Money is all around us. We are all earning and spending money to improve the quality of life of us and the people around us. Ever wondered where it all began? Why are we so dependent on money? In this article, we take a journey into the beginning of money, what was before money came to be, the present stage of money, and the future of money. Let’s begin.

What is Money?

“Money is the root of all evil…?”

Maybe. But this is only because the people that use money are ‘evil’. Money itself is harmless and can be used to do many good deeds. Either way, if I were to give ‘money’ a definition it would go something like this;

“Money is a medium of exchange”

Hold on! Where’s notes and coins in this definition?

Well, notes and coins do not necessarily constitute all forms of money or currency known to man. Money happens whenever and wherever anything (any object) serves the purpose of a medium of exchange.

What is ‘Money as a Medium of Exchange?

Fair question. An exchange is a transfer of ownership of something. It could be anything; a car, a book, a mobile phone, some food, etc. So say we pay $20 for some food item, that $20 just became a medium of exchange. Say we paid a bunch of pebbles to buy the same food, guess what, those pebbles just became a medium of exchange.

So in short, anything that facilitates a transfer of ownership of product/s between two or more parties is a medium of exchange and hence is known as ‘money’.

History of Money

The history of ‘money’ as a medium of exchange dates back to over 100,000 years ago. The very fist civilizations such as in Mesopotamia realized that what they produced soon grew to be too much for their individual consumption. So, they began exchanging what they produced with what their neighbors produced. At this point, it was mainly food items such as different types of grains or animal husbandry. However, this set the foundation for the Barter System or commodity money in the history of money.

A Brief Timeline of the History of Money

• Prior to 9,000 B.C. – the Barter System
• 9,000 – 6,000 B.C. – Cows, sheep, camels, goat, and other forms of livestock
• 3,000 B.C. – Cowrie Shells
• 1,000 B.C. – First Metal Money and Coins (bronze and copper)
• 600 B.C. – Modern Coinage (Silver, bronze, and gold)
• 118 B.C. – Leather Money
• 806 – Paper Currency
• 1816 – The Gold Standard
• 1930 – End of the Gold Standard
• 1950 – Plastic money (credit cards, debit cards)
• Present – Paper money, e-money, and cryptocurrency

(Source: PBS.org)

What was before ‘Money’?

So if ‘money’ coordinated everything and anything and everything could be considered as money (due to medium of exchange concept), what was before money?

Before ‘mediums of exchanges’ came into being, there was a whole other system in place called the ‘Barter System’.

The Barter System

This is a system where good were exchanged for other goods. There was no medium of exchange in this era. Simply a mere exchange of goods between two or more parties.

A farmer who has excess corn would give some corn to a fisherman and buy some fish. That’s all about the Barter System. This era dates back to God-knows-how-long years.

Even before the Barter System people used to create what they wanted. Those were much much simpler times. If a person didn’t have something, he didn’t pursue it. He was just satisfied with what he had.

Drawbacks of the Barter System

The Barter System was a simple, convenient system. But it had many drawbacks. Drawbacks that lead to the abandonment of the Barter System altogether.

1. No double coincidence of wants – This is one of the main drawbacks of the Barter System. This means that people’s wants always didn’t match. Let’s take the above example itself. Assume the corn farmer wants to exchange his excess stock of corn for some fish. But what if the fisherman doesn’t want corn? Or he already has corn from another farmer? Or he just doesn’t like corn? This meant a clash of wills between two parties and this happened a LOT more than you would think. People’s needs and wants did not match every time. Assume a potter exchanges some pottery for some corn. And next month the potter comes to exchange again. Although the corn has been eaten away the pottery still lasts. So the farmer would not need any more pottery. And again a clash occurs.
2. No specific unit of value – How much corn would be a fair exchange for one piece of pottery? Nobody knew. How many eggs were a fair trade for a cow? Nobody knew. Nobody knew how to quantify the value of one product against a totally different product.
3. No specific unit of measurement – Again something similar to the above problem, but this time it’s about measuring the quantities of goods to be exchanged. No Kilograms were invented back then.
4. The inability of divisibility of goods – This was again a huge problem in the Barter System. Say a Poultry farmer wants to exchange two chickens with a horse merchant. First of all, they didn’t know how many chickens were worth a horse. Secondly, the poultry farmer is only willing to exchange two chickens. There’s no way that he would get a horse for two chickens and there was no way of dividing the horse either. Even vice versa the situation is irrecoverable. There was no way to pay for some exchanges without having smaller units of mediums of exchange.
5. Inability to transport goods – Somethings were just not meant to be transported. A poultry farmer could not carry his chicken on his shoulder until he met a suitable buyer matching his exact exchange needs. When it comes to perishable goods it was worse.

