history of money essay

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What Is Money?

• Bartering to Currency
• First Official Currency
• Paper Currency
• Currency Wars

Mobile Payments

Virtual currency, the bottom line.

• Personal Finance
• Financial Literacy

The History of Money: Bartering to Banknotes to Bitcoin

How money has changed over 5,000-plus years

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The terms "money" and "currency" are often used interchangeably. However, several theories suggest they are not identical. According to some theories, money is inherently an intangible concept. Currency, on the other hand, is the physical or tangible manifestation of the intangible concept of money.

According to this theory, money cannot be touched or smelled. Currency is the coin, note, object, or physical representation that is presented in the form of money.

The basic form of money is numbers while the basic form of currency is paper banknotes , coins, or plastic cards like credit or debit cards. Though this distinction between money and currency is important in some contexts, for the purposes of this examination of the history of money, the terms are used interchangeably.

Key Takeaways

• Money is a medium of exchange with a recognized value that was adopted to make it easier for people to trade products and services with one another.
• The history of money crisscrosses the world as various cultures recognize the need to simplify trade by introducing a single, portable token of value into the process.
• People bartered before the world began using money.
• The world’s oldest known coin minting site was located in China, which began striking spade coins sometime around 640 BCE.
• Since then, the world has adopted banknotes and moved into digital forms of payment, including virtual currencies.

Money doesn't always have value, whether it's represented by a seashell, a metal coin, a piece of paper, or a string of code mined electronically by a computer. With global wealth estimated to be about $432 trillion at the end of 2023, the value of money depends on the importance that people place on it as a medium of exchange, a unit of measurement, and a storehouse for wealth.

Money allows people to trade goods and services indirectly. It helps communicate the price and value of goods and provides individuals with a way to store their wealth. It is valuable as a unit of account—a socially accepted standard by which things are priced and with which payment is accepted. However, both the usage and form of money have evolved throughout history.

Investopedia / Sabrina Jiang

From Bartering to Currency

Money has been part of human history for at least the past 5,000 years in some form or another. Before that time, historians generally agree that a system of bartering was likely used. Bartering is a direct trade of goods and services.

For example, a farmer may exchange a bushel of wheat for a pair of shoes from a shoemaker. However, these arrangements take time.

If you exchange an axe as part of an agreement in which the other party is supposed to kill a woolly mammoth, you have to find someone who thinks the tool is a fair trade for having to face down the 12-foot tusks of a mammoth. If this doesn't work, you would have to alter the deal until someone agrees to the terms.

A type of currency slowly developed over the centuries that involved easily traded items like animal skins, salt, and weapons. These traded goods served as the medium of exchange even though the value of each of these items was still negotiable in many cases. This system of trading spread across the world and still survives today in some parts of the globe.

One of the greatest achievements of the introduction of money was the increased speed at which business, whether it involved mammoth slaying or monument-building, could be done.

In early August 2021, Chinese archaeologists with the State University of Zhengzhou announced the discovery of the world’s oldest known, securely dated, coin minting site in Guanzhuang in Henan Province, China. A mint is a facility where currency is created. Sometime around 640 BCE, this facility began striking spade coins, one of the first standardized forms of metal coinage.

Millions of coins are circulating in the United States. As many as 47,250 coins are minted per minute at the Philadelphia Mint while 40,500 coins are produced per minute by the Denver Mint.

First Official Currency Is Minted

Meanwhile, farther west during this era, in 600 BCE, metal coinage was invented when Lydia's King Alyattes minted what is believed to be the first official currency, the Lydian stater.

The coins were made from electrum, a mixture of silver and gold that occurs naturally, and the coins were stamped with images that acted as denominations .

Lydia's currency helped the country increase both its internal and external trading systems, making it one of the richest empires in Asia Minor. Today, when someone says, "as rich as Croesus," they are referring to the last Lydian king who minted the first gold coin.

Transition to Paper Currency

During 1260 CE, the Yuan dynasty of China moved from coins to paper money . By the time Marco Polo, a Venetian merchant, explorer, and writer who traveled through Asia along the Silk Road, visited China in approximately 1271 CE, the emperor of China had a good handle on both the money supply and its various denominations.

In fact, in the place where modern American bills say, "In God We Trust," the Chinese inscription at that time warned: "Those who are counterfeiting will be beheaded."

Parts of Europe still used metal coins as their sole form of currency until the 16th century. Colonial acquisitions of new territories via European conquest provided new sources of precious metals and enabled European nations to keep minting a greater quantity of coins.

But banks eventually started using paper banknotes for depositors and borrowers to carry around in place of metal coins. These notes could be taken to the bank at any time and exchanged for their face value in metal, usually silver or gold coins.

This paper money could be used to buy goods and services. In this way, it operated much like currency does today in the modern world. However, it was issued by banks and private institutions rather than the government, which is now responsible for issuing currency in most countries.

The gold standard was established in the 1870s. Under this rule, currency printing was permitted based on the amount of gold a country had in its reserves.

The first paper currency issued by European governments was actually issued by their colonial governments in North America. Because shipments between Europe and the North American colonies took a long time, colonies often ran out of cash.

Instead of going back to a barter system, the colonial governments issued IOUs that traded as currency. The first instance was in Canada (then a French colony) in 1685 when soldiers were issued playing cards denominated and signed by the governor to use as cash instead of coins from France.

The Emergence of Currency Wars

The shift to paper money in Europe increased the amount of international trade that could occur. Banks and the ruling classes started buying currencies from other nations and created the first currency market.

The stability of a particular monarchy or government affected the value of the country's currency, and thus, that country's ability to trade on an increasingly international currency market .

The competition between countries often led to currency wars , where competing countries would try to change the value of the competitor's currency by driving it up and making the enemy's goods too expensive, by driving it down and reducing the enemy's buying power (and ability to pay for a war), or by eliminating the currency completely.

The 21st century gave rise to a novel form of payment activated with the touch of your finger. Mobile payments refer to money used to pay for goods and services. They can also be used to transfer money to another individual, such as a family member or friend. This can all be done using a portable electronic device, such as a smartphone or tablet device.

This form of payment first came to prominence in Asia and Europe before moving over to North America. From payments via text message, the technology evolved to allow checks to be deposited using the camera app on smart devices.

Mobile payment services like Apple Pay are vying for retailers to accept their platforms for point-of-sale payments. There are also apps dedicated to this method of payment, including Venmo and PayPal .

Virtual currencies are only available in electronic form. As digital representations of money, this type of currency is stored and traded using computer applications or specially designated software. The appeal of virtual currency is that it offers the promise of lower transaction fees than traditional online payment mechanisms do and is operated by decentralized authorities, unlike government-issued currencies.

Bitcoin ​ quickly became the standard for virtual currencies. It was released in 2009 by the pseudonymous Satoshi Nakamoto. All of the world's Bitcoin was worth $1.14 trillion as of Aug. 7, 2024.

Keep in mind, though, that virtual currencies like Bitcoin have no physical coinage because they are traded on exchanges. 

Although Bitcoin remains the most popular and most expensive one, other virtual currencies have hit the market. They include Ethereum, XRP, and Dogecoin.

How Long Has Money Been Around, and What Were the First Forms of Value Exchange?

Money has been part of human history for at least the past 5,000 years in some form or another. Historians generally agree that a system of bartering was likely used before this time. Bartering involves the direct trade of goods and services. For instance, a farmer may exchange a bushel of wheat for a pair of shoes from a shoemaker.

When and Where Did Coin Minting Begin?

The world’s oldest known, securely dated, coin minting site was located at Guanzhuang in the Henan Province of China. The mint began striking spade coins sometime around 640 BCE, likely the first standardized metal coinage.

When Were Coins Replaced by Paper Money?

The Chinese moved from coins to paper money around 1260 CE. By the time Marco Polo visited China in approximately 1271 CE, the emperor of China had a good handle on both the money supply and its various denominations.

The history of money is still being written. The system of exchange has moved from swapping animal skins to minting coins to printing paper money, and today, we appear to be on the cusp of a massive shift to electronic transactions .

Ancient transaction forms have been co-opted: for example, bartering still occurs on the margins in some markets such as the business-to-business (B2B) space and some consumer services. The monetary system will surely continue evolving as long as humans require a medium of exchange.

UBS. " Global Wealth Report 2024 ." Play Video.

Glyn Davies. " History of Money: From Ancient Times to the Present Day ," Pages 9-11. University of Wales Press, 2002.

