The History of Money

Most of the world is chasing after money. People are slaving away their 20s, 30s and 40s in the pursuit of money. And whatever people earn is worth lesser each year. Read this article to understand how this happens. Coming to the topic at hand, let’s talk about how we ended up with the system of money that all of us know and use.

Before we go into it, let’s clear up the difference between money and currency. Currency is what we use to transact in our daily lives, dollars, rupees, euros, rubles, credit cards, etc. Its goal is to be a medium of exchange, a unit of account, portable, durable, divisible, and interchangeable (your 10-rupee note is equal to my two 5-rupee notes). Money, by definition, should be all of this, plus be a good store of value.

But for argument’s sake, let’s consider the two to be the same, since that is how it is talked about. Before any form of money, a system was barter would have been used by people. Bartering meant directly trading different types of goods and services. For example, buying a pair of shoes for one bag of rice. The problem with this type of trade is, different goods have different storage problems and shelf life, so to say. Also, there is no way to know how many shoes a bag of rice should be worth exactly.

So, for simpler trade, there was always a requirement for a unit of exchange which would be uniform for everybody and across all goods and services. Humans have used cattle, sea shells, and many other objects as a form of exchange. The problem with these things is that these are not in a limited supply so the market can suddenly be flooded with more of them.

Humanity took a major stride somewhere around 1000 B.C., by making the first coins. These were reportedly used in China and were made of copper and bronze. Outside of China, in places like the Persian and Roman empires, precious metal coins were starting to circulate. These were made of gold, silver and bronze, since these metals have value by themselves, owing to the low supply in the world due to difficulty in mining.

By around the 12th century, paper money was being used in China, centuries before most of the world. But over-printing and therefore inflation, led to them stopping the use of paper. Europe was still mostly using metal coins in the 16th century, since colonial acquisitions of new territories provided new sources of precious metals and enabled these nations to keep minting coins.

In 1816, Gold was officially made the standard of value in England. The intentions and rules dictated a non-inflationary production of banknotes which reflected a given amount of gold in the vaults. The USA also pegged the dollar to gold in the year 1900. The notes at this time could be taken to the banks and exchanged for the metal, but it didn’t make sense to do so since using paper to transact is much easier than carrying around coins and bars of gold.

The Great Depression which started towards the end of the 1920s, marked the beginning of the end of the “Gold Standard”. In the United States, the gold standard was revised and the price of gold was devalued forcefully. Other countries’ gold standards soon ended as well, and it was completely done away with when the USA de-pegged the dollar from gold in 1971. After that, several industrialized states’ currencies were pegged to the US dollar and the US dollar was also no longer backed or exchangeable for gold.

The 21st century brought with it the marvel of the internet, which led to the creation of mobile and electronic payment methods. The most recent developments in this field are UPI (created by the National Payments Corporation of India) and apps like Google Pay and Apple Pay created by the tech behemoths. We were also introduced to blockchain-based payments in 2009 in the form of Bitcoin. While we’ll talk more about it in a later article, the Bitcoin network can be a major contender as a worldwide currency due to its low cost and speed. But it certainly is not at that point right now, due to low adoption and big swings in the price.

So, all of that has now brought us to the system we’re familiar with. Central banks can “print” their currencies as and when they deem necessary. This printing can and does cause the boom and bust cycles in economies. Global currencies are traded in the forex markets and prices are set by demand and supply, sometimes getting a push either up or down by an economic event, like the changing of interest rates. Maybe someday we have different types of currencies than we have now, maybe we go back to sea shells, who knows? But what would always serve you well is owning as many assets as you can.

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