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A brief history of money

We know from the previous page, that bartering for goods and services is very time consuming and inefficient, and this led to the development of commodity money. But how did we get from the creation of commodity money, such as cattle, beads, shells, tea, teeth and even feathers, to the coins and banknotes in your pocket today?

Unfortunately, historians have been unable to trace the exact development of the barter system to the monetary system, due to the origins of this transformation happening before written records began. Nevertheless, there is enough evidence to give us a good insight into how it is likely to have developed, as noted below in this brief history of money.  

 

That’s four shells, please

Mother Nature produced some of the earliest forms of money, with cowrie shells being used from about 1200 BC. This might seem like a very odd choice to us now, but there was some sound logic behind it.

  • They were durable, so they would last a long time and not devalue or disappear, as would happen if tea, for example, was used and then rotted. 

  • They were small, so they could easily be carried and hidden on the person, or buried for safekeeping.

  • They were all similar in size, providing a useful uniformity measure, for comparing quantities of shells. 

  • Although cowrie shells are found in the Indian and Pacific oceans, there is evidence that some European countries also accepted the shells as money. They were certainly an improvement on using cattle, the earliest form of money, as cattle are neither durable nor small!

During this period, other forms of money were also in use around the world. Whale’s teeth were used in Fiji, and Rai stones (very large circular stones) on the Island of Yap, a small island of Micronesia. This “stone money”, as it was called, could weigh up to several tonnes each, so not very useful for taking to market.

Banking, but not as we know it

A basic form of banking originated in Ancient Mesopotamia, (modern-day Iraq) where royal palaces and temples provided a secure place for keeping grain and other commodities. Records were kept in writing about who owned what, and who was in debt to who. These written records, or “receipts”, were then used instead of actual commodity transfers between parties.

Similarly, clay tokens were used in commodity warehouses in Ancient Egypt, China, Babylon and India. These tokens were traded in the markets instead of the commodities stored in the warehouses and were also given to workers as a form of payment.

This was the beginning of the banking system.

Metal money & coins

It is thought that the first significant use of metals as money began around 1000 BC, during the Iron Age, although some small usage can be traced back to 2000 BC in Babylon.

Using metals for coins seems very obvious to us now, as metal has many attractive features. Some of these features early coin makers would have been aware of are:

  • Hardwearing and durable

  • Scarce and therefore valuable

  • Shiny and attractive

  • Difficult to fake 

  • Divisible into smaller values

To begin with, precious metals in the form of gold and silver were used directly as forms of money. Then gold and silver alloys (metals mixed together) were produced in Lydia, (modern-day Turkey) around about 640 - 630 BC.  These coins, that were shaped like beans and had a lion symbol embedded on them, are thought by historians to be amongst the first regulated coins.

The Romans had been using bronze, originally as a barter system, in which rough bronze was used for making tools. Then they used pre-weighed bronze in 5-pound bars, called signed bronze, before moving onto much lighter bronze coins, used for the day to day transactions of buying and selling. Romans also used gold, silver and brass coins, as well as bronze coins. One gold coin was worth about 1,600 bronze coins!

Soon after, metal coins began appearing all over the world, eventually developing into the coins we use today.

Modern coins are not made of valuable metals anymore, but mixtures of cheaper metals. Even so, they do still look very similar to those produced more than two thousand years ago.

FACT: Grooves or ridges were added to the edges of coins, in the 18th Century, to prevent the criminal activity of coin clipping from taking place. Coin clipping involved the gradual clipping away of the edges of gold and silver coins, in order to steal, little by little, precious metals.  

 

Paper money

Paper money did not arrive until 1,600 years after the first regulated coins, eventually appearing in circa 1000 AD. It was first invented in China, during the reign of Emperor Zhenzong (997–1022).

Bankers would securely store people’s coins in safe places, and then issue paper receipts which were called Jiaozi. People could then use these “paper receipts” as a form of payment for goods, and the receipts could then be used to collect the coins from the bank, or alternatively to buy other goods or services from other parties.

The “paper” for these receipts was thought to be made from the bark of mulberry trees, with complicated designs engraved to try and prevent counterfeiting.

Jiaozi paper money was only issued in very high coinage values, and so it wasn’t used by most of the population, on a day to day basis.   

