After reading this article you will learn about the history of money.
In early ages, humans mainly subsisted nomadically or by hunting and gathering food. However, difficulties with storing things of value, hindrance to free movement, and the limitations imposed by their natural environment compelled them to trade for those goods and services they could not provide for themselves, especially once populations began to grow and settle in fixed locations. This led to the development of the barter system.
The Barter System:
Barter is the exchange of one item for another. For instance, in the olden days a Brahmin would exchange his services to provide knowledge in exchange for a certain quantity of rice, or a farmer may exchange his excess wheat produce for a cow in order to satisfy his future need to plough his field. In both these examples, no money changes hands. The Oxford English Dictionary defines barter as to trade by exchanging goods and services for other goods and services, not money.
Barter is the oldest way of conducting business and predates the use of coins and paper money. Historians have traced the origins of barter in settlements in the Middle East, Greece and Turkey, in addition to many other parts of Asia and to Africa between 8000 BC and 6000 BC. Barter survives in present days in some places in the world.
The barter system works well as long as people have goods that other people need and vice-versa. However, a few problems are inherent to the system. What if a person or a community had a surplus of something to trade that no one else wants? What if the terms for a fair transaction cannot be agreed upon?
These limitations of barter trade probably became more evident as communities started to interact with each other over greater distances and a network of trade routes sprang up to link great civilizations. The quantum of exchange in barter was hard to determine as it varied with different counterparties and between different regions.
The Development of Currency:
To overcome the problems faced by barter, the great early civilizations gradually developed alternative means of exchange. Commonly used and regularly demanded barter commodities, such as wheat, were standardized into weights and measures which, in turn, helped value other goods and services.
However, the use of such commodities as a ‘medium of exchange’ was still limited by the high cost of transporting them and the risk of perishability. This led to a need for a standardised ‘medium of exchange’, which could be transported easily and accepted across civilizations to buy or sell other goods. This gradually-developed medium of exchange came to be known as ‘currency’ or ‘money’.
Around 1200 BC, cowries’ shells were first used as a medium of exchange in China. These shells were widely available on the shores of the Pacific and Indian Oceans, and were still used as currency in some parts of the world as recently as the middle of the twentieth century.
Glyn Davies (2002), in his book, A History of Money: From Ancient Times to the Present Day, writes that in Neolithic societies, payments were required for many reasons, such as fines for crimes committed, dowries for brides, or taxes and tributes to rulers. In Davies’ view, currencies were already being used for purposes other than trade. He contends that these currencies eventually found further uses in trading activity.
Historians believed that the shift from barter towards the use of currencies was a gradual one. During the transition, people haggled over how much a currency was worth in terms of goods or services. As more and more transactions were executed using currency these created a ‘database’ of allocated values to currencies as well as goods and services. In time, the use of currency as a medium of exchange became standardized and accepted.
The Earliest Coins:
It is generally believed that the Lydians were the first people to have struck metal coins around 640 BC. This information is documented by the Greek historian Herodotus in the fifth century BC. The earliest coins were made from electrum, an alloy of gold and silver.
Lydia was one of the most important sources of electrum in the ancient world, and its capital city Sardis was a major commercial center that linked the Asian kingdoms of the East with cities surrounding the Aegean Sea. From Lydia, electrum coinage spread to the Greek cities of Asia Minor such as Byzantium, Chalcedon and Xanthus (present-day Kinik in western Turkey).
From there, it reached the Greek islands and then the mainland. But historians often find it difficult to tell where a particular coin belonged to as these early coins was not inscribed with the names of the places where they were made. Still, as coins were produced by states, rather than private individuals, their designs and inscriptions are a very rich source of information about political history, religion, and culture.
Development of Paper Money:
In China, the first time paper money emerged was after Ming dynasty (1368-1399 AD). The early development of paper money continued in Pennsylvania, in 1764; and by the government of the United States from 1837 to 1863. The Continental Congress Currency Notes, 1779, typical issues to finance the revolution. First penny note issued by first United States Chartered Bank in 1 789.
The Development of Banking:
Historians concur that early banking started in Italy where by the end of sixteenth century, moneychangers and goldsmiths started releasing loans from their customer deposits. This technique of depository lending supported industrial and societal growth by releasing funds, which would otherwise have remained unused in lockers and coffers.
It also increased the amount of money in circulation. The lenders had to be careful with how much they loaned as they simultaneously had to maintain the confidence of their depositors. This led to their maintaining a certain proportion of deposits as reserves.
In ancient times, temples too regularly functioned as banks. They were viewed as the safest places to store gold as their sacred status reduced the risk of theft and looting. Although there are no historical records that show where and when loans began, there are records of loans being made by temple priests to merchants in the Mesopotamian stronghold of Babylon in 1800 BC.
Large Mesopotamian temples were not only religious centers, law courts, schools, and archive depositories, but also banks and mercantile establishments. For early transactions, the role of Babylonian temples was not unlike that of state banks—they conducted their banking business with all the weight of official authority.
The temple of Shamash in Babylon was considered the most important of these early banks. Forms of lending were also evident in Roman times and monetary loans are mentioned in the Bible also.
The Development of Credit Cards and Electronic Money:
The widespread use of credit cards and electronic money as fundamental components of international fund transfers occurred towards the last quarter of the twentieth century.
Electronic money can be defined as ‘a payment instrument whereby monetary value is electronically stored on a technical device in the possession of the customer. The amount of stored monetary value is decreased or increased, as appropriate, whenever the owner of the device uses it to make purchase, sale, loading or unloading transactions.’
Wikipedia has defined Electronic Money as: