A Brief History of Money – Where we started and where we came from.

The history of money has several centuries of the formation of financial relations between people.

“Money has been made many times in many places. Social development did not require technological breakthroughs at that time – it was a purely mental revolution. The emergence of money is associated with the creation of a new inter-subjective reality that exists exclusively in the minds of people. Money is not coins and banknotes. Money is all that people are ready to use to evaluate the value of other things for the exchange of goods and services ”.
(Yuval Noah Harari, Sapiens: A Brief History of Humanity, 2011)

Presumably, the history of money began with hunting and gathering, which dominated 90% of human history. In a distant era, people were considered masters of several professions, learning the necessary survival skills.

An image of an early form of trading comes to mind: a caveman tries to trade by giving away rabbit fur in exchange for what he wants, for example, wild boar meat. Today, this exchange practice is called the barter system, and it is considered by some specialists as an early form of money transactions..

But anthropologist David Graiber argues that the earliest alleged predecessor of money, barter, did not actually exist before the advent of money. But even if there was a barter system, it would not become a sustainable daily practice, such as money exchange. In the end, imagine how hard it would be in situations where no one needs what you offer. If your only barter item was a dead mammoth, how would you carry it with you during the trade?

Bread game.

Towards the end of the Pleistocene era (called the last ice age that ended 10,000 years ago), domestication of animals and cultivation of plants appeared, as people began to spread around the world. This led to the emergence of agriculture, which centralized and increased population density. With a centralized population density, the need to be the best in all professions, as was the case with the hunting and collective lifestyle, has gone. So people began to focus on individual specializations of labor.

“Barter only works if all participants get what they want or need.”

Some people began to grow something, others – to order, others – to build. The clothing merchant offered the farmer several outfits for the sake of wheat, but the farmer does not need new things every day, as the clothing seller needs food. To receive food through the barter system, the tailor had to be creative in exchange before he saw bread. This situation resembles a game where the main prize is bread. In other words, a bread game. The barter system did not support the civilization of people with one specialty for each.

Ancient rules for making money decisions.

Demand for a controlled transaction system paved the way for the emergence of money that was used to measure value (money for accounting) and for a transaction (currency exchange). But the appearance of money did not begin with paper and coins, which we know and love today. Kauri shells were one of the first and most popular forms of money and were used for trade in Africa (especially in Uganda) and Asia until the 19th century (1801-1900).

Prehistoric banks arose in civilizations such as Mesopotamia, where people could organize their valuables to trade. With this new system, it became necessary to record the history of all transactions, incoming and outgoing, which also led to the first use of the book to record transaction history.

But the appearance of money was not agreed upon or initiated under a global agreement based on the experience of Mesopotamia. Like today, there are different forms of currency; Kauri shells are not a universal banknote. Grains, cloth, and other items were also used as money. Although they all look and describe differently, each of the objects had three main features:

1. He must have material embodiment. Ideas cannot be money. True, they can make money.

2. It must be sustainable. Just being tangible is not enough. Any civilization trading with the help of leaves can go bankrupt with a strong wind. Just try putting 50 leaves in your pocket.

3. The company must agree with him. Without consensus, the stability of any currency is undermined, because people are not sure whether others will be able to accept their money in the event of a transaction.

“The currency must be stable; if she just disappears, this is a huge risk.“

While the first two traits could easily be found in items such as shells, grain, and cloth, the third was a bit more complicated. Without any controlling organization that would ensure the acceptance of money, the stability of the currency could not be guaranteed. Around 600 BC this problem was solved with the advent of the coin.

Centralized money management through coins.

There is a problem with using grains – you can make more grain on the farm. Same thing with shells: just head to the beach! How could a currency system really earn credibility if someone is able to make more currency at any time? This was one of the main reasons that led to coins..

The Lydians of Ancient Greece were the first known group of people to start using coins. 500 years later, major cities such as Athens adopted this fashion. Unlike shells and crops, citizens couldn’t just go out and find more gold and silver to melt them and form coins with complex marks. Even in today’s world, this is still a rather difficult task, despite the abundance of tools at our disposal..

