The Origin of Money

When discussing the origin of religions amongst the civilizations, we talked about how we viewed God as a child, and what our first memory of God was. Let us do the same here, but with a small tweak – let’s replace the word God with Money. Do you remember when was the first time in your life you realized the magical power of an otherwise seemingly normal looking paper that could buy you chocolates, food, toys and every other materialistic luxury you wanted? I’m speaking for myself here, and I think also for most of us, when I say that as a kid, money would almost just feel like some natural construct, something that was always out there in existence, just like trees, rock and river. 

Although it would indeed be super cool if money did grow on trees, that is unfortunately not the reality, as we realized growing up. So, it would be really fascinating to find out how we humans actually ended up with these magical pieces of paper. In fact, it would be wrong to just call it a piece of paper since we see money and monetary transactions in all forms nowadays. About 98 percent of the transaction of money worldwide takes place without any paper involved. Money is now virtual – you don’t even need its physical manifestation. That way, it is even more fascinating to understand how we humans ended up with this almost virtual and seemingly mystical ‘thing’ called Money.  

Before diving in the topic of how money came into existence, let us first quickly summarize the different roles of Money. Money first acts as the medium of exchange. That is, for your 100 rupees note, you get a couple of notebooks. Money also acts as the medium for unit of transaction. That is, for extra 50 on top of 100 rupees, you get one more notebook. And finally, money acts as the medium for storage of value. Be it houses, automobiles, or even golds, we usually value things in terms of money, like a house worth 10 million rupees, and so on. 

And just like how we’ve dealt every topic in this series, to understand the origin, we have to go back in time, – to a time when there was no money.  

It is often easier to link the origin of money in terms of the evolution of the Barter System – a system which involved exchange of goods. However, the origin and evolution of money long predates even the Barter System.  

As we have discussed in earlier articles, sharing is an important trait of human beings that has helped them survive and prosper throughout their history. While sharing can be altruistic in nature, most of the time it tags along with the concept of reciprocating – the de facto ‘if I share something that I have today, I will also get something in return someday’. And it is through this act of sharing and reciprocating – which is basically exchanging – transactions started between early humans within their small groups. But as the societies flourished, the circles got bigger and it got difficult to keep track of the transactions. 

Thanks to the invention of writing along the way, humans could record the transaction and keep a strict account of who owes what to whom. The earliest proofs of this record keeping are the still present clay tablets from the time of Mesopotamia civilization, dating back as far as 3500 BC, where it was used to record the earliest writings of mankind. The clay tablets were the proof or the medium of trust showing that the transaction did happen, kind of like a modern day contract.

And that same concept of trust is what we find in our present financial transaction scenario as well. If you just take a look at a paper note, you will see the words along the line of “I promise to pay the bearer on demand“. So, basically, the clay tablets from the Mesopotamia days, and the physical form of money from our age are both a medium of trust. And in that sense alone, money evolved as a credit. In fact, the word credit itself comes from the Latin word credo which means “I trust”.  

It was only later when societies got even bigger and people had to carry on transactions outside their societies, that the Barter System evolved. As people could not “trust” someone outside their circle to pay back for the goods lent, it was imperative to have ‘in the moment’ exchange of other goods in return, which gave birth to the Barter System. However, the Barter System suffered from one inherent problem, known as the problem of ‘double coincidence’. If a transaction were to take place, it was imperative to have two parties who wanted corresponding goods in return. That is, if I wanted to exchange my grains for a goat, I had to find someone who had a goat and wanted grains in exchange, and it was harder to find people who could meet both the criteria. Thus, people felt a need for a medium that could bypass this problem of double coincidence.  

Also, since trust was still going to be an issue in transactions spanning multiple outside circles, the medium of exchange in itself had to have some value too. This reason saw the rise of the concept known as “Commodity Money”. For example, in a society where everyone valued goats, goats could act as the commodity money. But the problem with a goat as money is, although it is valued, it is difficult to carry around (not portable) and the goat could get sick and die too (perishable). So, it was important to find something that was not only valued but also portable and non-perishable. And at the time, the precious metals – mostly gold and silver, ticked the requirement. This led to the rise of money in the form of gold and silver coins.  

Let us digress a bit and wonder about another question here. Why are the precious metals precious in the first place? Why are Gold and Silver valuable (even today)? Do Gold and Silver have intrinsic value in themselves? The notion of intrinsic value is subjective in my opinion, because while some people might associate value with the need only (in that sense Golds and Silvers do not have value in themselves as they are not needed), some people might associate value with aesthetics too (in that sense, they are valuable because of their shiny and lustrous aesthetics). But the two main reasons why they are valuable has something to do with Economics and Chemistry. First, Gold and Silver are rare and their rarity gives them a higher value. Second, Gold and Silver are chemically very ‘uninteresting’ elements, as they are not as reactive with other elements and thus retain their quality even for a longer period of time. Therefore, because of its rarity and non-reactive nature (and also the physics part, which ensures its lustrous nature and aesthetics), Gold and Silver have long been valued, from ancient societies and civilizations where there was no notion of money to the present days.

