Nepali Wanderer

Do you remember your very first memory of money? The moment you realized that a seemingly ordinary piece of paper could buy you chocolates, food, and toys? As a child, money might have felt like a natural part of the world, just like trees, rocks, and rivers.

But as you grow older, you realize that money is a human construct. It’s fascinating to wonder how we ended up with these magical pieces of paper. In fact, money has now become virtual. About 98 percent of global transactions occur without any paper involved. This makes it even more intriguing to understand how we humans arrived at this virtual concept called money.

Before delving into its origin, let’s first discuss the different roles of money. Money acts as a medium of exchange: for example, you give a $10 note and receive a couple of notebooks. It also serves as a unit of account: for an extra $5 on top of $10, you get one more notebook. Lastly, money functions as a store of value: we often value assets like houses, stocks, or gold in terms of money.

When considering the origin of money, it’s easy to think of it as an evolution from the Barter System — a system that involved exchanging goods. However, the origin and evolution of money predate even the Barter System.

Sharing is a crucial trait that has helped humans survive and prosper. While sharing can be altruistic, it often involves reciprocity — the idea that if you share today, you’ll receive something in return tomorrow. This act of sharing and reciprocating led to early transactions among humans within small groups. As societies flourished and grew larger, it became difficult to track these transactions.

The invention of writing allowed humans to record transactions and maintain accounts of who owed what to whom. The earliest evidence of record-keeping comes from the clay tablets of Mesopotamia, dating back to around 3500 BC. These tablets served as proof or a medium of trust, much like modern-day contracts.

This concept of trust is still evident in today’s financial transactions. If you examine a paper note, you’ll see phrases like “I promise to pay the bearer on demand.” Essentially, both the clay tablets of ancient Mesopotamia and our modern money are mediums of trust. In this sense, money evolved as a form of credit. The word “credit” itself comes from the Latin word “credo,” meaning “I trust.”

As societies expanded and transactions had to be conducted outside familiar circles, the Barter System evolved. People couldn’t always trust outsiders to repay loans, so they needed to exchange goods on the spot, giving rise to the Barter System. However, the Barter System had an inherent problem known as the “double coincidence of wants.” For a transaction to occur, both parties had to have goods the other wanted. This difficulty led to the need for a medium that could bypass this problem.

The medium of exchange also had to have intrinsic value to ensure trust in transactions spanning multiple circles. This gave rise to the concept of “Commodity Money.” For example, in a society that valued goats, goats could act as commodity money. However, goats were not practical as they were not portable and could perish. Therefore, precious metals like gold and silver, which were portable and non-perishable, became ideal for use as money.

But why are precious metals like gold and silver valuable? While the notion of intrinsic value is subjective, the main reasons for their value relate to economics and chemistry. First, gold and silver are rare, giving them higher value. Second, they are chemically inert, meaning they do not react with other elements and retain their quality over time. Their rarity, durability, and aesthetic appeal have made them valuable throughout history.

Gold and silver coins, minted around 600 BC in the kingdom of Lydia (modern-day Turkey), became the first coin money. However, minting these coins was a complex task overseen by powerful entities like kings or authoritative figures. Over time, money became a tool not just for running the state and collecting taxes, but also for accumulating power and exerting control over the public and enemies during war. Some historians and economists argue that money originated more from states’ attempts to direct economic activity and concentrate power, known as “The State Theory of Money.”

As trade expanded across diverse regions, carrying heavy coins became impractical and unsafe. Thus, paper money originated as promissory notes used by merchants in exchange for commodities like gold and silver. These notes were initially redeemable for fixed exchange rates in gold, silver, or other valuable products, leading to the concept of Gold Pegged Currencies.

However, gold is rare and cannot be created at will. As states grew stronger, their confidence in ensuring that paper money could act as a currency without being pegged to gold also grew. This led to the concept of Fiat Money. Aptly named “Fiat,” meaning “Let it be done” in Latin, fiat money holds value purely because of state order and public trust. Today, most major currencies like the Dollar, Pound, and Rupee are fiat money.

Money is not just paper that any country prints. It is a concept that holds because people trust it. A currency’s worth is driven by the simple economics of supply and demand. Printing more money doesn’t create more wealth.

Throughout history, many empires and states have failed to grasp this principle. Whether out of necessity, desperation, greed, or miscalculation, many have tanked their economies, leading to chaos and calamity. Misunderstanding money has often led to conflicts, revolutions, and the fall of empires or governments.

As trust can exist without paper, money has become digitized with the evolution of electronics and the internet. Transactions have turned online, and money has transformed into something virtual, existing purely in computer bits and electronics chips.
Interestingly, we have come full circle with money. What started as trust-based transactions without a physical medium has returned to a similar concept. The only difference is that the circle, once small and within known communities, now encompasses the entire globe. Trust issues still exist, with some currencies more trusted than others, but we have come a long way in trusting written words or digital numbers.

A new concept, cryptocurrencies like Bitcoin and Ethereum, promises to break the state’s control over money through decentralization. Since cryptocurrencies are not issued by any central authority, they are immune to government interference, hinting at a future where states have no power over money.

Overall, money has been the biggest driver in leading our world to where it is today. Without money, without that trust and guarantee, large-scale cooperation would be impossible. While culture and religion also connect people, money prompts cooperation with strangers for tasks they might not otherwise care about. Money, in that sense, transcends culture and geography like no other human invention.

To trace the journey of history through the lens of money, we must travel to a land that not only invented the world’s first paper currency but also played a pivotal role in institutionalizing the power of money. Next, we journey back in time to China, one of the most powerful countries throughout history.