Zhao, Hao and et al. " Radiocarbon-Dating an Early Minting Site: the Emergence of Standardised Coinage in China ." Antiquity , vol. 95, no. 383, October 2021, pp. 1161-1178.

United States Mint. " Coin Production ."

World History Encyclopedia. " The Importance of the Lydian Stater as the World's First Coin ."

World History Encyclopedia. " The Invention of the First Coinage in Ancient Lydia ."

Hans Ulrich Vogel. " Marco Polo Was in China: New Evidence from Currencies, Salts and Revenues ," Page 94. Koninklijke Brill, 2012.

The Mariners' Museum and Park. " Marco Polo ."

Hans Ulrich Vogel. " Marco Polo Was in China: New Evidence from Currencies, Salts and Revenues ." Page 173. Koninklijke Brill, 2012.

World Gold Standard. " The Classical Gold Standard ."

Bank of Canada. " A History of the Canadian Dollar: New France (ca. 1600-1770) ." Pages 4-5.

BBVA. " Dissecting Digital Payments: How They Are Evolving Around The World ."

Tranglo. " How Mobile Payment Technology Took Over the World ."

Bitcoin Project. " Frequently Asked Questions ." Select "General: Who Created Bitcoin?"

CoinMarketCap. " Bitcoin (BTC) ."

CoinMarketCap. " Today's Cryptocurrency Prices by Market Cap ."

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A Brief (and Fascinating) History of Money

Money . People worry about it, think of ways to get more of it, and dream about how to spend it. But how much do we really know about money? Keep reading for a short history of currency.

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The Invention of Money

When the Venetian merchant Marco Polo got to China, in the latter part of the thirteenth century, he saw many wonders—gunpowder and coal and eyeglasses and porcelain. One of the things that astonished him most, however, was a new invention, implemented by Kublai Khan, a grandson of the great conqueror Genghis. It was paper money, introduced by Kublai in 1260. Polo could hardly believe his eyes when he saw what the Khan was doing:

He makes his money after this fashion. He makes them take of the bark of a certain tree, in fact of the mulberry tree, the leaves of which are the food of the silkworms, these trees being so numerous that whole districts are full of them. What they take is a certain fine white bast or skin which lies between the wood of the tree and the thick outer bark, and this they make into something resembling sheets of paper, but black. When these sheets have been prepared they are cut up into pieces of different sizes. All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver; and on every piece a variety of officials, whose duty it is, have to write their names, and to put their seals. And when all is prepared duly, the chief officer deputed by the Khan smears the seal entrusted to him with vermilion, and impresses it on the paper, so that the form of the seal remains imprinted upon it in red; the money is then authentic. Anyone forging it would be punished with death.

That last point was deeply relevant. The problem with many new forms of money is that people are reluctant to adopt them. Genghis Khan’s grandson didn’t have that difficulty. He took measures to insure the authenticity of his currency, and if you didn’t use it—if you wouldn’t accept it in payment, or preferred to use gold or silver or copper or iron bars or pearls or salt or coins or any of the older forms of payment prevalent in China—he would have you killed. This solved the question of uptake.

Marco Polo was right to be amazed. The instruments of trade and finance are inventions, in the same way that creations of art and discoveries of science are inventions—products of the human imagination. Paper money, backed by the authority of the state, was an astonishing innovation, one that reshaped the world. That’s hard to remember: we grow used to the ways we pay our bills and are paid for our work, to the dance of numbers in our bank balances and credit-card statements. It’s only at moments when the system buckles that we start to wonder why these things are worth what they seem to be worth. The credit crunch in 2008 triggered a panic when people throughout the financial system wondered whether the numbers on balance sheets meant what they were supposed to mean. As a direct response to the crisis, in October, 2008, Satoshi Nakamoto, whoever he or she or they might be, published the white paper that outlined the idea of Bitcoin , a new form of money based on nothing but the power of cryptography.

The quest for new forms of money hasn’t gone away. In June of this year, Facebook unveiled Libra, global currency that draws on the architecture of Bitcoin. The idea is that the value of the new money is derived not from the imprimatur of any state but from a combination of mathematics, global connectedness, and the trust that resides in the world’s biggest social network. That’s the plan, anyway. How safe is it? How do we know what libras or bitcoins are worth, or whether they’re worth anything? Satoshi Nakamoto’s acolytes would immediately turn those questions around and ask, How do you know what the cash in your pocket is worth?

The present moment in financial invention therefore has some similarities with the period when money in the form we currently understand it—a paper currency backed by state guarantees—was first created. The hero of that origin story is the nation-state. In all good stories, the hero wants something but faces an obstacle. In the case of the nation-state, what it wants to do is wage war, and the obstacle it faces is how to pay for it.

The modern system for dealing with this problem arose in England during the reign of King William, the Protestant Dutch royal who had been imported to the throne of England in 1689, to replace the unacceptably Catholic King James II. William was a competent ruler, but he had serious baggage—a long-running dispute with King Louis XIV of France. Before long, England and France were involved in a new phase of this dispute, which now seems part of a centuries-long conflict between the two countries, but at the time was variously called the Nine-Years’ War or King William’s War. This war presented the usual problem: how could the nations afford it?

King William’s administration came up with a novel answer: borrow a huge sum of money, and use taxes to pay back the interest over time. In 1694, the English government borrowed 1.2 million pounds at a rate of eight per cent, paid for by taxes on ships’ cargoes, beer, and spirits. In return, the lenders were allowed to incorporate themselves as a new company, the Bank of England. The bank had the right to take in deposits of gold from the public and—a second big innovation—to print “Bank notes” as receipts for the deposits. These new deposits were then lent to the King. The banknotes, being guaranteed by the deposits, were as good as gold money, and rapidly became a generally accepted new currency.

This system is still with us, and not just in England. The more general adoption of the scheme, however, was not a story of uninterrupted success. Some of the difficulties are recounted in James Buchan’s fascinating “ John Law: A Scottish Adventurer of the Eighteenth Century .” Law was the Edinburgh-born son of a goldsmith turned banker. He moved to London in 1692, where he observed the wondrous new scheme of government paid for by long-term debt and paper money. One of the most significant effects of the paper money was the way it stimulated borrowing and lending—and trading. Law had an instinctive understanding of finance and a love of risk, and it is tempting to wonder what would have happened if he had lent his services to the English government. Instead, on April 9, 1694, a different fate was set in motion. He killed a man in a duel, or brawl—the distinction, as Buchan explains, was not all that clear. “Duels then were not the tournaments of the Middle Ages or the affairs of honour of later years, governed by written codes of conduct and discharged at dawn with pistols in some snowy forest clearing,” he writes. They might be conducted “with rapiers or short swords in hot or barely cooling blood, sometimes with seconds drawn and fighting, and shading away into assassination and armed robbery.” Law was sent to prison to await a murder trial. He used his connections to get out, as prisoners of means did, and fled abroad as an outlaw.

Law spent the next few years knocking around Europe, learning about gambling and finance, and writing a short book, “Money and Trade Considered,” which in many respects foreshadows modern theories about money. He became rich; like Littlefinger in “Game of Thrones,” Law seems to have been one of those men who had the knack of “rubbing two golden dragons together and breeding a third.” He bought a fancy house in The Hague and made a close study of the many Dutch innovations in finance, such as options trading and short selling. In 1713, he arrived in France, which was beset by a problem he was well suited to tackle.

The King of France, Louis XIV, was the preëminent monarch in Europe, but his government was crippled by debt. The usual costs of warfare were added to a huge bill for annuities—lifelong interest payments made in settlement of old loans. By 1715, the King had a hundred and sixty-five million livres in revenue from taxes and customs. Buchan does the math: “Spending on the army, the palaces and court and the public administration left just 48 million livres to meet interest payments on the debts accumulated by the illustrious kings who had gone before.” Unfortunately, the annual bill for annuities and wages of lifetime offices came to ninety million livres. There were also outstanding promissory notes, amounting to nine hundred million livres, left over from various wars; the King wouldn’t be able to borrow any more money unless he paid interest on those notes, and that would cost an additional fifty million livres a year. The government of France was broke.

In September of 1715, Louis XIV died, and his nephew the Duke of Orleans was left in charge of the country, as regent to the child king Louis XV. The Duke was quite something. “He was born bored,” the great diarist Saint-Simon, a friend of the Duke’s since childhood, observed. “He could not live except in a sort of torrent of business, at the head of an army, or in managing its supply, or in the blare and sparkle of a debauch.” Facing the financial crisis of the French state, the Duke started listening to the ideas of John Law. Those ideas—more or less orthodox policy today—were wildly original by the standards of the eighteenth century.

