The History of Money: From Barter to Banknotes

Money, whether it’s represented by a metal coin, a shell or a piece of paper, doesn’t always have value. Its value depends on the importance that people place on it—as a medium of exchange, a unit of measurement, and a storehouse for wealth.

Money allows people to trade goods and services indirectly, it helps communicate the price of goods (prices written in dollar and cents correspond to a numerical amount in your possession, i.e. in your pocket, purse, or wallet), and it provides individuals with a way to store their wealth in the long-term.

Money is valuable merely because everyone knows that it will be accepted as a form of payment. However, throughout history, both the usage and the form of money have evolved.

While most of the time, the terms “money” and “currency” are used interchangeably, there are several theories that suggest that these terms are not identical. According to some theories, money is inherently an intangible concept, while currency is the physical (tangible) manifestation of the intangible concept of money.

By extension, according to this theory, money cannot be touched or smelled. Currency is the coin, note, object, etc. that is presented in the form of money. The basic form of money is numbers; today, the basic form of currency is paper notes, coins, or plastic cards (e.g. credit or debit cards). While this distinction between money and currency is important in some contexts, for the purposes of this article, the terms are used interchangeably.

The Transition From Bartering to Currency

Money–in some way, shape or form–has been part of human history for at least the last 3,000 years. Before that time, historians generally agree that a system of bartering was likely used.

Bartering is a direct trade of goods and services; for example, a farmer may exchange a bushel of wheat for a pair of shoes from a shoemaker. However, these arrangements take time. If you are exchanging an axe as part of an agreement in which the other party is supposed to kill a woolly mammoth, you have to find someone who thinks an axe is a fair trade for having to face down the 12-foot tusks of a mammoth. If this doesn’t work, you would have to alter the deal until someone agreed to the terms.

Slowly, a type of currency–involving easily traded items like animal skins, salt, and weapons–developed over the centuries. These traded goods served as the medium of exchange (even though the value of each of these items was still negotiable in many cases). This system of trading spread across the world, and it still survives today in some parts of the globe.

One of the greatest achievements of the introduction of money was increasing the speed at which business, whether mammoth-slaying or monument-building, could be done.

Chinese Create Object That Resembles Modern-Day Coin

Sometime around 770 B.C., the Chinese moved from using actual usable objects–such as tools and weapons–as a medium of exchange to using miniature replicas of these same objects that had been cast in bronze. Due to impracticality–nobody wants to reach into their pocket and impale their hand on a sharp arrow–these tiny daggers, spades, and hoes were eventually abandoned for objects in the shape of a circle. These objects became some of the first coins.

Although China was the first country to use an object that modern people might recognize as coins, the first region of the world to use an industrial facility to manufacture coins that could be used as currency was in Europe, in the region called Lydia (now western Turkey). Today, this type of facility is called a mint, and the process of creating currency in this way is referred to as minting.

First Official Currency Is Minted

In 600 B.C., Lydia’s King Alyattes minted the first official currency. The coins were made from electrum, a mixture of silver and gold that occurs naturally, and the coins were stamped with pictures that acted as denominations. In the streets of Sardis, in approximately 600 B.C., a clay jar might cost you two owls and a snake. Lydia’s currency helped the country increase both its internal and external trading systems, making it one of the richest empires in Asia Minor. (Today, when someone says, “as rich as Croesus”, they are referring to the last Lydian king who minted the first gold coin.)

Transition to Paper Currency

Around 700 B.C., the Chinese moved from coins to paper money. By the time Marco Polo–the Venetian merchant, explorer, and writer who travelled through Asia along the Silk Road between A.D. 1271 and 1295–visited China in approximately A.D. 1271, the emperor of China had a good handle on both the money supply and various denominations. In fact, in the place where modern American bills say, “In God We Trust,” the Chinese inscription at that time warned: “Those who are counterfeiting will be decapitated.”

Parts of Europe were still using metal coins as their sole form of currency all the way up to the 16th century. This was helped by their colonial efforts; the acquisition of new territories via European conquest provided them with new sources of precious metals and enabled them to keep minting a greater quantity of coins.

However, banks eventually started using paper banknotes for depositors and borrowers to carry around in place of metal coins. These notes could be taken to the bank at any time and exchanged for their face value in metal–usually silver or gold–coins. This paper money could be used to buy goods and services. In this way, it operated much like currency does today in the modern world. However, it was issued by banks and private institutions, not the government, which is now responsible for issuing currency in most countries.

The first paper currency issued by European governments was actually issued by colonial governments in North America. Because shipments between Europe and the North American colonies took so long, the colonists often ran out of cash as operations expanded. Instead of going back to a barter system, the colonial governments issued IOUs that traded as a currency. The first instance was in Canada (then a French colony). In 1685, soldiers were issued playing cards denominated and signed by the governor to use as cash instead of coins from France.

The Emergence of Currency Wars

The shift to paper money in Europe increased the amount of international trade that could occur. Banks and the ruling classes started buying currencies from other nations and created the first currency market. The stability of a particular monarchy or government affected the value of the country’s currency, and thus, the ability for that country to trade on an increasingly international market.

The competition between countries often led to currency wars, where competing countries would try to change the value of the competitor’s currency by driving it up and making the enemy’s goods too expensive, by driving it down and reducing the enemy’s buying power (and ability to pay for a war), or by eliminating the currency completely.

Mobile Payments

The 21st century has given rise to two novel forms of currency: mobile payments and virtual currency. Mobile payments are money rendered for a product or service through a portable electronic device, such as a cell phone, smartphone, or a tablet device. Mobile payment technology can also be used to send money to friends or family members. Increasingly, services like Apple Pay and Google Pay are vying for retailers to accept their platforms for point-of-sale payments.

Virtual Currency

Bitcoin​, released in 2009 by the pseudonymous Satoshi Nakamoto, quickly became the standard for virtual currencies. Virtual currencies have no physical coinage. The appeal of virtual currency is it offers the promise of lower transaction fees than traditional online payment mechanisms, and virtual currencies are operated by a decentralized authority, unlike government-issued currencies.

The Bottom Line

Despite many advances, money still has a very real and permanent effect on how we do business today.