All these issues lead to the downfall of the Barter System, which is also considered the first stage of the evolution of money. Some exclude the Barter era from the evolution stages of money simply for the fact that there was no money involved in this stage. But the downfall of the Barter System is the reason for the evolution into the first real stage of the evolution of money as we know it.

Stages of Evolution of Money

1) Commodity Money

This is considered the first stage of the evolution of money. In this stage, certain types of commodities were used as a medium of exchange. Don’t confuse this with the Barter System though.

In this stage, people defined a certain specific commodity to be used as a medium of exchange. They did not simply exchange what they have, as in Barter System. They ‘bought’ what they wanted using these specific commodities.

Some of these commodities used in this era were salt, seashells, pebbles, salt, cocoa seeds, tobacco, feathers, grains, and many more.

Later on, people found out places to get plenty of these commodities, and then these commodities became available in abundance and lead to the fall of the commodity money system.

Commodity money is considered the oldest form of ‘money’ used today.

2) Metallic Money

The downfall of the Commodity money era led to the next stage of evolution known as Metallic money. In this era, people emphasized the fact that ‘money’ should be hard to come by.

So initially people started using pieces of Gold and Silver (mainly) and other metals as a medium of exchange.

Later on, they developed hooks, circular pieces, etc from these metals and used them as money assigning them values based on the approximate content of Gold or Silver. This made the transactions fast and easy.

3) Paper Money

Carrying Gold and Silver around was a dangerous activity. Since people realized its value the ‘evils’ begin to emerge.

As a solution, the first-ever banking systems came into place. This, however, is unlike any banks of today. In this era, the bankers were the goldsmiths.

People owning Gold or Silver began to leave them at a Goldsmith and take a written note certifying to the value of the metals he has placed in Goldsmith’s custody. So the owner could use this written note as a certification of the value he owns and make purchases with it.

These Goldsmiths later on initiated the banking function that still exists to date.

4) Notes and Coins

This is the present era of evolution of money. Notes and coins dominate the mediums of exchange today.

The real value (intrinsic value) (value to create a note or a coin) is less than the extrinsic value (value mentioned on the face of the note or coin) to stop the abuse of the monetary system.

The first real use of coins dates back to 500 – 700 BC in India and China.

Notes and coins are not without their own limitations. Both types wear off and degrade with use. So, there is a need to continuously mint or print new notes and coins every year, which itself costs money. Also, there still is the possibility of getting robbed of these physical assets.

5) Electronic Money

This is the present and the future of money. Even today credit cards, debit cards, and all those plastic cards are replacing the need to use notes and coins.

One of the main reasons for this shift is the increased security and portability these plastic cards provide over the standard notes and coins.

In the future notes and coins will cease to exist and we would only need a plastic card or even the touch of our fingertip to transfer billions of dollars from one person to another within a matter of seconds.

6) Cryptocurrency

Several types of cryptocurrency have risen in the past decade as a form of medium of exchange. These are purely digital assets held in digital wallets of people all over the world. However, right now, cryptocurrency such as Bitcoin, Ethereum, LiteCoin, or even Dogecoin are decentralized, highly volatile, and have very less integration into the real world for the exchange for goods and services. Thus we are not ready to move into a fully-fledged cryptocurrency economy just yet.

Conclusion

Humanity has lived through several stages of the evolution of money in a relatively short span of time. But, we are yet to discover the perfect form of money. Maybe, cryptocurrency is the solution in the future. Maybe, we will need no money at all in the future.

What do you think about the history and evolution of money so far? Where do you think currency is headed? Drop a comment below.