Law thought that the important thing about money wasn’t its inherent value; he didn’t believe it had any. “Money is not the value for which goods are exchanged, but the value by which they are exchanged,” he wrote. That is, money is the means by which you swap one set of stuff for another set of stuff. The crucial thing, Law thought, was to get money moving around the economy and to use it to stimulate trade and business. As Buchan writes, “Money must be turned to the service of trade, and lie at the discretion of the prince or parliament to vary according to the needs of trade. Such an idea, orthodox and even tedious for the past fifty years, was thought in the seventeenth century to be diabolical.”

This idea of Law’s led him to the idea of a new national French bank that took in gold and silver from the public and lent it back out in the form of paper money. The bank also took deposits in the form of government debt, cleverly allowing people to claim the full value of debts that were trading at heavy discounts: if you had a piece of paper saying the king owed you a thousand livres, you could get only, say, four hundred livres in the open market for it, but Law’s bank would credit you with the full thousand livres in paper money. This meant that the bank’s paper assets far outstripped the actual gold it had in store, making it a precursor of the “fractional-reserve banking” that’s normal today. Law’s bank had, by one estimate, about four times as much paper money in circulation as its gold and silver reserves. That is conservative by modern banking standards. A U.S. bank with assets under a hundred and twenty-four million dollars is obliged to keep a cash reserve of only three per cent.

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The new paper money had an attractive feature: it was guaranteed to trade for a specific weight of silver, and, unlike coins, could not be melted down or devalued. Before long, the banknotes were trading at more than their value in silver, and Law was made Controller General of Finances, in charge of the entire French economy. He also persuaded the government to grant him a monopoly of trade with the French settlements in North America, in the form of the Mississippi Company. He funded the company the same way he had funded the bank, with deposits from the public swapped for shares. He then used the value of those shares, which rocketed from five hundred livres to ten thousand livres, to buy up the debts of the French King. The French economy, based on all those rents and annuities and wages, was swept away and replaced by what Law called his “new System of Finance.” The use of gold and silver was banned. Paper money was now “fiat” currency, underpinned by the authority of the bank and nothing else. At its peak, the company was priced at twice the entire productive capacity of France. As Buchan points out, that is the highest valuation any company has ever achieved anywhere in the world.

It ended in disaster. People started to wonder whether these suddenly lucrative investments were worth what they were supposed to be worth; then they started to worry, then to panic, then to demand their money back, then to riot when they couldn’t get it. Gold and silver were reinstated as money, the company was dissolved, and Law was fired, after a hundred and forty-five days in office. In 1720, he fled the country, ruined. He moved from Brussels to Copenhagen to Venice to London and back to Venice, where he died, broke, in 1729.

The great irony of Law’s life is that his ideas were, from the modern perspective, largely correct. The ships that went abroad on behalf of his great company began to turn a profit. The auditor who went through the company’s books concluded that it was entirely solvent—which isn’t surprising, when you consider that the lands it owned in America now produce trillions of dollars in economic value.

Today, we live in a version of John Law’s system. Every state in the developed world has a central bank that issues paper money, manipulates the supply of credit in the interest of commerce, uses fractional-reserve banking, and features joint-stock companies that pay dividends. All of these were brought to France, pretty much simultaneously, by John Law. His great and probably unavoidable mistake was to underestimate the volatility that his inventions introduced, especially the risks created by runaway credit. His period of brilliant success in France left only two monuments. One was created by the Duke of Bourbon, who cashed out his shares in the company and used the windfall to build the Great Stables at Chantilly. “John Law had dreamed of a well-nourished working population and magazines of home and foreign goods,” Buchan notes. “His monument is a cathedral to the horse.” His other legacy is the word “millionaire,” first coined in Paris to describe the early beneficiaries of Law’s dazzling scheme.

How did these once wild ideas become part of the very fabric of modern finance and government? Trial and error. It was not the case that smart people figured everything out at once and implemented it simultaneously, as Law tried to do. The modern economic system evolved, and evolution involves innovations, repetitions, failures, and dead ends. In finance, it involves busts and panics and crashes, because, as James Grant says in his lively new biography of the Victorian banker-journalist Walter Bagehot, “in finance and economics, we keep stepping on the same rakes.”

Bagehot (pronounced “badge-it”) knew all about those rakes. He grew up in the West of England in a family with strong links to a well-run local bank, Stuckey’s. After going to university and trying his hand at being a lawyer, he turned to journalism and to banking, the latter career paying for the former. He married the daughter of James Wilson, who had founded The Economist , in 1843—Bagehot became its third editor—and lived a life that was, from the outside, fairly uneventful. The interest in Bagehot comes from his dazzling, witty, paradox-loving writing, and in particular from his two key works, “ The English Constitution ” (1867), which sums up the unwritten order of Great Britain’s political institutions, and “ Lombard Street ” (1873), which explains how banking works. These books are still readable today, but they were of interest mainly to wonks until Ben Bernanke name-checked Bagehot as a crucial influence on the thinking behind the 2008 bank bailouts. That caused a revived interest, which led to the writing of Grant’s “ Walter Bagehot: The Life and Times of the Greatest Victorian .”

“Greatest” is a loaded word, especially since Grant—who is, among other things, the founder of Grant’s Interest Rate Observer —makes it clear that Bagehot was an unashamed misogynist and racist (“There are breeds in the animal man just as in the animal dog”) and an accomplished hypocrite. The last quality was useful from the journalistic point of view; Bagehot was brilliant at swapping sides without ever admitting that he had changed his mind. A Confederate victory in the Civil War, for instance, was “a certain fact,” and President Lincoln was “dishonest and foolish,” a settled view that didn’t preclude Bagehot from declaring, once the Union had prevailed, that “panic did not for a moment unnerve the iron courage of the American democracy.” His subsequent elegy for Lincoln is a genuinely lovely piece of writing: “Difficulties, instead of irritating him as they do most men, only increased his reliance on patience; opposition, instead of ulcerating, only made him more tolerant and determined.”

In a sense, this highfalutin hypocrisy and lack of principle is the point of Bagehot. His work on the English constitution focussed on a paradox: the pomp and circumstance of monarchy had an important function, he argued, precisely because the monarch had no real power. Bagehot’s work on banking similarly focussed on the difference between appearances and realities, specifically the gap between the air of solidity and respectability cultivated by Victorian banks and the evident fact that they kept collapsing and going broke. There were huge bank crises in 1797, in 1825, in 1847, and in 1857, all of them caused by the oldest and simplest reason of bankruptcy in finance: lending money to people who can’t pay it back.

In theory, all the money in circulation during the era of Victorian banking was backed up by deposits in gold. One pound in paper money was backed by 123.25 grains of actual gold. In practice, that wasn’t true. There were multiple occasions—usually linked to the cost of that old classic, war with France—when the government suspended the convertibility of paper money to gold. In addition, banks could print their own money. They often didn’t have enough gold to sustain the value of their notes, in the event of customers coming to the bank and demanding conversion. That phenomenon, the dreaded “bank run,” was a direct outcome of the fractional-reserve banking prefigured by John Law. A system in which banks don’t hold cash reserves equivalent to their outstanding loans works fine, unless enough people turn up at the bank and simultaneously want their paper money turned into its metal equivalent. Unfortunately, that kept happening, and banks kept going broke. The issues at stake were the same as those that had shaped the career of John Law, and which are on people’s minds again today: What is money? Where does it derive its value? Who finally guarantees the value of debts and credits?

Bagehot had answers to all those questions. He thought that money, real money, was gold, and gold alone. All the other forms of currency in the system were merely different kinds of credit. Credit was indispensable to a functioning economy, and helped make everybody rich, but in the final analysis only gold was legal tender, according to the strict definition of the term—money that cannot be refused in settlement of a debt. (U.S. currency makes sure you know it is legal tender: it says so right there on the front.) Bagehot loved a paradox, and this was one: all the credit in the system was essential to the economy, but it wasn’t really money, because it wasn’t gold, which underpinned the value of everything else.

