A Brief History of Money

Money: everyone wants it. Whenever a purchase occurs, the buyer acts in belief the product will provide more benefit than the money spent, and that it does not cost more than it would somewhere else or, depending on urgency, after some time. Money is a massive factor in everyone’s choice of career, save ascetics and the exceedingly rich, and influences our decisions about our living arrangements, our eating habits, our leisure, our transportation, etc. It’s little wonder why people obsess over money; we need it to buy all our comforts and needs. Yet, for all the time so many people spend thinking about money, very little is spent on what distinguishes money from other goods, or how money might be categorized.

In economies without money, trade is reliant on the barter system, with goods and services directly exchanged for one another. For example, if a cow farmer’s roof needed repair, the farmer might offer a carpenter 3 gallons of milk for the task. The obvious flaw in this system is that a lactose intolerant carpenter would need to trade milk to a third party, who would take it in exchange for whatever the carpenter wants. And they, too, might not like milk, passing it on to fourth person, and so on. Such a system greatly restricts the scale at which an economy can operate. “Having to find specific people to trade with,” writes Irena Asmundson in Finance and Development, “makes it very difficult to specialize.” And it is only in an economy with a high degree of specialization and resultant technological advancement where such a system could overcome the hinderance presented by the need for mutual benefit from trade.

Money is a commonly-agreed upon medium of exchange: the means by which a society evolves past the need for barter. Unlike other goods, which derive their value from their use to satisfy a need or create something that can, money’s value comes from the fact that it is agreed to have value. Reliable money is easily quantified into units with a steady commonly-accepted value. Money should also function as a store of value, retaining its value so that it can be tradeable for as long as possible; something like milk is not useful because of this, whereas stones or metals are. Metals, particularly gold and silver, did become recognized in many civilizations as the best form of money. This is because, as Asmundson writes, “precious metals seemed to serve all three needs (of money): a stable unit of account, a durable store of value, and a convenient medium of exchange.”

Today, gold and silver no longer dominate as the preferred medium of exchange; they were replaced by paper bills. The substitution of dollar bills for precious metals was a gradual process, beginning with a system designed to overcome one of the most apparent troubles of metal currency: its weight. For a fee, banks would let people deposit some of their gold in exchange for papers certifying ownership of the gold deposited. The depositor could then use these bank notes as money, since it was understood that it could be exchanged for gold at any time. This system owed its success to the fact that money’s value is not dependent on physical access, unlike most other goods. Gradually, these notes overtook gold coin as the primary money. In America, this process concluded in the 1970s, when the dollar was completely taken off the gold standard.

This is an example of a transition from a metal currency to a fiat currency, a currency not bound to any resource but instead valued based on trust that it will continue to be valued, with its supply determined entirely by the will of the state, or, as is the case in many countries like the US, a central bank with complete power over the money supply granted by the state. As the supply of a fiat money is not bound to a scarce resource, there are no restraints on the supply; not even the money printers running out of paper and ink is a restriction, as most fiat money is kept not in paper bills, but in accounts, which are written down or digital. This transition is driven by the desire of politicians and bankers for a money supply which can be expanded as conditions require; previously, the only way for the money supply to be expanded was fractional reserve banking, where banks lent out the money of depositors to borrowers while still having the money in the depositors’ accounts. This was risky, because if too many depositors suspected the bank didn’t have their money, there would be a “bank run;” depositors would rush to withdraw more cash from a bank than the bank actually had.

The proliferation of computers has made paper currency obsolete in most transactions beyond purchasing lunch from a food truck or tipping a resturaunt employee. Most purchases now take place through debit or credit cards, websites, and mobile phone apps. Technological advancement has also made possible the rise of cryptocurrencies. As Andrey Sergeenkov explains in CoinDesk, a cryptocurrency is an entirely digital currency, with the supply not centrally controlled like fiat money’s, and with all transactions encrypted. Transactions take place over a digital ledger called a blockchain that archives every transaction that has ever taken place with a given cryptocurrency. Cryptocurrencies garnered attention over the past decade, with many people viewing them as a viable alternative to fiat money for a number of reasons; Sergeenkov writes that cryptocurrencies are faster and less expensive for international trades, do not require a bank to intermediate transactions, and some have supply caps to prevent depreciation.

Though what form currency takes and how it’ll be supplied will remain a matter of discussion, it is certain that money will continue to evolve to serve the need for an effective store of value which can effectively be transferred between parties, as our understanding of how currency should operate to best serve as a medium of exchange evolves.

References

Asmundson, I. Oner, C. 2012. What Is Money? Finance and Development, Vol. 49, No. 3, https://www.imf.org/external/pubs/ft/fandd/2012/09/basics.htm

Sergeenkov, A. 2021. What is Cryptocurrency. CoinDesk. https://www.coindesk.com/learn/what-is-cryptocurrency/