Coming back to our principal topic at hand, in the past, since Gold and Silver could be minted into coins, they ticked the boxes of portability along with durability and rarity. And hence, the first coin money was minted out of a gold and silver alloy, around 600 BC, in the kingdom of Lydia, the modern day Turkey.  

However, the extraction and minting of these ores was not an easy task, so the task would be overseen and controlled by powerful entities of the state, mostly by the Kings or highly authoritative people. With time, money did not just remain as the means of running the state and collecting taxes from the public, but also as the weapon for the state to accumulate power and exert control over its public, and also its enemies during war. In fact, there are many historians and economists who believe in the ‘state theory of money’, which basically argues that money originated more out of states’ attempts to direct economic activity and concentrate power.  

Although states did have the authority over the money, it was the traders and merchants who actually revolutionized the concept of money. As the transactions got bigger, and trade flourished and spanned across diverse geographical and cultural regions, it was both infeasible and unsafe to carry heavy lumps of coins for long distances. Hence, the concept of paper money originated.  

But these papers were more of like promissory notes mostly used by the merchants in exchange for other commodities like Gold and Silver as the bearer of the note would be able to exchange the equivalent commodity in return.Initially, the paper bills were supposed to be redeemable for fixed exchange rates in gold, silver, or other valuable products. It then led to the concept of Gold Pegged currencies where the currency would be equivalent to a fixed amount of gold. 

However, Gold is a rare element, and cannot just be created according to one’s need or please. But sometimes, the state might feel the need (or sometimes just greed) of creating more money. So, as the states got stronger, their confidence in ensuring that an otherwise normal looking paper could act as a money despite not being pegged with gold or any valuable commodity also got stronger. This gave rise to the concept of Fiat Money. Aptly named as ‘Fiat’, which in Latin means “Let it be done”, fiat money is valuable purely because of an order maintained by the state, and the trust people have in that order. Today, most of the currencies that are commonly known – be it Dollar, Pound or Rupees – are all Fiat Money.  

But as we have already discussed, money is not the mere paper that any country prints. Money is a concept, and the concept holds only because of the trust people have in the concept. A currency is worth only as much as people value it, and it’s worth is driven by the simple economics of demand and supply. Therefore, just printing truckloads of money will not lead to truckloads of wealth. Many empires and states throughout history have at times failed to grasp this simple principle of economics. Be it out of necessity, or desperation, or greed, or pure miscalculation, many empires and states have not only tanked their economy, but also sown the seeds of chaos. Money after all is one unique entity that interconnects and affects every cog in society. So, it is not a coincidence that the value of money has led to many conflicts, wars, revolution, and eventual fall of empires or governments.  

As trust and faith is something that can exist even without paper, it is no wonder that it eventually got digitized. With most of the world running online nowadays, thanks to evolving electronics and the internet, money transformed into something virtual. Today, almost all of the money exists purely in computer bits embedded in electronics chips and displayed in digital platforms.  

Come to think about it, we have come full circle with money in a way. What started out as something out of pure trust, no physical need needed in between and prominent in small circles has again turned into something built out of pure trust, with almost no physical medium. And the trust that exists throughout the world is only possible because of our whole globe turning into a small circle, thanks to the internet. Of course, there are still issues related to trust if we delve deeper, with some currencies in the world gaining more trust than others, but overall, we have come a long way where we can just about trust the words written in a paper or numbers displayed in screens.  

There is one popular new kid in the block now – the Bitcoin, which promises to even break the long love-lust relation and control of the States over money, with the introduction to the concept of decentralization. As cryptocurrencies like Bitcoin are not issued by any central authority, it makes them immune to government interference or manipulation, thus ending the power of state to control the world of money. 

Overall, throughout history, through its evolution, money has been a key driver, not just for growth and innovation and daily life, but for rise, fall and re-rise of states and empires, wars and revolutions. But above all, money has been a key driver in leading our world to where it is today – since without money, without that trust and guarantee, people would simply not cooperate on a large scale on a consistent basis. While concepts like culture and religion also connects people, it is money that prompts a person to wake up in random hours when he does not want to, cooperate with random people he is otherwise not related to, and devote his precious hours of life doing some random work that he probably doesn’t even care about that much. Money in that sense bypasses culture and geography like no other human invention.  

Without money, there would be no mammoth monuments, no disneyland, no space crafts, and no excursions to mars. Simply put, money is the single greatest unifier in human history, a common language that everyone speaks.  

To trace our journey of history with money, we travel to a land that not only invented the world’s first paper money, but also played a pivotal role in institutionalizing the power of money. Next up, we go back in time to one of the most powerful countries of today – the land of China. 

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