So where was all the gold? In the Bank of England. The role of that once private company had evolved. Bagehot thought it was the Bank of England’s job to hold the gold, so that all the smaller banks didn’t have to. Instead, the smaller banks took deposits, made loans, and issued paper money. If they got into trouble—which they tended to do—the big bank would bail them out. Why shouldn’t all the other banks hold their own gold, and take care of their own solvency? Bagehot the banker-writer was completely frank about the reason. “The main source of the profitableness of established banking is the smallness of the requisite capital,” he wrote. The modern way of putting this would be to talk about the bank’s return on equity. The less equity the bank needed to keep as a margin of safety, the more money it could lend, and, therefore, the more profit it could make. Gold was essential in order to guarantee the currency, but the bankers didn’t want it taking up valuable space on their balance sheets. Better to let the government do that, in the form of the Bank of England.

We still have a version of this system, in which government guarantees underpin the profitability of banks. The central bank’s crucial role is to lend money freely at a time of crisis—to be what is called “the lender of last resort.” Grant, who admits to “a libertarian’s biases,” sees this doctrine as the seed of “deposit insurance, the too-big-to-fail doctrine, and the rest of the modern machinery of socialized financial risk.”

Like John Law and Walter Bagehot, I’m the child of a man who worked in a bank, and, as such, I had a banker’s-son question running through my mind as I read Grant’s entertaining book: what happened to Bagehot’s bank? The answer is that Stuckey’s was taken over by another bank, Parr’s, in 1909. Parr’s was part of the larger National Westminster Bank, which was taken over by the Royal Bank of Scotland, in 2000. R.B.S., as it is unaffectionately known in the U.K., grew through takeovers to become, in the early years of this century, the biggest company in the world, as measured by the size of its balance sheet. Then came the credit crunch, and the moment—the latest version of the old familiar one—when things turned out not to be worth what they were supposed to be worth. The biggest bank in the world came, according to its chairman, to within “a couple of hours” of complete collapse. The outcome was a huge bailout, and the nationalization of R.B.S., with costs to the British taxpayer of forty-five billion pounds. Not much about that story would have surprised John Law or Walter Bagehot. Maybe, though, both men—the man who almost bankrupted a country and the supreme advocate of bankers’ bailouts—would be amused to see just how little we have learned. As for the question of what to do about the bankers responsible for the crash, Kublai Khan would probably have had some ideas. ♦

Origins of Money and of Banking

The history of credit and banking goes back much further than the history of coins. Nevertheless the story of the origins of money goes back even further still.

The origins of money in its various forms, and of banking, are discussed in the book by Glyn Davies , on which this essay is based.

Davies, Glyn. A history of money from ancient times to the present day, 3rd ed. Cardiff: University of Wales Press, 2002. 720 pages. Paperback: ISBN 0 7083 1717 0. Hardback: ISBN 0 7083 1773 1.

See also Money in Fiction

What is Money?

Functions of Money

Causes of the Development of Money

Primitive forms of money, the invention of banking and coinage, greek coinage, money exchange and credit transfer, the royal monopoly of minting, paper money, intangible money, noteworthy points regarding the origins of money.

At first sight the answer to this question seems obvious; the man or woman in the street would agree on coins and banknotes, but would they accept them from any country? What about cheques? They would probably be less willing to accept them than their own country's coins and notes but bank money (i.e. anything for which you can write a cheque) actually accounts for by far the greatest proportion by value of the total supply of money. What about I.O.U.s ( I owe you ), credit cards and gold? The gold standard belongs to history but even today in many rich people in different parts of the world would rather keep some of their wealth in the form of gold than in official, inflation-prone currencies. The attractiveness of gold, from an aesthetic point of view, and its resistance to corrosion are two of the properties which led to its use for monetary transactions for thousands of years. In complete contrast, a form of money with virtually no tangible properties whatsoever - electronic money - seems set to gain rapidly in popularity.

All sorts of things have been used as money at different times in different places. The alphabetical list below, taken from page 27 of A History of Money by Glyn Davies , includes but a minute proportion of the enormous variety of primitive moneys, and none of the modern forms.

Amber, beads, cowries, drums, eggs, feathers, gongs, hoes, ivory, jade, kettles, leather, mats, nails, oxen, pigs, quartz, rice, salt, thimbles, umiacs, vodka, wampum, yarns, and zappozats (decorated axes).

It is almost impossible to define money in terms of its physical form or properties since these are so diverse. Therefore any definition must be based on its functions.

• Unit of account (abstract)
• Common measure of value (abstract)
• Medium of exchange (concrete)
• Means of payment (concrete)
• Standard for deferred payments (abstract)
• Store of value (concrete)
• Liquid asset
• Framework of the market allocative system (prices)
• A causative factor in the economy
• Controller of the economy

Not everything used as money as all the functions listed above. Furthermore the functions of any particular form of money may change over time. As Glyn Davies points out on page 28:

"What is now the prime or main function in a particular community or country may not have been the first or original function in time, while what may well have been a secondary or derived function in one place may have been in some other region the original which gave rise to a related secondary function... The logical listing of functions in the table therefore implies no priority in either time or importance, for those which may be both first and foremost reflect only their particular time and place."

He goes on to conclude from this that the best definition is as follows:

Money is anything that is widely used for making payments and accounting for debts and credits.

In his preface the author writes:

"Money originated very largely from non-economic causes: from tribute as well as from trade, from blood-money and bride-money as well as from barter, from ceremonial and religious rites as well as from commerce, from ostentatious ornamentation as well as from acting as the common drudge between economic men."

One of the most important improvements over the simplest forms of early barter was the tendency to select one or two items in preference to others so that the preferred items became partly accepted because of their qualities in acting as media of exchange. Commodities were chosen as preferred barter items for a number of reasons - some because they were conveniently and easily stored, some because they had high value densities and were easily portable, and some because they were durable. These commodities, being widely desired, would be easy to exchange for others and therefore they came to be accepted as money.

To the extent that the disadvantages of barter provided an impetus for the development of money that impetus was purely economic but archaeological, literary and linguistic evidence of the ancient world, and the tangible evidence of actual types of primitive money from many countries demonstrate that barter was not the main factor in the origins and earliest development of money.

Many societies had laws requiring compensation in some form for crimes of violence, instead of the Old Testament approach of "an eye for an eye". The author notes that the word to "pay" is derived from the Latin "pacare" meaning originally to pacify, appease, or make peace with - through the appropriate unit of value customarily acceptable to both sides. A similarly widespread custom was payment for brides in order to compensate the head of the family for the loss of a daughter's services. Rulers have since very ancient times imposed taxes on or exacted tribute from their subjects. Religious obligations might also entail payment of tribute or sacrifices of some kind. Thus in many societies there was a requirement for a means of payment for blood-money, bride-money, tax or tribute and this gave a great impetus to the spread of money.

Objects originally accepted for one purpose were often found to be useful for other non-economic purposes and, because of their growing acceptability began to be used for general trading also, supplementing or replacing barter.

Thus the use of money evolved out of deeply rooted customs; the clumsiness of barter provided an economic impulse but that was not the primary factor. It evolved independently in different parts of the world. About the only civilization that functioned without money was that of the Incas .

The use of primitive forms of money in the Third World and North America is more recent and better documented than in Europe and its study sheds light on the probable origins of modern money. Among the topics treated are the use of wampum and the custom of the potlatch or competitive gift exchange in North America, disc-shaped stones in Yap, cowrie shells over much of Africa and Asia, cattle, manillas and whales teeth.

Manillas were ornamental metallic objects worn as jewelry in west Africa and used as money as recently as 1949. They were an ostentatious form of ornamentation, their value in that role being a prime reason for their acceptability as money. Wampum's use as money in north America undoubtedly came about as an extension of its desirability for ornamentation. Precious metals have had ornamental uses throughout history and that could be one reason why they were adopted for use as money in many ancient societies and civilizations.

In Fijian society gifts of whales teeth were (and in certain cases still are) a significant feature of certain ceremonies. One of their uses was as bride-money, with a symbolic meaning similar to that of the engagement ring in Western society. Whales teeth were "tambua" (from which our word "taboo" comes) meaning that they had religious significance, as did the fei stones of Yap which were still being used as money as recently as the mid 1960s.

The potlatch ceremonies of Native Americans were a form of barter that had social and ceremonial functions that were at least as important as its economic functions. Consequently when the potlatch was outlawed in Canada (by an act that was later repealed) some of the most powerful work incentives were removed - to the detriment of the younger sections of the Indian communities. This form of barter was not unique to North America. Glyn Davies points out that the most celebrated example of competitive gift exchange was the encounter, around 950 BC, of Solomon and the Queen of Sheba. "Extravagant ostentation, the attempt to outdo each other in the splendour of the exchanges, and above all, the obligations of reciprocity, were just as typical in this celebrated encounter, though at a fittingly princely level, as with the more mundane types of barter in other parts of the world." (page 13).

