The History of Money: When were coins first used, and by whom?
The history of money spans thousands of years, reflecting humanity’s evolving needs for trade, wealth storage, and economic organization. From barter systems to digital currencies, the concept of money has been central to the development of societies worldwide.
Each stage in the history of money has been marked by innovations that addressed the limitations of previous systems, driven by the need to facilitate trade, store wealth, and organize economies efficiently.
The Origins of Money and Barter Systems
Before money as we know it today, people engaged in barter, trading goods and services directly. This system, while simple, had its limitations, primarily the double coincidence of wants—the unlikely chance that two parties each have what the other desires. The inefficiency of barter led to the adoption of various objects as mediums of exchange.
Commodity Money: The First Evolution
Commodity money represents the first significant evolution in the history of money. Items like cattle, grains, shells, and salt served as money because they had intrinsic value. In ancient societies, for instance, cattle were not only wealth symbols but also crucial resources for food and labor. However, commodity money had its drawbacks, such as perishability and the difficulty of subdividing or transporting it.
Currency in the Ancient Near East
The inception of currency traces back to the ancient Near East around 3150 BC, with civilizations like Egypt pioneering the use of precious metals as a standard for trade. The ancient Egyptians introduced the deben, equivalent to 93.3 grams, to measure the value of goods in copper, silver, or gold.
Following the 12th Dynasty (circa 1985-1773 BC), the kite, weighing about ten grams, supplemented the system for silver and gold transactions. With ten kites making one deben, this method served dual purposes: as a physical representation of wealth and a unit of account for trading goods, embodying both currency and money in the ancient economy.
In Mesopotamia, a few hundred miles from Egypt, an early form of currency emerged, rooted in a silver standard. By the era of the Third Dynasty of Ur (circa 2112-2004 BC), records from Umma testify to a silver-based accounting system, possibly predating this period.
It’s not surprising that some Sumerian texts reveal that silver functioned as the principal currency for major dealings, with state-sanctioned merchants documenting transactions in silver, regardless of whether the trade involved non-silver items.
This system facilitated commerce by providing a uniform measure of value across diverse goods and services. However, like the Egyptian model, Mesopotamia’s reliance on precious metals as a currency standard proved unwieldy over time, setting the stage for the evolution towards more practical forms of money.
The Invention of Coins
The transition from commodity money to metallic money marked a pivotal moment. The first coins were minted in the ancient kingdom of Lydia around 600 BC. Made from electrum, a natural alloy of gold and silver, these coins featured stamped designs to certify their authenticity and value.
Coins offered significant advantages over commodities, including durability, divisibility, and ease of transport. They facilitated trade over larger areas and were instrumental in the expansion of empires.
The Lydians’ ingenuity in economic matters gained admiration from their Greek neighbors, who soon embraced and propagated the use of coined currency, spreading this revolutionary concept throughout the ancient world.
Greek city-states and Drachma
In the sixth century BC, the Greek city-states innovated their economy by minting their own silver and gold coins, known as the drachma. This marked a pivotal moment in the history of currency.
However, it was during and around the time of the Peloponnesian War (431-404 BC) that the Greeks contributed significantly to financial history through the introduction of numerous monetary concepts, with banking being among the most impactful.
This period saw the emergence of financial institutions that facilitated the exchange, storage, and lending of money, laying foundational principles for modern banking.
The Greeks’ development of banking represented a major advancement in economic practices, influencing future generations and civilizations in managing and conceptualizing financial transactions and economic systems.
Did you know…?
- Greek banking originated in Athens during the Peloponnesian War, starting within the Parthenon Temple to finance the war against Sparta.
- Utilizing bullion donations, Greek financiers minted coins and provided interest-bearing loans, managed by a regulatory board for efficiency. This innovative banking model, initially centered around sacred treasuries, expanded across Greek city-states.
- Meanwhile, the Romans, inspired by Greek monetary systems but not adopting the drachma, established the silver denarius as their standard, with the bronze sestertius and copper as forming lower denominations, indicating a structured currency system distinct from Greek practices.