With each coin, there was a literal sign of approval of the coin itself. The rulers printed faces or national symbols on them as a guarantee that they and the civilizations with which they are associated guarantee the value of the coin. In other words, as long as their civilization exists, the currency will still be worth something. The transition to the use of coins made the circulation of money controlled by the rulers and the currency itself, and therefore more understandable for most ordinary citizens.

The advent of paper money.

Although the invention of coins solved many monetary problems, flaws still existed. Firstly, the coins were cast from precious metals, including gold. The circulation and supply growth was limited by the availability of these precious metals. Secondly, they took up a lot of space and were heavy, which made their storage and carrying uncomfortable. Discomfort and lack of gold supplies became an active issue before paper.

In 100 BC the Chinese invented the first kind of paper. Soon after, a case of its monetary use was recorded. Instead of carrying coins everywhere, a person could leave his valuables in the bank and in return provide a signed note indicating the value of the item (s) that the person had in the bank. In fact, this was the first banknote. A similar system was based on the belief that a note can be exchanged for real values. Instead of constantly exchanging physical values, people began to exchange notes from the bank.

After Mongolia’s invasion of China, the Mongol Empire also headed for paper currency. In the 13th century, Marco Polo first brought paper money to Europe. By the 17th century, Europe had caught a growing trend, and jewelers began to use the practice of using bank notes as a guarantor backed by their gold.

Since people used and held a paper note rather than exchanging everything for reserve securities, European banks began to issue more banknotes, betting on the hypothesis that every person holding banknotes would not knock on the door the next day asking for gold . This was the first practice of using currency in the form that we now consider modern money..

Rejection of gold.

Today’s money does not allow us to buy out stocks of silver or gold. But this was not so until the 1930s. Prior to this, every dollar was backed by gold by almost half (0.40 dollars.)

The Americans, just like the Europeans, believed that the population would not withdraw all the money right away.

But in the early 1930s, a bad financial time came for the United States. The Great Depression in 1929 was the collapse of the stock market. In an attempt to revive the US economy, Franklin D. Roosevelt (president at the time) decided to print money to initiate a spending program. Unfortunately, with a limited supply of gold, his hands were tied: he could not increase taxes during this economic tragedy and could not print more currency, because gold was not enough. The Great Depression turned people into gold miners, who, in fear for the future, made a stir in the banks and were ready to destroy the economy. But banks only had $ 0.40 in the form of gold for every dollar, so they couldn’t pay money to those who wanted it..

Read also: What does the exchange rate depend on

Therefore, in 1933, President Roosevelt made private ownership of gold illegal. To prevent the export of gold from banks, he closed their doors for three days. Then he forbade citizens to have gold: it became a serious crime with a punishment of up to 10 years in prison. Citizens were instructed to return gold back to the Federal Reserve, and the Federal Reserve was to issue paper money.

Despite the authoritarian nature of the plan, the idea did not bring success. The damage was severe, and in 1971, President Richard Nixon officially withdrew the US dollar from gold support. Only in 1977 did private ownership of gold become legal again. Ironically, President Ford, who lifted the Golden Ban, did not even know that owning gold is illegal.

Today’s monetary system.

Now we have reached the current monetary practice. We saw how it all began and how the barter system turns into a currency based on value with objects such as grain, shells and fabric. Prices were then guaranteed by the government by minting coins. When coins became a burden, paper replaced them..

With most transactions that were processed primarily through paper, governments became lenient to the ratio of paper currency to available precious metals. Soon after, paper currency was no longer associated with jewelry; instead, the banknote became an expression of government promises that it was worth something.

Today, even paper money is a controversial currency. In Sapiens (2011), anthropologist Yuval Noah Harari states:

“Even today’s coins and banknotes are a rare form of money. The total amount of money in the world is 60 trillion dollars, but the amount of coins and banknotes is less than 6 trillion dollars. More than 90% of the money – over 50 trillion dollars that appear on our accounts – exists only on computer servers ”.

In other words, 90% (possibly even higher, because these statistics were published in 2011) of the world’s currency is digital. A separate topic for conversation and writing an article is the recently appeared cryptocurrency. One of its characteristics is a complete lack of centralization and work on blockchain technology..

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