By the 16th century, goldsmiths began storing gold coins for customers and issuing them with receipts, in a similar way to the Chinese Jiaozi five hundred years earlier. These receipts could also be converted back into gold on demand or used to trade with third parties, but as they had lower values than the Jiaozi paper money, they were able to be used by many more people.

The Bank of England issued its first paper money in the same year it opened, 1694.

One hundred years later, paper money had spread right around the world and was in common use by the early 19th century.

Unlike commodity money, such as gold and silver coins, paper money doesn’t have any real value, other than a “promise” to pay the bearer, (or owner) a specified amount of gold or silver upon demand. This is known as a “promissory note” and takes us into the age of “fiat” money, as opposed to commodity money.

Fiat money

Just to be clear, fiat money has nothing to do with the Italian motor company called Fiat!

What it does mean, is simply “faith” money, which describes money that has no intrinsic value itself. For example, the £20 note in your pocket, isn’t really worth £20, it’s probably worth less than 1 penny, and the same goes for a £50 and £10 note, and a £2 coin. They are all practically worthless. However, because a third party has faith in the money or currency, they agree its face value and can ensure it maintains its value. The third-party backing the currency is usually a Government.

During the 19th century, some counties had signed up to what was known as the gold standard. These countries included, the UK, USA, Canada, France and Japan amongst others, and what that meant was you could take your bank-note to a bank, and they would promise to exchange it for its face value in gold.

This practice no longer happens, the UK left the gold standard in 1931, and it was completely abandoned in the early 1970s when the USA also stopped using it. This is when bank-notes changed from being promissory notes, backed by an asset, to fiat money, backed by faith in the system, and Governments.  

FACT: UK bank-notes have the phrase “I promise to pay the bearer on demand the sum of £x pounds” But since 1931, you haven’t actually been able to exchange your bank-note for gold or any other asset

Currencies

As well as money being both notes and coins, it also comes in different currencies. A currency is a set of money for a different country or a different area of the world. For example, the currency for the UK is the Pound, the USA has the Dollar, Japan has the Yen and Europe has the Euro.

If you wanted to travel to another country, you would need to make sure you took some local currency with you, in order to buy things there, as some countries only take their own currency to trade. 

All currencies are worth a different amount compared to other currencies, this is known as their exchange rate. The strength of different currencies changes on a day to day basis, and so does the exchange rates between the countries.

The British Pound used to be worth 1.5 Euros and 2 Dollars in the not too distant past, but it is now only worth slightly over 1 Euro, and about 1.33 Dollars. This is because the Pound’s strength has weakened compared to others. When the Pound loses its value compared to other countries, it makes it more expensive for UK citizens to travel abroad, and go on holiday. If on the other hand, the Pound gained in strength, then it would be comparatively cheaper to go on holiday.   

You may have noticed your weekly supermarket shop has increased in price quite considerably over the last few years. This is because the Pound has weakened, making it more expensive to buy in goods from abroad, such as some fruits, vegetables and meats.  

       

Bitcoins and cryptocurrencies 

A modern history of the development of money would not be complete without a few words on Bitcoin, and cryptocurrencies.

This form of currency or money is very new, with Bitcoin only being created in 2009, and many others following quickly thereafter.

Bitcoin and other cryptocurrencies, such as Ethereum, and Ripple, are digital currency systems which have not been created or issued by any bank or Government and are therefore not regulated.

Bitcoin is created or "mined" by powerful computers connected to the internet.

These powerful computers have to try and crack very complicated codes before they can earn any Bitcoin. “Miners” who do crack the codes first, are rewarded with new Bitcoins. Each and every new Bitcoin is recorded on something called a blockchain, which is a public record of all Bitcoins created, and every Bitcoin transaction. A blockchain is just a fancy word for a list of records.

This mining may seem like an awful lot of hard work for the average Joe, and to be frank, most of us don’t have anywhere near the computing power required to mine Bitcoins.

The alternative, and far easier way of obtaining Bitcoin, is to simply buy it with cash. For this, you will need a secure digital wallet, and a Bitcoin marketplace or broker. (Be very wary of scams!)

Bitcoin owners are anonymous, instead of using names or any other identifying information, Bitcoin connects buyers and sellers through encryption keys.

The value of Bitcoin is determined by supply and demand, and it can behave in a similar way to the stock market, with significant moves both up and down. One Bitcoin has been worth between $1 and nearly $64,000 each since its creation, making some people very rich, and losing other people millions in the process.