We went through a breakdown of what money is and its functions in society, but that was only scratching the surface of what this particular phenomenon really is. Money itself, as well as its evolution in both the forms it takes and the roles it serves, goes back to ancient civilizations (some scholars think it was even earlier).
In the beginning (1000 BC - 400 AD)
When the idea of money first emerged, it was just that - an idea. Nothing really official. Historians have documented several cases of primitive societies using what we would call money, but only for non-commercial purposes such as arranging marriages, negotiating treaties, building up followers, etc. It was used more for cultural rather than economic purposes.
That all changed with the cultivation of crops and plants (9000-6000 BC) when people began using them as a form of money. But this raises an obvious problem, plants take time to grow, meaning that if farmers didn’t save up from their last harvest, they’d have to wait maybe weeks until they could buy something. So what’s needed now? Debt, credit, and a way to record and track money - something we can thank the Mesopotamians for.
Their cities’ structures paved the way for representative money - a type of money made out of an intrinsically valuable commodity. In exchange for depositing their grain in a temple, farmers would receive a clay token as a receipt, to buy goods or pay off debts.
Trading with foreigners, on the other hand, required something different. Some sort of proxy commodity that would settle exchanges in case barter failed. But this necessitated that at least both parties accepted the same commodity, which wasn’t easy. As trade routes expanded, increasing the number of trade parties, finding that common denominator that everyone would agree on just became more difficult. This meant a sort of trial-and-error method had to be used, in which commodities that weren’t universally accepted by the trading parties were eliminated. As a result, gold and silver emerged as the first international monetary system.
From here we enter the development of coinage. As the world entered the Bronze Age, using metals as a form of money was preferable since they were durable, portable and easily divisible as opposed to crops. The earliest uses of metal money can be traced back to ancient China during the Zhou Dynasty (1046 BC - 256 BC) which used small knives and spades made of bronze. From there it sort of went viral, with several ancient civilizations throughout history adopting it.
However, there were a select few developments here and there that helped make money what it is today. Modern coins came from the kingdom of Lydia around 7th century BC - disk-shaped, made of gold, bronze, and silver, and one side of the coin having a human head ingrained on it. This design paved the way for coins to end up in circulation hundreds of years later.
In Ancient Greece, Pheidon was the first ruler to enact official standards for weight and gold (kind of like the gold standard). This also led to the process of minting - the manufacturing of coins that can be used as a currency - in the 7th century.
Beyond metal: paper money (400-1450)
Paper money can be traced back to the Tang dynasty (618-907), where people would deposit their stashes of copper coins in exchange for receipts. Since these “credit notes” (paper money goes by many names) were often temporary, it didn’t yet take over from coins. The replacement occurred in the 12th century, when the government realized the advantages of paper money - you can collect a lot of them without putting on a lot of weight - and started controlling the issuance of them.
However, back then, people did not understand the importance of controlling inflation. As China adopted paper money, the amount of paper notes in circulation grew and grew, and so you had soaring levels of inflation. Because of this and the fact that they were running out of material to make the money, the use of paper money in China was once again non-existent.
But that was before it was adopted in Europe. Travelers such as Marco Polo and William of Rubruck observed the use of paper money during the Yuan dynasty and documented it in their writings. It wasn’t long before Italian money traders were going through the same struggles as the Chinese with coins and switched to promissory notes (cheques). As its usage increased, these notes became known as “bills of exchange” which was a formal way of a buyer promising to make payment sometime in the future. Once the seller had the bill, they’d exchange it for money from the bank.
Europe also went through some material problems. As a response to shortages of paper, the English monarchy ordered the development of tally sticks. They’re roughly what they sound like; a piece of wood etched with writing, serving as a sort of cheque. Even though they were intended for emergencies, the use of tallies became commonplace up until the 19th century when paper money became prevalent.
Seeing how this may be a lot to take in, we’re gonna split this article into 2 and go through the banking and gold era (1450 -1971) as well as electronic money in our next article.