Cattle are described by the author as mankind's "first working capital asset" (page 41). The religious use of cattle for sacrifices probably preceded their adoption for more general monetary purposes. For sacrifice quality - "without spot or blemish" - was important but for monetary purposes quantity was of more significance since cattle, like coins, can be counted. Obviously there were very practical reasons for the association between cattle and wealth but anthropological evidence from Africa in very recent times shows that when cattle are regarded as a form of money, not only health cattle but also scrawny ones will be valued to the detriment of the environment supporting them and their owners.

Glyn Davies quotes linguistic evidence to show how ancient and widespread the association between cattle and money was. The English words "capital", "chattels" and "cattle" have a common root. Similarly "pecuniary" comes from the Latin word for cattle "pecus" while in Welsh (the author's mother tongue) the word "da" used as an adjective means "good" but used as a noun means both "cattle" and "goods" .

The author also cautions that "one should not confuse the abstract concept of an ox as a unit of account or standard of value, which is its essential but not only monetary function, with its admittedly cumbersome physical form. Once that is realized (a position quickly reached by primitive man if not yet by all economists or anthropologists), the inclusion of cattle as money is easily accepted, in practice and logic." (Page 41). He also points out that until well into the present century the Kirghiz of the Russian steppes used horses as their main monetary unit with sheep as a subsidiary unit. Small change was given in lambskins.

The invention of banking preceded that of coinage. Banking originated in Ancient Mesopotamia where the royal palaces and temples provided secure places for the safe-keeping of grain and other commodities. Receipts came to be used for transfers not only to the original depositors but also to third parties. Eventually private houses in Mesopotamia also got involved in these banking operations and laws regulating them were included in the code of Hammurabi.

In Egypt too the centralization of harvests in state warehouses also led to the development of a system of banking. Written orders for the withdrawal of separate lots of grain by owners whose crops had been deposited there for safety and convenience, or which had been compulsorily deposited to the credit of the king, soon became used as a more general method of payment of debts to other persons including tax gatherers, priests and traders. Even after the introduction of coinage these Egyptian grain banks served to reduce the need for precious metals which tended to be reserved for foreign purchases, particularly in connection with military activities.

Precious metals, in weighed quantities, were a common form of money in ancient times. The transition to quantities that could be counted rather than weighed came gradually. On page 29 of A History of Money Glyn Davies points out that the words "spend", "expenditure", and "pound" (as in the main British monetary unit) all come from the Latin "expendere" meaning "to weigh" . On page 74 the author points out that the basic unit of weight in the Greek speaking world was the "drachma" or "handful" of grain, but the precise weight taken to represent this varied considerably, for example from less than 3 grams in Corinth to more than 6 grams in Aegina. Throughout much of the ancient world the basic unit of money was the stater , meaning literally "balancer" or "weigher" . The talent is a monetary unit with which we are familiar with from the Parable of the Talents in the Bible. The talent was also a Greek unit of weight, about 60 pounds.

Many primitive forms of money were counted just like coins. Cowrie shells, obtained from some islands in the Indian Ocean, were a very widely used primitive form of money - in fact they were still in use in some parts of the world (such as Nigeria) within living memory. "So important a role did the cowrie play as money in ancient China that its pictograph was adopted in their written language for money ." (page 36) Thus it is not surprising that among the earliest countable metallic money or "coins" were "cowries" made of bronze or copper, in China.

In addition to these metal "cowries" the Chinese also produced "coins" in the form of other objects that had long been accepted in their society as money e.g. spades, hoes, and knives. Although there is some dispute over exactly when these developments first took place, the Chinese tool currencies were in general use at about the same time as the earliest European coins and there have been claims that their origins may have been much earlier, possibly as early as the end of the second millennium BC. The use of tool coins developed (presumably independently) in the West. The ancient Greeks used iron nails as coins, while Julius Caesar regarded the fact that the ancient Britons used sword blades as coins as a sign of their backwardness. (However the Britons did also mint true coins before they were conquered by the Romans).

These quasi-coins were all easy to counterfeit and, being made of base metals, of low intrinsic worth and thus not convenient for expensive purchases. True coinage developed in Asia Minor as a result of the practice of the Lydians, of stamping small round pieces of precious metals as a guarantee of their purity. Later, when their metallurgical skills improved and these pieces became more regular in form and weight the seals served as a symbol of both purity and weight. The first real coins were probably minted some time in the period 640 - 630 BC. Afterwards the use of coins spread quickly from Lydia to Ionia, mainland Greece, and Persia.

One of the smaller Greek coins was the silver obol . In the Attic standard of weights and coinage six silver obols were worth one silver drachma. It is interesting to note that before the development of coinage six of the pointed spits or elongated nails used as tool currency constituted a customary handful similar to that of the even earlier grain-based methods. Therefore one of the early Greek coins, the obol, was simply a continuation of a primitive form of money - the iron spit or pointed rod.

Inflation was a problem even in the early days of coin production. In 407 BC Sparta captured the Athenian silver mines at Laurion and released around 20,000 slaves. As a result Athens was faced with a grave shortage of coins and in 406 and 405 BC issued bronze coins with a thin plating of silver. The result was that the shortage became even worse. Good coins tended to disappear from circulation since people naturally kept them and used the new coins instead in order to get rid of them.

This gave rise to what is probably the world's first statement of Gresham's law, that bad money drives out good, in Aristophanes' play, The Frogs , produced in 405 BC. Aristophanes wrote "the ancient coins are excellent...yet we make no use of them and prefer those bad copper pieces quite recently issued and so wretchedly struck." These base coins were demonetized in 393 BC.

Considerable rivalry developed between different currencies. "In coinage as in other matters the Greek city-states strove desperately for predominance, as did their arch-rivals the Persian emperors."

City-states with strong and widely accepted currencies would have gained prestige. In the 1960s newly independent countries in the Third World took pride in the trappings of nationhood - their own airlines, national banks, and currency. The city states of ancient Greece took a similar pride in their currencies - as is suggested by the beauty of their coins. Glyn Davies quotes another author, J. Porteous, who wrote " the fifth century saw the minting of the most beautiful coins ever made." He also quotes two historians, Austin and Vidal-Naquet, who claimed that "in the history of Greek cities coinage was always first and foremost a civic emblem. To strike coins with the badge of the city was to proclaim one's political independence."

Coercion played a role in establishing monetary uniformity. In 456 BC Athens forced Aegina to take Athenian 'owls' and to stop minting her own 'turtle' coinage and in 449 BC Athens issued an edict ordering all 'foreign' coins to be handed in to the Athenian mint and compelling all her allies to use the Attic standard of weights, measures and money. The conquests of Alexander the Great brought about a large degree of monetary uniformity over much of the known world. His father, Philip, had issued coins celebrating his triumph in the chariot race in Olympic games of 356 BC - an example of the use of coins as propaganda.

The Roman emperors made even more extensive use of coins for propaganda, one historian going so far as to claim that "the primary function of the coins is to record the messages which the emperor and his advisers desired to commend to the populations of the empire."

On pages 85-86, Glyn Davies points out that "coins were by far the best propaganda weapon available for advertising Greek, Roman or any other civilization in the days before mechanical printing was invented."

The great variety of coinages originally in use in the Hellenic world meant that money changing was the earliest and most common form of Greek banking. Usually the money changers would carry out their business in or around temples and other public buildings, setting up their trapezium-shaped tables (which usually carried a series of lines and squares for assisting calculations), from which the Greek bankers, the trapezitai derived their name, much as our name for bank comes from the Italian banca for bench or counter . The close association between banking, money changing and temples is best known to us from the episode of Christ's overturning the tables in the Temple of Jerusalem (Matthew 21.12) .

Money changing was not the only form of banking. One of the most important services was bottomry or lending to finance the carriage of freight by ships. Other business enterprises supported by the Greek bankers included mining and construction of public buildings. The most famous and richest of all was Pasion who started his banking career in 394 BC as a slave in the service of two leading Athenian bankers and rose to eclipse his masters, gaining in the process not only his freedom but also Athenian citizenship. In addition to his banking business he owned the largest shield factory in Greece and also conducted a hiring business lending domestic articles such as clothes, blankets, silver bowls etc. for a lucrative fee.

