What is money and where did it come from? The world today runs on money. Yet most of us don’t really know how to describe it or where the idea of money even came from. With this article, we explore what it means to call something money and how it works. Money has had a long and fascinating journey to become what it is today. From natural objects to barter and paper money to bitcoin, let’s see how money came to be.

What is Money?

In short, money is a representation of value. Today, money does not have any intrinsic value of its own. The only value it has is given to it. This allows us to use it to trade goods and services.

What if money did not exist? Then we would have to resort to trading directly in the items we want, like exchanging bags of rice for cattle. However, even when trading physical goods, we would hold a value in mind. For example, no one would choose to give away a flock of sheep for a handful of rice, simply because the flock is more valuable than the small quantity of food. 

Money is simply our internal valuation taking another form. While money may be a human creation, it has come about organically as the need for giving comparative value to items arose. 

Throughout history, money has been represented by seashells, stamped precious metals, paper and lines of code. It is important to distinguish between money and currency. We refer to the items above as currency, while money is a more intangible concept. Currency is only a tool used to represent money. Meanwhile, as we see from money stored with banks today, money does not always have to have a physical form. 

Functions of Money

Whether seashells or paper currency, all money shares some basic characteristics that enable its use.

Medium of Exchange

First and foremost, it is important for money to be a medium of exchange. This allows us to exchange money for various goods and services. It creates a market where money transfers can replace trying to find specific items the seller may want. 

Unit of Account

This is also referred to as a measurement of value. Money allows us to give any good or service a fixed value. For example, Instead of having to decide how many planks of wood are of equal value to rolls of cloth, money enables both to be priced at a fixed amount. Thus, it standardises how we measure value.

Store of Value

Money makes it much easier for us to store wealth. If instead of your bank account you had to hold your wealth as a physical object, it would be significantly more difficult. Physical goods require enough storage space, yet might still lose value over time as the goods depreciate in quality. Money alleviates both of these concerns. 

Barter System

Now that we understand what money really means, we can look at the barter system. This system is considered the precursor to money. It involves directly trading goods and services for each other. 

The biggest hurdle in this system is the “double coincidence of wants”. Suppose you have two rolls of linen and want ten planks of wood. In this situation, you have to find someone who is not just willing to give you ten planks of wood, but also willing to accept two rolls of linen in return. Therefore, both parties must want what the other person is offering. If the second party wants bags of wheat instead of linen, you will not be able to complete the exchange. 

This led to the formation of pseudo-currencies. Items like tools and weapons or salt became a more general means of exchange because many were willing to accept them. However, they were still not an effective unit of account as their value had to be negotiated for every transaction. 

First Minted Currency

For most of human history, the barter system was used. That all changed almost 2500 years ago when minted currency gained popularity. In both China and Greece, metals were used to mint coins, which were stamped to indicate authenticity and value. In the kingdom of Lydia, the coins were made from a naturally-occurring combination of silver and gold called electrum. 

Minted currency greatly benefitted both internal and external trading of the economies, helping them grow to be the richest empires of their time. 

Growth of Paper Money

It is believed that paper money first originated in China, given their extensive use of the commodity. Historians believe it occurred around the turn of the millennium in 1000 CE under emperor Zhenzong. However, it took some time for it to spread to the rest of the world, where coins were still the dominant form of currency. By the 18th and 19th centuries, other countries began using paper money too. However, this was usually in the form of promissory notes rather than the notes we see today. These notes promised to pay the bearer a certain amount of gold or silver. They were essential for the development of banks, as banks began to issue promissory notes and act as the assurers of their value. 

This was followed by the creation of fiat money and the gold standard. Governments around the world began to issue fiat money, which was valued at the level decided by the issuing authority. However, this form of currency had no intrinsic value, unlike gold and silver. This would have allowed governments to issue as many notes as they wished.

To combat this, the United Kingdom introduced the Gold Standard in 1821, which was adopted by other countries soon after. This would keep the value of fiat currency tied to a fixed quantity of gold. Changing the value of a currency would also involve changing this amount of gold. 

However, this system also had its drawbacks like an inability to control inflation. This led to today’s system of free exchange rates where countries decide on their exchange rate regime individually. 

Modern Day Money

It took a long time to move from coins to paper, but the shift from paper to newer forms of money has been more rapid. The 1960s led to the development of plastic money in the form of debit and credit cards. The magnetic strip on the back allowed for scanners to automatically obtain account information to complete transactions. The introduction of embedded chips also improved the security of the service. 

Second, net banking and mobile payments came into existence. This enabled users to make payments simply with their electronic devices, without ever having to hold a form of currency. All transactions in this system take place digitally where the buyer and seller need not exchange physical forms of payment. 

Digital Assets and Crypto

Finally, this brings us to the creation of crypto assets. These exist as lines of code on a blockchain, which is a publicly available ledger. The first token of this form is Bitcoin, which was launched in 2009 by an anonymous person or group known as Satoshi Nakamoto. The token is not issued by a central authority. Rather, it operates on a decentralised network of computer systems. 

These tokens, like fiat currencies, do not have any value of their own. However, in this case, it is the token's users who grant it its value through trading on crypto exchanges and using it for goods and services. Today, the Bitcoin price is over $23,000 per token.

The use of crypto tokens provides users with anonymity, convenience and a system of payments separate from any central authorities. While this is still an emerging industry, many users already make transactions using crypto. 

Final Thoughts

Currency has taken a long time and has gone through many variations to get to where it is today. With every iteration, it has only emerged as a better tool to enable people and economies worldwide. Digital assets and crypto tokens are further improvements to this formula, introducing new advantages to the landscape of payments. They provide more security and allow decentralised communities of users to decide their value.

byShivna

They provide more security and allow decentralised communities of users to decide their value.

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