The history of money: From beans to bitcoin

KnowledgeDec 21st 20
history-money

People needed a way to exchange goods and services long before money existed. But how did they do it?

2000BC: The First Cashless Society

Humans once lived as hunter gatherers and had fewer priorities: staying warm, staying alive and making sure the things you wanted to eat didn’t eat you first. Even in a world of prehistoric minimalism, people still wanted something they didn’t have, or needed a service from someone. Here’s an example. Winter is rolling in and a cave man has realised that his cave is a bit draughty. Luckily, he has some spare meat. The cave man exchanges some for warm bear skins. This method of exchange is called the barter system.

The first forms of money

The bartering system wasn’t perfect. People needed to find someone with the goods they wanted. But that’s not all, the other person has to want what you have to offer in exchange.

Over time people came up with solutions: using metal, animals and even seashells as a medium of exchange. Early Roman soldiers were paid in salt, which is where the word ‘salary’ comes from. These methods were more effective because it was easier for people to agree on their value. As precious metals such as gold and silver began to be mined, big lumps called ingots were used as a crude form of currency.

Then, around 700BC, things changed forever. The Kingdom of Lydia, located in modern-day Turkey, was the first society to create coins.

Coins are convenient but not when you need lots of them. People in Ancient China thought the same. Instead of carrying heavy coins, people could leave them at a bank and carry signed notes that assured the value.

Banknotes were born. This spread rapidly through Asia and was brought back to Europe by Marco Polo in the 13th Century.

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Banks take centre stage

By the mid-17th century, European banks had started issuing notes that promised to pay the bearer, on demand, a fixed sum of gold. This was called the ‘Gold Standard’.

Trading often involved lots of money, meaning that traders needed lots of coins. Instead of hauling huge piles of coins, now traders could simply swap bank notes.

Customers began to use the paper money more than the valuables they represented. Consequently, banks issued more notes than they had in their vaults because customers wouldn’t come and ask for all their gold on the same day. This is a core characteristic of banking to the present day.

Central governance of money

The 17th had another important financial invention: central banks. The first central bank, founded in 1668, was the Swedish Riksbank.

Central banks are important because they are responsible for the production and distribution of money.

Central banks are also responsible for raising and lowering interest rates. This usually happens to stop the economy growing too quickly or to kickstart activity and spending.

Another important function of central banks is what is called ‘a lender of last resort.’ This means that central banks can provide emergency funds to commercial banks and governments. This is sometimes referred to as a bailout.

FIAT system and inflation

Fiat currencies are government-issued currencies that are not backed by commodities such as gold and silver. Instead, their value comes from the existence of the government that issues them.

Fiat currencies only really took off after 1971, when the U.S. dollar detached itself from the gold standard.

Fiat money gives central banks a lot of power because they can control how much money is printed. Governments sometimes print too much money, resulting in inflation.

Inflation is the decline of the purchasing power of currency over time. This means that while keeping your savings in fiat currency might sound sensible, unless they are stored in an account that accrues interest, they will lose value as time goes on.

Banking & Bitcoin

Most modern states are democracies, where the citizens decide how things are done. The same cannot be said for the mainstream finance industry.

But then, in 2009, something incredible happened. From the ashes of the 2008 global financial crisis rose a phoenix, albeit a small and, at the time, largely-unnoticed one. A pseudonymous individual called Satoshi Nakamoto published a paper outlining Bitcoin, a cryptocurrency that would soon change the world of finance.

Bitcoin is decentralized, meaning that there is no central bank or government in charge of how much of it there is and how often it gets made. Cryptocurrency also had another revolutionary concept: the community alone can set the rules.

Bitcoin began as an idea among people who wanted a radically different way of financial thinking. A decade later, cryptocurrency has elbowed its way into contemporary consciousness as the latest form of money in an evolutionary arc that spans thousands of years.

Cryptocurrency is the future

It may seem counterintuitive that many people around the world have a smartphone but not a bank account. If anything, it is a damning indictment of how the mainstream financial industry can exclude those that need it most. Fortunately, all that anyone needs to own cryptocurrency is a mobile phone and an internet connection.

The most amazing thing about cryptocurrency is that it is a living, breathing ecosystem that can be adapted to the needs of the people that use it. In many cases, the underlying technology is like programmable Lego, in the sense that new pieces can be added to it to additional services and functions.

One thing’s for sure, cryptocurrency is the only financial ecosystem that is flexible enough to adapt to the needs of an international society in the digital age, developing at breakneck speed.

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