This archive report was first published on 7 August 2020.
The Evolution of Money ¶
As we approach the 10th anniversary of Bitcoin, it's worth reflecting on the history of money and how it has evolved over time. From commodity money to cryptocurrencies, the evolution of money has been a long and winding road.
Humans have been using some form of money for thousands of years, with historians dating the use of money back to prehistory. However, pinpointing the exact beginning of money is complicated, as it likely developed in multiple places across the world as people transitioned from hunter-gatherer communities to farming lifestyles.
Initially, there was no need for a medium of exchange in smaller community units, as people could coordinate their efforts towards common goals and were not highly specialized. However, as societies grew and became more complex, the need for a medium of exchange became apparent, enabling the financial system to develop.
Commodity Money
The first type of money used was commodity money, which has value in and of itself, in addition to its value as a medium of exchange. A good example of commodity money is cowrie shells, which were used in China, India, and Africa. Metals such as gold and silver were also used as commodity money, as they are long-lasting, divisible, portable, and scarce – essential attributes of a good money type.
The transition from a barter system to using commodity money was one of the most significant monetary inventions in human history. Before the use of money, trade was generally bilateral, with people exchanging one type of good or service for another. However, as economies grew, this became increasingly difficult, as the information processing needed for active trading exploded. Money and markets fixed this problem by denominating many things in similar base units.
Coins
Coins were first minted in China, Areas, and India around 700-500 BCE. The first official currencies were minted by King Alyattes of Lydia in 600 BC, using electrum, a natural blend of silver and gold. The electrum was scarce and durable, making it an excellent choice of material for producing coins.
The evolution from commodity money to coins made trade faster and easier. Money no longer needed to be considered; one could simply hear of the denomination and calculate the value. Moreover, the value on the coin was decoupled from its size, making it easier to move money around.
Print Money
As with commodity money and coins, paper money developed in several places at different times. In the 11th century, the Song Dynasty in China was one of the first to introduce this new type of fee. It originated from merchant deposit documents during the Tang Dynasty, where merchants and traders sought ways to reduce the amount of copper coinage needed for larger transactions. In Europe, paper money was developed from the expense of exchange, which was used during the Middle Ages. In 1661, the Swedish Banco (a precursor to Riksbanken) introduced the first European banknotes, printed with copper plates.
Once again, paper money had several advantages over coins. There was no need to carry heavy amounts of coins, and larger transactions became more comfortable. Storage and transfer of wealth were improved, as the notes required less space. It is speculated that this development helped the growth of the financial system in the Americas, as it was less difficult to transmit money across the Atlantic Ocean.
Plastic Money
In 1958, Bankamericard – the first modern credit card – was introduced. It was launched in Fresno, California, and later licensed to other banks across the US. After several years, these licenses merged under the Visa brand in 1976. In parallel, the Mastercard brand also emerged.
Plastic money, as it was once known, was another enhancement in the evolution of money. Carrying large amounts of cash became unnecessary, and we could now make large and small transactions without worrying about money. Furthermore, the credit card added new functionality to money, including the possibility of remote payments. This had a significant impact on the financial system, particularly with the development of the internet. Many of the most visible organizations today would not have been possible without plastic money.
Cryptocurrencies
On January 3, 2009, the genesis blocks along the Bitcoin blockchain were mined, marking the beginning of a new era in money. This pivotal moment marked the first of a new type of money and a new asset class. Bitcoin seemed to solve the problem of double-spending, and also showed how we could have digital cash, which was limited.
Fast forward to today, and we have seen a surge in the number of free cryptocurrencies. This vast landscape of money is not new, and a historical example of this can be seen in the US in the 19th century. Before the Federal Reserve was granted the right to disperse currency in 1913, there were over 5,000 different types of banknotes in circulation, provided by various private banks across the country.
