In this article series, we will dig deep in detail to uncover the mysteries of money by looking at how it came about, and hopefully predict how it will evolve in the near future. First, we have to understand what money is and where it was first used.
Money can make a civilization and it can also break one. It is undeniable that money plays a central role in everyone’s life today — whether they admit it not. The introduction of money can be seen as the one final step that brought the world to where it is.
The power of finance is everywhere we look — from the technology we use to the wars we fight.
The big question everyone wants a simple answer to is, how did money come to be since the times of barter trade, and what is the future of money? Is cryptocurrency really the future of money after digital currency or is it just a fad?
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning”. — Henry Ford
We quote this because it encapsulates the content of the series that may be unsettling for most of you. We feel compelled to write this series as we’ve been researching the financial world for a few years now, so it definitely gave us a more complete view of the world.
Money’s Barter Origins
History became a part of human history about 3,000 years ago, but going by definition of money, it is justifiable to say that it had been in use a little longer than that. When people discovered that they could trade their surplus goods such as grains and hides for those they lacked, like salt and hoes, money was effectively a part of us.
When early man began domesticating livestock and plants about 11,000 years ago, it spelt death to the hunting and gathering way of life and paved way for more permanent settlements. Bartering set the stage for money because of its most important property: exchange of value.
It became so popular before money that it formed the backbone of the economy of Egypt 9,000 years ago. It was very easy for someone growing wheat, for instance, to trade several bales of his harvest with another who rears goats. However, barter’s greatest weakness was that it was difficult to quantify, and business was only possible when a seller can find a buyer with the exact goods they are looking for in the right quantities. Yes, barter was great, but its limitations were too great for it to be convenient. These drawbacks led to the gradual introduction of a new medium of exchange to replace barter.
Enter Cowrie Shells
Societies along the coast of the Indian ocean solved this problem about 1200 BC by introducing a more standardized currency: cowrie shells. This currency worked just like modern currency and it simplified commerce. As a medium of exchange, cowrie shells were more effective than barter. This currency caught on in Africa and East and South Asia.
The problem, however, was that cowrie shells were not worth a lot of money and it had no central control authority. It wasn’t long before a new medium of exchange was born to replace it. In 1100 BC, people in China began using small replicas of goods cast in bronze as currency. This type of currency may not have caught on for practical reasons but they gave birth to the first Gold currency marked ‘Ying Yuan’, Ying being the name of the city in which the coins were used.
These coins, now referred to as the ‘Chu gold block money’, were made of sheets of gold about 3 to 5 millimeters in thickness and available in varying sizes to represent different values. This currency is considered the first real money used in recorded history.
In the time before coin money, Europe and Asia relied on precious metal currency, especially gold and silver. Travelers and merchants carried with them bars (ingots) and rings of precious metals across the world, and while they stored value and were a medium of exchange, they were very cumbersome and inconvenient.
They had to be weighed and their quality verified by an expert every time a transaction took place. Precious as they were, these commodity currencies had great drawbacks, the most notable being that they were liable to value fluctuations, they were not compact, and were not directly convertible in all markets.
The First Coin
King Alyattes of the Lydian Empire (present day Turkey) who ruled in the 7th century BCE is accredited for introducing the first functional coin money in his empire. Known as the Stater, the coin was a huge success since it was issued by a governing authority, which meant that it could be trusted by the subjects of that governments and foreign traders.
At this time, there was no requirement that the coin be made out of a specific metal, but the Lydian Stater met the basic requirements to be considered ‘money’.
The effects of the Lydian Stater coin were observable just a few years after its introduction. Commerce quickly progressed and became a part of the empire’s culture. Herodotus even recorded that the Lydians were the world’s first real merchants that connected the East and the West (Europe) thanks to ‘the spirit of commercial activity that the natives of Lydia possessed’.
Before long, commerce prospered in the region, and with the truce in war between the empire and its neighbors (including Greece and the Persians), it wasn’t long before King Alyattes was ‘technically expanding’ his empire as far as Hellenspont and Bosporus (present day Dardenelles Strait and Black Sea).
Properties of Money
The Lydian Stater coin was a unique form of currency for many reasons.
- The Lydian Stater was issued by a central governing authority; therefore, it was standardized and a legal tender. Whereas they came in somewhat irregular shapes, most of the coins were bean-shaped or oval, but they were fairly consistent in weight. The design was unmistakable since they were minted in the capital Sardis (the capital of the empire) using the electrum metal.
- It stored value: Perhaps the most important characteristic of money is that it must be able to store value. When you have a certain amount of money in your pocket, you should go to bed and wake up in the morning with the value of the money still the same. This is one feature that the Lydian Stater had that most other currencies in use at that time did not. With this coin, holding money became the most effective way to store value.
- It was a unit of account: Commerce boomed in Lydia with the introduction of the Stater coin for one simple reason: the coin was a yardstick with which economic transactions were measured. Merchants from all over could come to Sardis with their commodities with full knowledge of what to expect in payment should they find a buyer. They also knew that they could buy other items with the coins they received and not have to worry about how to do the conversion math.
- It was portable medium of exchange: As the Stater coin became popular, its demand within the Lydian empire and outside grew. In modern terms, the coin became more valuable because it was scarce. For money to be useful, it must be easy to carry and must be widely acceptable within and outside a jurisdiction. The Lydian Stater is considered the first real money in human history because it had these features.
- The Stater bridged representative and fiat money: Representative money is essentially a token or a certificate that can be exchanged for an underlying commodity. For instance, in Europe, merchants stored their gold or silver money in a vault with a third-party and instead paid with a certificate that showed how much they transferred in a transaction. Fiat money, on the other hand, does not represent an asset and has no intrinsic value. The Lydian Stater was a genius invention because it bore both the properties of a representative currency used in Europe and Asia at that time and the fiat feature that arose from it being declared a legal tender by a governing authority.
Emergence of Modern Money
Functional and revolutionary as it was, the Lydian Stater had its drawbacks, but it was a starting point for the money we use today. The Stater was limited in divisibility, meaning that while its value accrued due to scarcity, it was difficult to carry out large transactions because one had to carry a large amount of oval-shaped coins that had to be counted and even weighed to ascertain the value. It was also around this time that the first money counterfeiters came into business — minting the easy to replicate coins and passing them off as genuine electrum coins.
In this series of article, we will dig deep to understand why this is, and what properties newer money brought about that changed the course of history — commerce, way of life, globalization, and even governance and power. We will also discover why the first middlemen were necessary for commerce to grow beyond the extent that the coins allowed, and why banks appeared and never left.
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