When Egypt fell under the rule of a Greek dynasty, the Ptolemies (323-30 BC) the old system of warehouse banking reached a new level of sophistication. The numerous scattered government granaries were transformed into a network of grain banks with what amounted to a central bank in Alexandria where the main accounts from all the state granary banks were recorded. This banking network functioned as a giro system in which payments were effected by transfer from one account to another without money passing. As double entry booking had not been invented credit transfers were recorded by varying the case endings of the names involved, credit entries being in the genitive or possessive case and debit entries in the dative case.

Credit transfer was also a characteristic feature of the services provided in Delos which rose to prominence in banking during the late second and third centuries BC. As a barren offshore island its inhabitants had to live off their wits and make the most of their two great assets - the island's magnificent natural harbour and the famous temple of Apollo - around which their trading and financial activities developed. Whereas in Athens banking, in its early days, had been carried on exclusively in cash, in Delos cash transactions were replaced by real credit receipts and payments made on simple instructions with accounts kept for each client.

The main commercial rivals of Delos, Carthage and Corinth, were both destroyed by Rome and consequently it was natural that the Bank of Delos should become the model most closely imitated by the banks of Rome. However their importance was limited by the Roman preference for cash transactions with coins. Whereas the Babylonians had developed their banking to a sophisticated degree because their banks had to carry out the monetary functions of coinage (since coins had not been invented), and the Ptolemaic Egyptians segregated their limited coinage system from their state banking system to economise on the use of precious metals, the Romans preferred coins for many kinds of services which ancient (and modern) banks normally provided. After the fall of the Roman Empire banking was forgotten and had to be re-invented much later.

Banking re-emerged in Europe at about the time of the Crusades. In Italian city states such as Rome, Venice and Genoa, and in the fairs of medieval France, the need to transfer sums of money for trading purposes led to the development of financial services including bills of exchange . Although it is possible that such bills had been used by the Arabs in the eighth century and the Jews in the tenth, the first for which definite evidence exists was a contract issued in Genoa in 1156 to enable two brothers who had borrowed 115 Genoese pounds to reimburse the bank's agents in Constantinople by paying them 460 bezants one month after their arrival.

The Crusades gave a great stimulus to banking because payments for supplies, equipment, allies, ransoms etc. required safe and speedy means of transferring vast resources of cash. Consequently the Knights of the Temple and the Hospitallers began to provide some banking services such as those already being developed in some of the Italian city states.

One of the reasons for the rapid spread of the use of coins was their convenience. In situations where coins were generally acceptable at their nominal value there was no need to weigh them and in everyday transactions where relatively small numbers were involved counting was quicker and far more convenient than weighing. By the Middle Ages monarchs were able to use this convenience as a source of profit.

On page 168 Glyn Davies writes, "because of the convenience of royally authenticated coinage as a means of payment, and with hardly any other of the general means of payment available in the Middle Ages being anything like as convenient, coins commonly carried a substantial premium over the value of their metallic content, more than high enough to cover the costs of minting. Kings could turn this premium into personal profit; hence ... the wholesale regular recall of coinage... first at six yearly, then at three-yearly intervals, and eventually about every two years or so. In order to make a thorough job of this short recycling process it was essential that all existing coins should be brought in so as to maximize the profit and, in order to prevent competition from earlier issues, the new issues had to be made clearly distinguishable by the authorities yet readily acceptable to the general public."

These recoinage cycles were far more frequent than was justified by wear and tear on the coins but the profits from minting, known as seigniorage , supplemented the revenue that English monarchs raised from the efficient systems of taxation introduced by the Normans. However, revenue from minting depended on public confidence in the coinage and consequently an elaborate system of testing was introduced.

"Anyone who had occasion to handle coins of silver or gold in any volume, whether merchants, traders, tax collectors, the King himself, the royal treasury, or the sheriffs, required reliable devices for testing the purity of what passed for currency." (Page 144). One of these methods was rough and ready - the use of touchstones which involved an examination of the colour trace left by the metal on the surface of a schist or quartz stone. The other, the Trial of the Pyx , was a test held in public before a jury. This Trial involved the use of 24 "touch needles", one for each of the traditional gold carats, with similar test pieces for silver.

Thus, despite the challenge of counterfeiters, governments controlled coin production and hence the money supply. Not until the rise of commercial banking and the widespread adoption of paper money was this monopoly broken, with profound consequences for the growth of democracy .

In China the issue of paper money became common from about AD 960 onwards but there had been occasional issues long before that. A motive for one such early issue, in the reign of Emperor Hien Tsung 806-821, was a shortage of copper for making coins. A drain of currency from China, partly to buy off potential invaders from the north, led to greater reliance on paper money with the result that by 1020 the quantity issued was excessive, causing inflation. In subsequent centuries there were several episodes of hyperinflation and after about 1455, after well over 500 years of using paper money, China abandoned it.

Bills of Exchange

With the revival of banking in western Europe, stimulated by the Crusades, written instructions in the form of bills of exchange, came to be used as a means of transferring large sums of money and the Knights Templars and Hospitallers functioned as bankers. (It is possible that the Arabs may have used bills of exchange at a much earlier date, perhaps as early as the eighth century). The use of paper as currency came much later.

Goldsmith Bankers

During the English Civil War, 1642-1651, the goldsmith's safes were secure places for the deposit of jewels, bullion and coins. Instructions to goldsmiths to pay money to another customer subsequently developed into the cheque (or check in American spelling). Similarly goldsmiths' receipts were used not only for withdrawing deposits but also as evidence of ability to pay and by about 1660 these had developed into the banknote .

Virginian Tobacco

In England's American colonies a chronic shortage of official coins led to various substitutes being used as money, including, in Viriginia, tobacco, leading to the development of paper money by a different route. Tobacco leaves have drawbacks as currency and consequently certificates attesting to the quality and quantity of tobacco deposited in public warehouses came to be used as money and in 1727 were made legal tender.

Gold Standard

Although paper money obviously had no intrinsic value its acceptability originally depended on its being backed by some commodity, normally precious metals. During the Napoleonic Wars convertibility of Bank of England notes was suspended and there was some inflation which, although quite mild compared to that which has occurred in other wars, was worrying to contemporary observers who were used to stable prices and, in accordance with the recommendations of an official enquiry Britain adopted the gold standard for the pound in 1816. For centuries earlier silver had been the standard of value. The pound was originally an amount of silver weighing a pound. France and the United States were in favour of a bimetallic standard and in 1867 an international conference was held in Paris to try and widen the area of common currencies based on coins with standard weights of gold and silver. However when the various German states merged into a single country in 1871 they chose the gold standard. The Scandinavian countries adopted the gold standard shortly afterwards. France made the switch from bimetallism to gold in 1878 and Japan, which had been on a silver standard, changed in 1897. Finally, in 1900, the United States officially adopted the gold standard.

With the outbreak of the First World War in 1914 Britain decided to withdraw gold from internal circulation and other countries also broke the link with gold. Germany returned to the gold standard in 1924 when it introduced a new currency, the Reichsmark and Britain did the following year, and France in 1928. However the British government had fixed the value of sterling at an unsustainably high rate and in the worldwide economic crisis in 1931 Britain, followed by most of the Commonwealth (except Canada) Ireland, Scandinavia, Iraq, Portugal, Thailand, and some South American countries abandoned gold.

The United States kept the link to gold and after the Second World War the US dollar replaced the pound sterling as the key global currency. Other countries fixed their exchange rates against the dollar, the value of which remained defined in terms of gold. In the early 1970s the system of fixed exchange rates started to break down as a result of growing international inflation and the United States abandoned the link with gold in 1973.

The break with precious metals helped to make money a more elusive entity. Another trend in the same direction is the growing interest in forms of electronic money from the 1990s onwards. In some ways e-money is a logical evolution from the wire transfers that came about with the widespread adoption of the telegraph in the 19th century but such transfers had relatively little impact on the everyday shopper.

The evolution of money has not stopped. Securitisation, the turning of illiquid assets into cash, developed in new directions in the 1990s. One much publicised development was the invention of bonds backed by intangible assets such as copyright of music, e.g. Bowie bonds , named after those issued by the popstar David Bowie. (See also Something Wild , the first novel dealing with Bowie bonds).