Paper Money: A Chinese Innovation
While coins facilitated trade, carrying large quantities was cumbersome. The Chinese, during the Tang dynasty, innovated by using paper notes as representations of value, a practice that expanded in the Song dynasty.
Initially, these notes were issued by merchants, but governments soon took over, recognizing the benefits of controlling the money supply. The concept of paper money spread through the Mongol Empire to Europe, where it laid the foundation for modern banking systems.
Coin currency, originating in the ancient Near East and Europe, spread to East Asia, evolving independently. By the Qin (221-206 BC) and Han (206 BC-AD 220) dynasties, it was standardized. Image: An ancient coin.
History of the usage of money in Africa
In the Kingdom of Kongo, a variety of currencies circulated, including iron pieces. However, nzimbu shells, found exclusively near Luanda’s coastal town, emerged as the most significant and widely accepted form of currency due to their rarity and value.
Beyond these shells, the kingdom engaged in the human slave trade, which distressingly became another form of currency for the region. Nzimbu shells were commonly used within the kingdom itself, but when it came to international trade, especially with European nations such as Portugal, slaves were tragically utilized as a form of payment. This was primarily because the Portuguese, who sought weapons and other goods, showed little interest in the shells that were valued in Kongo.
The Kongo rulers, aiming to forge strong geopolitical ties and acquire European weaponry, acquiesced to these demands, integrating human lives into their currency system. This practice persisted alongside the development of paper money elsewhere, highlighting a stark contrast in the evolution of monetary systems globally during this period.
The Rise of Banking and Representative Money
The evolution of paper money in Europe, possibly developing independently from China, was influenced by the Crusades.
The Knights Templar created banking networks across Europe and the Middle East to support their crusading activities and to serve Christian pilgrims. Pilgrims could deposit coins at a Templar bank in Europe, receiving a paper note representing the deposit’s value. Upon reaching the Holy Land, this note could be exchanged for coins at a Templar bank, after deducting a service fee. This early banking system and use of paper currency laid the groundwork for the banking practices in Venice and other Italian city-states, which significantly contributed to the development of the modern European banking system.
Europe’s use of banknotes, known as representative money, allowed for more flexible and efficient commerce. Banks also facilitated the use of cheques and later electronic transfers, further abstracting the concept of money from physical objects.
The Gold Standard: Linking Currency to Precious Metals
By the 19th century, many countries adopted the gold standard, fixing their currencies’ value to a specific amount of gold. This system facilitated international trade by providing a stable exchange rate among currencies.
However, it also restricted monetary policy, as the supply of money was tied to gold reserves. The Great Depression of the 1930s led many countries to abandon the gold standard, moving towards fiat money, which is government-issued currency not backed by a physical commodity but by the government’s decree.
From the 15th to 19th centuries, money saw few developments aside from the rise of paper currency. The gold standard, initiated by England in 1717, backed paper money with gold at fixed rates, a system widely adopted by Western nations for stable, tangible currency value.
Keynesian Economics and Money
British economist John Maynard Keynes (1893-1946) advocated for a post-war economic system prioritizing employment and consumption over inflation control, forming the basis of “Keynesian economics.”
This approach endorses government intervention as necessary to achieve these objectives, emphasizing fiscal and monetary policies to manage economic cycles.
Contrary to the gold standard’s principles of “hard money,” Keynes criticized tying currencies to gold or other precious metals, arguing it limited the flexibility needed for governments to address unemployment and stimulate economic growth.
Keynes’ theories reshaped economic policies, emphasizing the role of government in moderating the economy and advocating for measures to influence demand and maintain full employment.
The Bretton Woods System and the Rise of Fiat Money
The Bretton Woods Conference in 1944 established the US dollar as the world’s primary reserve currency, pegged to gold, and other currencies pegged to the dollar. This system collapsed in 1971 when the US ended the dollar’s convertibility into gold, leading to the widespread adoption of fiat money.
Fiat money’s value comes from the trust and faith that people and governments have in it, not from its intrinsic value or the value of a commodity backing it.
Digital Money and Cryptocurrencies
The latest evolution in the history of money is the advent of digital currency, which began with the digitization of traditional banking and the rise of online financial transactions.
