over their phones. It’s incredible to think of when you consider we aren’t so far removed from cowrie shells.
The Next Chapter: Virtual Currency
It’s better to fail in originality than succeed in imitation. – Herman Melville
We may be, right in this moment, living in the first chapters of one of the most dramatic changes in money since people decided to leave their cows at home and start paying with shells.
Although virtual currencies, such as bitcoin, have lost substantial value as of late, it seems clear that a digital world requires a digital currency. As we saw in the early days of European paper money, currency transitions aren’t always easy. There will be shenanigans. (Mooncoin, anyone?) But it seems certain that the money of tomorrow will bear very little resemblance to what we use today, and even less of a resemblance to what we’ve used in the past.