Some of the points stressed by Glyn Davies in his book are:-

• Money did not have a single origin but developed independently in many different parts of the world.
• Many factors contributed to its development and if evidence of what anthropologists have learned about primitive money is anything to go by economic factors were not the most important.
• Money performs a variety of functions and the functions performed by the earliest types were probably fairly restricted initially and would NOT necessarily have been the same in all societies.
• Money is fungible: there is a tendency for older forms to take on new roles and for new forms to be developed which take on old roles, e.g. (this is my example) on English banknotes such as the 5 pound notes it says "I promise to pay the bearer on demand the sum of five pounds" and below that it carries the signature of the chief cashier of the Bank of England. This is a reminder that originally banknotes were regarded in Britain, and in many other countries, as a substitute for money and only later did they come to be accepted as the real thing.

Relevance of History

One of Glyn Davies's main motives for writing the book was that, as he writes in his preface around the next corner there may be lying in wait apparently quite novel problems which in all probability bear a basic similarity to those that have already been tackled with varying degrees of success or failure in other times and other places. Furthermore he is of the opinion that economists, especially monetarists, tend to overestimate the purely economic, narrow and technical functions of money and have placed insufficient emphasis on its wider social, institutional and psychological aspects.

These issues aren't simply of academic interest. Economists still argue about how to measure and control the money supply and numerous different measures, corresponding to slightly different definitions have been proposed. These disputes have implications for the material well-being of everyone, especially now that thanks to the development of computer networks, new forms of money are coming into existence. Hence the importance of learning from history.

Translations

Päritolu raha ja pangandus a translation of this article into Estonian by Catherine Desroches from DoMyWriting .

Monetary Economics, History of

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• Robert W. Dimand  

Part of the book series: The New Palgrave Economics Collection ((NPHE))

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As with so much else in the Western tradition, theorizing about the role of money can be traced back to Plato and Aristotle in the fourth century bce, although they may have drawn on pre-Socratic philosophers whose works survive, if at all, only in fragments. In his Republic (1974), Plato remarked that money was a symbol devised to make exchange easier. He disapproved of gold and silver as money, preferring a currency that would have value only internally, not in external commerce. The analysis in Aristotle’s Nicomachean Ethics (1996) and Politics (1984) of what constitutes just exchange led Aristotle to a more systematic discussion of a medium of exchange. His account of the functions of money, and of the properties that suit a commodity such as gold or silver to be the medium of exchange, as well as his use of the myth of Midas to distinguish between gold and wealth, influenced comparable presentations by Nicolas Oresme in about 1360 (Oresme, de Sassoferrato and Buridan, 1989), Adam Smith (1776), and, through Smith, any number of 19th-century textbooks (see Menger, 1892; Monroe, 1923). Barter might be the most basic form of exchange, but it involves accepting goods one does not wish to consume in order to make a further exchange for what is desired. Aristotle noted the convenience of a generally accepted medium of exchange in reducing the number of transactions required. He saw the convenience of stating prices in terms of the medium of exchange, and that, if a commodity is to serve as a medium of exchange, it must also be a store of value, retaining purchasing power between being received and being spent (but he did not mention the function of money as a standard of deferred payment).

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Dimand, R.W. (2010). Monetary Economics, History of. In: Durlauf, S.N., Blume, L.E. (eds) Monetary Economics. The New Palgrave Economics Collection. Palgrave Macmillan, London. https://doi.org/10.1057/9780230280854_24

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Essay on History Of Money

Students are often asked to write an essay on History Of Money in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

Let’s take a look…

100 Words Essay on History Of Money

Barter system.

Long ago, people did not have money. They used the barter system, which means trading things directly. For example, a farmer with many apples could trade with another person who had lots of fish. This way, both got what they needed. But it was hard when one person did not want what the other had to offer.

First Forms of Money

To make trading easier, people started using objects like shells or grains as money. These were things everyone agreed had value. Later, metal coins appeared. They were better because they lasted longer and had standard values.

Paper Money

As trade grew, carrying lots of coins became difficult. China was the first to use paper money. It was lighter and could represent more value than the same weight in coins. Soon, other countries started making their own paper money.

Modern Money

Today, we have many ways to pay for things. Besides coins and paper, we also use cards and online banking. This digital money can be moved quickly over the internet, making buying and selling faster than ever before. Money keeps changing to meet our needs.

250 Words Essay on History Of Money

What is money.

Money is something people use to buy goods and services. Long ago, before money was created, people traded things directly. This was known as barter. If you had chickens and wanted a cow, you had to find someone who was willing to trade their cow for your chickens. This was not always easy!

The First Forms of Money

To make trading easier, people started using things like shells, beads, or metals as money. These items were valuable and easy to carry around. Around 5000 B.C., metal coins became popular, especially in places like China and Lydia, which is now part of Turkey. Coins were great because they had set values and were made by governments.

Around 700 A.D., China began using paper money. It was lighter than coins and could represent more value. Paper money became widely used because it was more convenient. Governments printed bills and promised to exchange them for things like gold or silver.

Today, money is not just coins and paper. We use electronic money, like the numbers in a bank account, and we can buy things with cards or online. Even though we don’t always see or touch our money, it still has value and helps us get what we need or want.

Money has changed a lot over time, from barter to coins to paper, and now digital forms. It has always been a way for people to trade and make life easier.

500 Words Essay on History Of Money

Money is something that people use to buy goods and services. Long ago, there was no money, and people would trade things they had for things they needed. For example, a person with chickens could trade eggs for wheat from a farmer. This is called barter.

Coins and Paper Money

Around 600 B.C., the first coins were made in what is now Turkey. These coins were easier to use than heavy metals because they had a set weight and value. Later, in China, the first paper money appeared about 1,000 years ago. Paper money was lighter than coins and could be carried in large amounts more easily.

Banks and Checks

As trade grew, people needed safe places to keep their money, so banks were created. Banks also started the idea of checks. A check is a piece of paper that tells the bank to give money from one person’s account to another. This way, people didn’t have to carry a lot of money, which could be heavy or dangerous if stolen.

Looking Ahead

Money keeps changing. In recent times, some people have started using digital currencies, like Bitcoin. These are not controlled by any country but work across the whole world through the internet. It’s a new chapter in the history of money.

In conclusion, money has come a long way from bartering to coins to paper and now digital forms. It’s a tool that helps people trade and will continue to change as our world does. Money makes it easier for us to get what we need and want, and understanding its history helps us appreciate its role in our lives.

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Finance: The History of Money Essay

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Wealth is constituted only of money as per the document. Wealth is defined as the ability to have an abundance of many different types of goods at your convenience. It explains that the accumulation of capital results in an increase in wealth. The article puts into consideration whoever owns the property but assumes that everyone’s living standards will improve regardless of the property owner.

The document explains that the value of money is somehow related to the amount that is in circulation. The value of a good is determined by the number of sellers and buyers. The article assumes that a country’s gold inflow determines how rich the country is, and this only increases with an increase in trade, but this is not the real case.

For example, supplying Britain with less quantity of gold compared to other countries will make British goods cheaper. As a result, cheap prices would cause more inflow of gold from other countries. However, for money to be created, there has to be a debt. The idea is founded on the fact that debt is the basis of the moneymaking process.

In general, the opposition to the interest rate regulation is opposition to price regulation. It states that England would be better off without the interest rates being set in the beginning. In this case, money is seen as a “pledge” to acquire goods and as a “counter” to determine value.

The currency stock is always on the rise, and thus for a country to have a balance of trade, it should be in a position to accumulate a large stock of its own. According to the article, there is an estimated cash requirement for each economic group that is determined by the length of the payment period.

Regulating interest rates will obstruct trade and make it difficult to lend and borrow. Interest rates regulation will also make life difficult for the less privileged in the society since they will get no profit that is allowed by the interest law. Regulating interest rates will also be an advantage to the bankers who lend money to clients at its par value. Money is an important commodity and is of necessity given that everyone must have it.

The regulation has increased the number of debts making borrowing a regular norm. From the article, it is apparent that no one borrows money without plans given that it is forced to by various circumstances. The situation will cause individuals to look for money and have it at whatever cost. As a result, many people would decide to bank their money. If this happens to be the case, it means that there will hardly be enough money in the country to ensure trade flourishes.

Politically, the document does not support the regulation of interest rates. It is opposed to the reduction of the maximum legal rate to four percent from six percent. These interests will not be productive since people will avoid the interests making the rates higher than before the regulation. The situation gives economists grounds to object the interest control strategy used today. Silver and gold are the most appropriate commodities used as currency in international trade.

These have equal value in all states, while the value of paper money is determined by the government involved and is only valid in that particular state. The result of the trade is riches and power. A nation’s wealth and living standard of its people is increased by the amount of trade of a country. Money makes it possible to acquire and accumulate property leading to prosperity and increased chances of conflicts. The effects also lead to political unrest in society.