The introduction of cryptocurrencies, like Bitcoin in 2009, represented a paradigm shift—money that is purely digital, decentralized, and operates independently of traditional banking systems.
Cryptocurrencies use blockchain technology to secure transactions and control the creation of new units, offering a new way of thinking about what money can be.
The Future of Money
The future of money may see further innovations, including central bank digital currencies (CBDCs), which are digital forms of fiat money. These could offer the benefits of cryptocurrencies, such as security and efficiency, while being backed by governments.
The challenge lies in balancing innovation with security, privacy, and inclusion, ensuring that the next stages in the history of money continue to serve the needs of societies globally.
As we move forward, the challenge will be to ensure that future forms of money continue to enable economic activity while adapting to technological advancements and changing societal needs. Image: Bitcoin.
Frequently Asked Questions
The history of money is a fascinating journey through time, reflecting the evolution of human societies and their economic practices.
Here are some frequently asked questions about the history of money:
What is the earliest form of money?
The earliest form of money is not coins or paper, but commodities that held value and could be exchanged, such as livestock, grains, shells, and other natural resources. These commodities were valuable in themselves and could be used by those who received them.
When were coins first used, and by whom?
Coins first appeared in the ancient kingdom of Lydia (now part of modern day Turkiye) around 600 BC. They were made from electrum, a natural alloy of gold and silver, and stamped with pictures that acted as denominations.
This marked a significant shift from cumbersome monetary systems, enhancing trade efficiency and influencing neighboring Greeks to adopt and spread coined currency globally.
How did paper money come about?
Paper money first emerged in China during the Tang dynasty (618–907 AD), but it became more widespread during the Song dynasty (960–1279 AD). It was initially used among merchants before being adopted by the government to facilitate transactions and reduce the need to carry heavy coinage.
What role did banks play in the development of money?
Banks played a crucial role in the evolution of money by providing a safe place to deposit coins and later issuing banknotes, which could be redeemed for gold or silver. This practice laid the foundation for modern banking and the concept of paper money as a representation of value.
When did money become digital?
The concept of digital money started to take shape in the late 20th century with the advent of electronic banking and the internet. However, it was the introduction of cryptocurrencies like Bitcoin in 2009 that truly ushered in the era of digital money, allowing for direct peer-to-peer transactions without the need for a central authority.
What impact did the gold standard have on the economy?
The gold standard, which pegged the value of currency to a specific amount of gold, was widely adopted in the 19th and early 20th centuries. It helped stabilize currencies and international trade but also limited governments’ ability to respond to economic crises by restricting their control over monetary policy.
How have cultures around the world contributed to the development of money?
Different cultures have contributed to the development of money through their unique innovations and practices. For example, the Mesopotamian civilization developed early forms of credit and banking, while African and Pacific cultures used exotic materials and objects as currency, illustrating the diverse origins and evolution of money systems.
What was the Bretton Woods System?
The Bretton Woods System established post-WWII allowed international dollar-based transactions with an option for nations to convert dollars to gold, indirectly reviving the gold standard.
However, it lacked controls on dollar printing, leading to a surplus of dollars over US gold reserves by 1960. Despite these flaws, the system contributed to a stable Western economy with low unemployment.
Nevertheless, vulnerabilities, including lack of protections against speculative attacks and unlimited money issuance, led to its downfall.
France’s significant gold conversion in 1965 and departure from NATO and the Gold Pool highlighted these issues.
The system finally collapsed in 1971 when President Nixon ended dollar-to-gold conversion, marking the end of the Bretton Woods agreement and a pivotal shift in global financial policy.
In 1973, the International Monetary Fund (IMF) officially declared the demise of the Bretton Woods System.
What is Fiat Money?
Post-Bretton Woods, currencies are market-valued without precious metal backing, termed “fiat money,” holding accounting value only. While fiat’s concept remains stable over fifty years, the Computer Age reshapes its future use.
What challenges does the future of money face?
The future of money faces several challenges, including ensuring security and privacy in digital transactions, managing the transition to digital currencies while maintaining financial inclusion, and addressing the environmental impact of mining cryptocurrencies.
