Human transactions have come a long way since the Stone Age. The merchandise trade of our ancestors eventually gave way to money, which has taken various forms over the past thousand years, from wax beads to metal to paper. In the 21st century, it often manifests as intangible electronic transfers and even cryptocurrencies.
Money is one of the greatest inventions of mankind. It has moved the world for millennia, and this is not a new feeling: As the Latin writer Publilius Syrus said in the first century BC: “Money alone makes the whole world move.” But what is this shape-changing source of wealth anyway? For Americans, the word is reminiscent of pennies, nickels, dimes, quarters, and dollars. Of course, these make up the currency of only one nation at any given time. The United Nations recognizes a further 179 current world currencies, and hundreds or thousands more have long gone the way of the shilling.
Also, money is far more complex than the bills and coins we carry in our purses and wallets. Formal definitions usually indicate that they serve many purposes: a convenient unit of exchange, a way to store wealth over the long term, and a standardized measurement of value. This list only scratches the surface of the uses of money.
The physicality of money might be its least important quality. In fact, most economists agree that it doesn’t even need a physical form, especially in modern times. David Orrell and Roman Chlupatý write in The Evolution of Money: “The concept of currency has become increasingly abstract, to the point where actual coins and banknotes make up only a small part of existing money.” That is the end of the story, however – at least so far. Let us turn to the beginning.
The birth of money
Most thinkers on the subject, from Aristotle to today’s mainstream economists, have speculated that money emerged from a prehistoric exchange economy in which people traded goods and services directly.
Such a system requires that both parties want what the other has to offer and that they can agree on the relative value of each item. Are 30 bananas the same as a fishing net? Three nets for an ox? Money, on the other hand, is what everyone wants, and it is the unit by which everything else is measured. That means I can sell my bananas to someone else for money, the economic common denominator, and buy your ox with it.
Money also frees us from lugging our wealth around in all of its cumbersome bulk. Imagine rolling a bushel of barley into the cafe to pay for your latte. How many goats might it take to rent a SoHo studio? Certainly more than you can hold in 800 square meters. The old societies were obviously not that complex, but as they grew, economist Glyn Davies writes in The History of Money: “The demands of trade have exceeded the framework of barter.” Money came to the rescue.
Almost anything can serve as money as long as it is permanent and scarce. In large parts of Asia and Africa, cowrie shells – the houses of small and large sea snails – have done their work well into modern times. On the Micronesian island of Yap, huge donut-shaped limestones played the role of currency, even though they were immobile. In other cases the best option was some kind of “commodity money” such as cattle, salt or grain, the intrinsic value of which was agreed upon by most of the people in a given society.
Precious metal lumps such as gold and silver are also raw materials with the added benefit of malleability. The first uniform metal money comes from the Chinese Zhou dynasty, in which tiny replicas were forged to represent cowrie shells, as well as knives, spades, and other tools. But the first coins that we would recognize as such were made in the 7th century BC. Minted in Lydia, a kingdom in what is now Turkey. His last king with his legendary wealth lives on in the expression “rich as Croesus”.
Banking and the gold standard
Coins were much easier to transport and value – as opposed to weighing raw metal pieces – and soon spread throughout the Greek city-states and beyond. Meanwhile, an even more convenient method developed in China.
Instead of constantly moving coins from place to place, the Chinese government kept the coins in one place and instead issued pieces of paper. This was the beginning of representative money, where the money objects themselves are not valuable. From his travels east, Marco Polo brought this concept back to Europe where it led to banking.
First in Italy and later in England, people began to deposit their gold bars with goldsmiths and notaries who effectively functioned as what we now call banks. These institutions issued receipts for the deposits, and over time the receipts became a currency for themselves – although they could always be redeemed for actual coins, people circulated the notes just as often as they did stand-alone payments.
In this arrangement, the representative paper money is still covered by commodity money in the form of valuable materials. Centuries later, gold and silver still remain the most universal symbols of wealth. To date, the US government stores around 5,000 tons of gold in Fort Knox. A few hundred miles east, the Federal Reserve Bank of New York guards the world’s largest gold deposit – 6,190 tons, owned by customers around the world as of 2019 – in a vault 80 feet below the streets of Manhattan.
The gold standard dominated the international economy for centuries and tied the value of currencies to the value of the rare yellow metal. But over the past hundred years, governments have decoupled the two. The norm now is fiat money, which has no intrinsic value and is not backed by anything that does. You can’t go to the bank and hand over a stack of hundred dollar bills and ask for an ounce of gold. These pieces of paper are only valuable because the government claims it is, and only as long as the citizens have confidence in their government.
Wealth on the web
Even hard currencies are getting harder and harder to come by. As Orrell and Chlupatý write, we are now “in a virtual regime where most of the money is created at will by private banks, simply by entering a number on a computer account.” Today, incarnated money rarely has to change hands. For decades, credit cards have enabled bits and bytes to represent greenbacks, and in recent years, cryptocurrencies have sparked what may be the next financial revolution.
Bitcoin – the most famous in a growing constellation of cryptocurrencies – is an increasingly popular virtual money created in 2009 by an anonymous person or group known only as Satoshi Nakamoto. Even more abstract than digital dollars, they’re just a series of balances in a decentralized online ledger called a blockchain. There are no physical bitcoins.
Using what is known as peer-to-peer technology, cryptocurrencies remove middlemen such as banks and the government, enabling direct transactions between a large user community. With so many people independently tracking the transactions, it is next to impossible for anyone to cheat. This format eliminates the problem of trusting millions of people – you just have to trust the system.
Economists are still debating the extent to which cryptocurrencies will change the world and whether it is good or bad. However, the digital transformation of the currency in general is well underway and has far-reaching implications. The migration of money into cyberspace means that it is “no longer tied to the fate of any government or individual country,” as the cultural anthropologist Jack Weatherford wrote in 1997. “The emerging system will change the meaning of money.” Perhaps in a century, cash will be as obsolete as cowrie shells.