History of Money & Commerce: From Bartering to Bitcoin
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We’re all familiar with the concept of money. In its simplest form, it’s a means of exchange, a method of payment, and a measure of wealth. Prices and values are expressed through currency, which circulates from person to person, business to business, and country to country, facilitating trade and commerce.
But how often do we think about where money originated? Money could be considered one of humanity’s greatest inventions. It allowed people to interact and trade with one another and receive the food, technology, and goods they needed. Over the centuries, its form has evolved from bartering to coins, to banknotes, to credit, and most recently, cryptocurrency.
Bartering & Cowrie Shells
Bartering is a system of exchange where goods and services are directly traded for other goods and services. Bartering benefits both parties and takes place without the use of currency. It’s considered the oldest medium of exchange and likely dates back thousands of years, perhaps back to the dawn of early humans.
In 6000 B.C., Mesopotamian tribes engaged in bartering to obtain spices, food, weapons, and livestock. The Silk Road trade routes connected the world’s greatest civilizations at the time, China and Rome. Silk, tea, and porcelain were traded to the West, while gold, wool, wine, and jewels were traded to the East.
Bartering has also been used in times of economic crisis. During the Great Depression when money was scarce, farmers relied on bartering in order to pay their bills, feed their families, and survive. In 2021, currency instability and hyperinflation in Venezuela forced locals to rely on bartering to obtain common household items.
The bartering system’s biggest drawback was its ability to scale. Most goods being bartered were perishable, making them difficult to bring on long journeys. Moving livestock and other heavy goods across great distances was physically taxing. To solve this, a new medium of exchange was invented.
Enter cowrie shells. This primitive form of currency used the shells of a small marine snail known as a cowrie. Cowrie shells possessed all the characteristics you’d expect from coins, including durability, convenience, and consistent size and appearance. They were also difficult to forge.
Cowrie shells were used for centuries throughout Asia, Africa, Arabia, and Oceania. This form of currency was accepted until the 20th century, making it the longest running currency in history.
Cowrie shells came with their own set of problems however. Cowrie shells could be easily found on previously unexplored coastlines, meaning people could increase their wealth by spending time exploring. Since cowries could only be found in warm shallow waters, it also meant that they became more valuable the further they were from the source. For example, in Europe, a single cowrie shell could be enough to buy you a horse, whereas it may have taken thousands in a place where shells were abundant.
Ultimately, the natural supply of cowrie shells from coastlines could not meet the growing demand from inland civilizations, preventing the currency from further adoption. Shells were later replaced by a more centralized form of currency.
Coinage
While their exact origin remains a mystery, some of the earliest known coins came from Lydia (modern day Turkey) in the fifth century B.C. These coins were made out of electrum, an alloy of silver and gold, and were stamped with images of various gods and emperors. The Lydian technique of minting coins was quickly adopted by other empires including ancient Greece, Rome, Persia, and India. Coins from this era were made from precious metals such as silver, copper, and gold, giving them intrinsic value due to their rarity.
Coins from China were developed independently from other civilizations and may date back as far as 1000 B.C. Chinese coins used base metals like iron and bronze, rather than precious metals. These coins differed in shape as well. Early Chinese coins replicated the look of cowrie shells, before taking a knife-like appearance and, finally, a more familiar round shape. These round coins were fitted with a hole in the middle so that larger quantities could be carried with a string.
Paper currency originated with the Chinese Tang dynasty (618–907 CE), as a way to replace carrying large amounts of coin, especially along the Silk Road. Merchants left their “strings of coins” with a trustworthy source and received an official deposit receipt in return. This receipt was traded for goods and services. By the end of the Song dynasty (960–1279 CE), paper money became preferable to coins since it was easier to carry.
To build trust in paper currency, the government created coin deposit locations and strictly limited the supply of new paper currency.
By 1265, Song rulers created a standardized currency that was usable across the empire and was even backed by gold and silver. The new currency was short-lived, however, as the Song dynasty fell to the Mongol empire led by Kublai Khan.
The Mongol empire issued its own currency called the “chao,” which was backed by the government, but not by silver or gold. Marco Polo, who was traveling with the Khan at the time, was so impressed with Mongol paper currency that he wrote about it in his book. Marco Polo would later be credited with bringing the concept of paper money to Europe, although it would take several more centuries before adoption.
After a massive financial crisis in 1455, China eliminated the use of paper money to bring down inflation. Paper money would not be reintroduced in China until the 1890s under the Qing dynasty.
Gold Standard
The gold standard was a monetary system under which a country’s currency was tied to the value of gold. With the gold standard, countries agreed to convert currency into a fixed amount of gold, which could be bought or sold at that price. The gold standard system was first adopted by the United Kingdom in 1821, before being adopted by the United States and the majority of other developed countries.
The outbreak of World War I marked the beginning of the end for the gold standard, as governments across the globe struggled financially and the availability of gold fluctuated. Following the war, many countries abandoned the gold standard in favor of the fiat money system. By contrast, fiat money is a currency that lacks intrinsic value and is not backed by a commodity such as gold or silver. The value of fiat currency is dynamic and is based on supply and demand of the currency against other currencies on the foreign exchange market.
Credit Cards & Digital Currency
In the 1920s, retailers, hotels, and oil companies began issuing charge cards for customers with established accounts. These small, rectangular sheets of metal were embossed with the customer’s name, address, and account number, allowing the business to imprint them and take a record of their purchase. Charge cards were accepted only by the businesses that issued them and acted as a precursor to credit cards.
In 1949, businessman Frank McNamara forgot his wallet while dining out at a restaurant in New York City. The embarrassment he felt was something he looked to never feel again. A year later, he returned with a cardboard charge card, called the Diners Club Card. This early credit card was accepted at restaurants around New York City and allowed customers to make just a single monthly payment for all of their dining expenses.
In 1958, Bank of America released the innovative new credit card, the BankAmericard. This credit card came with a $300 spending limit and was the first credit card to offer revolving credit, giving people the ability to carry a balance.
The next iteration of payment technology was ushered in by the Internet, which allowed users to make online purchases with their credit cards. While credit cards paved the way for online transactions, the invention of cryptocurrencies evolved the landscape even further.
In 2009, Bitcoin became the world’s first decentralized currency. Bitcoins are digital coins you can send through the internet, without going through a central bank or clearinghouse. Instead, Bitcoin uses a technology called blockchain. Blockchain is essentially a public ledger of all bitcoin transactions that is copied to every computer within the network. Every time a new transaction occurs on the blockchain, a record of that transaction is added to every member of the blockchain. This makes it nearly impossible to cheat the system. This process is overseen by individuals known as “miners,” who verify Bitcoin transactions using computers that solve complex math equations. In return for their efforts, miners are rewarded with newly created Bitcoin.
As Bitcoin’s popularity increased, other cryptocurrencies using the same blockchain technology emerged. Today there are more than 4,000 different cryptocurrencies available. While adoption for Bitcoin and cryptocurrencies has increased, they come with many challenges. The immense energy needed to power the mining and verification of bitcoin transactions has led to climate change concerns. Cryptocurrencies also remain highly volatile, often with a value that surges wildly day to day.
Conclusion
If we’ve learned one thing, it’s that money and commerce are always evolving. As we move into the next era of commerce, digital currencies have the potential to change the way we think about money.