The Ultimate Guide for the History of Money

History of Money

If we think about the money that we use everyday, it essentially symbolizes a value that other people recognize. The value of money is always dependent on how other people perceive it. Imagine being stranded on a desert island with a million dollars in cash. Since there is nobody else around, it would actually be rather worthless. Suppose there was a native tribe on the island. Offering them a million dollars in paper money would likely be scoffed, since it poses no real value to them. On the other hand, offering them a large amount of food in trade for other goods might easily be more welcomed. In this article, we explore the history and evolution of money, from its earliest roots to the digital versions we use today.

Bartering

Before money, as we recognize it today, was ever created, people used a bartering system to exchange goods. Bartering can be tricky to pin down, since the value of goods exchanged is not always equal or exact. For example, suppose a farmer suggested trading milk for some cloth from a tailor. How would they agree exactly how much milk would be equal to a bolt of silk? In many bartering situations, it was highly likely that one person in the transaction was not receiving the true value of the goods that they were trading for. Eventually people recognized this problem and turned to a more standardized solution: money.

Early Forms of Money

Before modern forms of money came into use, people relied on units of weight to solve their trading problems. The Mesopotamians introduced this concept via the shekel. For example, a certain amount of grain might be equivalent to a predetermined amount of gold or other precious metals.

Commodity Currency

In its earliest incarnation, money was not made from paper or even metal. Instead, it was represented as tokens or goods that were widely regarded as having a high value. A famous example is cowrie shells. It was much more convenient to trade a handful of shells rather than a herd of cattle or baskets of food. Eventually, people in China began to create metal versions of cowrie shells, and this is considered to be the earliest types of coins. Later on it evolved into flat, round coins with a hole through the middle. Several coins could be linked together on a length of thread or cord and worn by a person. There are still some coins around the world that feature a hole in the middle. Commodity currency allowed people to trade for perceived value rather than goods. For example, a person might want to buy a farmer's crop in advance. If he has no goods to trade, he could use money, or a commodity currency, to buy the crop. This would be useful to the farmer, since money does not spoil or rot; instead it retains its value year round.

Paper Money

Once again, when it comes to paper money, China is known to have produced the first versions. They used it for hundreds of years, with the value varying drastically during that time, before the concept was introduced to Europe. Later on, paper money was used in Europe as a form of credit note. For example, a person could pay for goods with a paper note that promised a certain sum at a later date. In the early days, people would actually handwrite their monetary promises on specially issued paper from the bank. Later on, the bank simply printed it themselves and issued these banknotes to the public.

Gold Backing

In 1816, England introduced gold as their currency's standard of value. It was evolved from the practice of money lenders, merchants, and other money exchangers who kept enormous amounts of gold in banks for safety. Using gold as currency value meant that each banknote symbolized a certain amount of gold. The same practice reached the United States in 1900, leading to the birth of the central bank.

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