Money’s natural interest is raised in two ways. First, it is raised by lending the inhabitant’s money in small portions. The strategy will lead to high interests given the scarcity of money. Secondly, it is raised when the money required for trade in a country is higher than what the country has when needed for operations. According to the article, more money will be needed, thus resulting in the price increment.

It is evident from the document that having mines in a country does not make a country rich. More often than not, the country always tends to be poorer compared to other countries without mines. Digging and manufacturing of these minerals call for labor that incorporates many people — being rich means having more gold and silver compared to other countries across the world. Countries that take such measures enable them to trade and enjoy commodities from other countries, which are paying for the services.

Silver and gold are an easier way to being rich if managed well. A country can become rich if they do not have the mines through commerce and conquest. In most cases, conquest appears to be outdated given that it was used by the Romans to produce wealth. Commerce is then the most common way as it fits everyone. For instance, England is one of the hardworking kingdoms and gained its riches through commerce.

Trade is of the essence of growing riches while money is needed to run the same trade. Reducing the interest rate to four percent will discourage lenders and will be a loss to the economy as this money runs trade. In general, money is brought in when importing less and exporting more commodities.

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History of Money

Money can be said to be a commodity that is employed as a medium of exchange while carrying transactions. Categorically, money is assumed to be a store of value and unit of account in addition to being a medium of exchange for goods. A large number of writers find the first two not being very essential comparing to the third one. As a matter of fact, other goods are considered to be better in terms of intertemporal value storing, as compared to money. This is due to the fact that from time to time, money degrades in value through inflation or overthrow of a government (Rothbard 2).

On the basis by which money is measured, there are data that are published by the Federal Reserve on a weekly and monthly basis. It shows three main measures: M1, M2, and M3. It also gives data on overall sum of debt of non-financial branches of the US economy. Money measures show different degree on liquidity that different types of money usually have. The narrowest measure is usually M1, which is restricted to the liquid form of money in addition to savings account. It is the amount in travelers hands of the public among other deposits by which cheques can be written. M2 constitutes M1 and some other savings accounts, whereas M3 includes M2 and some other denominations, which are much larger (Moffat).

Forms that money has taken over the history of mankind

First, anything could have been used for trading if only the buyer and seller could agree on the value of items on trade. For example, a pig could be taken for trade with a few sacks of grain. However, the system of barter often failed in cases when where the two could not come to an agreement on the relative value of the trading items (Rothbard 45). Thus, all items that could be traded were given values according to a given number of coins that had variations. The most often used coins in the daily purchasing were copper and bronze. Silver coins were used for more expensive products. Rarely, gold coins were used, although they were made because of their great value. Additionally, gold is a very soft metal, and it could be easily damaged if not handled with great care. Thus, this resulted to reduced value of gold (Weber 3).

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In avoidance of carrying around many coins, traders began producing vouchers that represented specific quantity of coins. This was done successfully in circumstances where traders had some cash to back up the voucher that was issued. On the other side, there were those who often issued vouchers with values far greater comparing to what they were capable of paying. Another risk that was involved was the situation when people countered fake vouchers resembling a valid voucher and with no redeemable value. At a given time, the government started issuing paper money that was official and backed by silver or gold reserves, giving more stability to the system of paper money. Therefore, the government avoids a possibility to go bankrupt. Furthermore, the government is now able to take control over counterfeiting, because there was launched a standard system of money. With the help of computers, it is now possible to carry commercial transactions electronically (“A Brief History of Money Point” 5). With the given cases, money is not changed on hands but can modify accounts according to the transactions that are made. This helps people to avoid the risk of carrying cash on hand.

Fiat and commodity based money

Fiat money is money that is worthless and has no guarantee that is provided by the government, whereas commodity money is that which derives its value from the actual commodity from which the good is made. Thus, when a golden coin was to be made, its cost could be based on the coin and not the nominal value of the coin. Commodity money became a more convenient type of trade due to its superiority to that of barter. On the other hand, commodity money is normally faced with fluctuations in prices.

Supposedly that the commodity on use is gold, and some new gold mining is found, those that had much gold will lose their wealth. In today’s life, some of the prisoners use alcohol or cigarettes to be commodity money. Generally, without an official tender, people should suggest something that is common, stores value and is convenient.

On the other hand, the introduction of fiat money proved being more convenient. Rather than carrying around the silver coins, silver, or even cigarettes, one could only carry backed papers by the government. Over a given period of time, government has not been interested in making provisions of the fait currency with gold or any other commodity, and, thus, fait money became based on the government that issue it. Most of the governments demand that their national currency was accepted while paying debts (“Commodity Money vs. Fiat Money”).

The origin of expression “Bad money drives out good”

This is explained by the law of Gresham that states “Bad money drives out good”, though it is well regarded as: “Bad money drives out good if their exchange rate is set by law” (“Gresham’s Law”). The law specifically applies to a situation where two kinds of commodity money exist in circulation, and the legal tender law necessitates that it was accepted and possessed alike face values that are meant for economic deals. Artificially, money that has been overvalued attempts to drive the undervalued money out from circulation; which is done through price control.

The law of Gresham derived its name from Sir Thomas Gresham, an English financier, during the Tudor dynasty. Forty years before, Nicolause Copernicus had started the law. Aristophanes realized that bad money was used instead of good money in his fifth century century play. Good money refers to the money that shows a small disparity amid its nominal worth and the value of the commodity. Without laws governing legal tender, there can be free exchange of metal coins money in market values above bullion. The case is not theoretical and is observable presently in the bullion coins. Such coins possess certain purity and are convenient to handle. In trading, coins are more preferable than anonymous metal hunks, which are more precious thereby giving the coins more value. The demand for coins makes them profitable (“Gresham’s Law”).

Meaning of a “touchstone”

The term refers to a part of a hard stone, which is dark, for instance, a slate, jasper, or basalt, which is applied in the assaying process involving testing of the metals’ purity. There was widespread application of these stones, but in the modern society, it has reduced. Touchstones are presently kept in assaying offices, and some individuals preserve them just because of curiosity. Some of them are in museums, although they are old. To use a touchstone, a piece of metal under test would be taken and rubbed against the stone. Among the frequently tested metals, there were silver and gold because of their categorical softness and large value, which served as incentive in alloying them, using cheaper metals (Smith).

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After laying down the streak under test, the second streak was applied for comparison, using a testing pencil that is called alloy. Moreover, the impurities in the sample could be dissolved using acidic solutions in order to compare the difference amid the two streaks. The comparison could reveal some traces of cheap metal alloy. Touchstones were characteristically kept with collection of the testing pencil and acids too because of testing, whereas some firms produced and supplied them (Smith).

Where the word dollar came from

In 1516, Joachimsthal launched the silver mine, which was followed by a mint called Joachimsthal. Initially, the mint began churning coins known as Joachimsthalers, which were later shortened in their name to thalers and are currently known as the Dutch. This was corrupted to dollar by the English, and the words dollar was given to any foreign silver coin. For instance, the English men who settled in wide America named the Spanish piece of eight the Spanish dollar, which was wide in circulation.

Numerous years following the independence, the Americans could use any oddball coinage at their disposal, including the Spanish dollar. However, as time went by, they started considering having their own currency. Thomas Jefferson was not for the idea of using the English system but proposed the possession of a monetary unit with the label dollar, since this term was familiar to many. The continental congress pronounced the dollar as the US currency in 1785 up to 1794, when it was minted. Washington was already referring to the almighty dollar in 1837, and this continued later (Adams).

Why the dollars are sometimes known as bucks

The European settlers learnt of the dollar from the Indians during the eighteenth century. It meant a deerskin, which was employed in trading its rights as well as a unit of value in trading for other commodities. During the Indian Territory visit to Ohio, Conrad Weiser wrote in his periodical that he had been robbed of 300 bucks, and every whisky’s cask ought to be traded for 5 bucks. The value of deerskin had declined in the following century and could serve as an exchange medium during the time when the buck passed the dollar (Sproul 3).

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In 1856, a Californian newspaper reported the incident to the court. Notwithstanding the fact that twentieth century inflation hit the bucks, their use progressed. In nineteenth century, poker players assigned the dealer with a market which they could call the buck. The name arose, because they made use of a knife whose handle came from buckhorn. Therefore, the buck was passed when the responsibility of the transactions changed to the player.

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