How did money begin in history?
Introduction: The Importance of Studying the Evolution of Money
Mechanisms of exchange and storage of value have always been among the most important pillars of the development of human societies. Money, in all its forms, did not suddenly appear in the form of banknotes or coins; rather, it is the result of a long evolution that began with the barter system, progressed through commodity money, to paper currency, and finally to the digital transformation we are witnessing today. This historical journey reveals the close relationship between the development of payment methods and the growth of global trade and markets, and the extent of their impact on the structure of the economy and the behavior of consumers and governments alike.
The Age of Barter and Primitive Exchange Strategies
For thousands of years, humans have relied on the barter system as the primary means of exchanging goods and services. In this system, there is no monetary intermediary; rather, two parties directly exchange goods or services based on a prior agreement on their value.
Sumerian Civilization: The First Records of Barter
Sumerian Mesopotamia (c. 3500 BC): Sumer is the first known civilization to use a system of barter, where farmers and manufacturers recorded the quantities of barley, hides, and cloth exchanged between families and temples in clay tablets.
Clay tablet technology: The Sumerians recorded the quantities of goods in specific units of measurement, enabling them to settle disputes over exchanged values and establish the first standards of exchange.
Ancient Egypt, the Zakat System, and Barter
Barter and Textile Exchange: In Pharaonic Egypt, grain, hides, and cloth were used as barter currency to pay taxes and zakat.
The Role of Temples and Scribes: Temples served as a central bank, storing large quantities of grain and distributing it to the poor and working class, giving these valuable commodities a stored value.
Barter Limitations and Motives for the Search for Currency
1. Double Coincidence of Wants: It's not always easy for two people to need what the other offers at the same time.
2. Difficulty in Measuring Value: The personal value of a commodity may vary from one individual to another.
3. Perishable Commodities: Such as sheep and vegetables, forcing societies to seek more durable alternatives.
Commodity Money and Its Impact on Trade
To overcome the problems of barter, societies agreed to use certain commodities as a standardized medium of exchange, known as "commodity money."
Precious Metals as a Standard of Value
Gold and silver are inherently scarce, durable, and divisible.
Prospecting and Working: Stimulated mining and metalworking activities, contributing to the emergence of the first early global markets.
Other Commodities and Their Economic Impact
Cowrie shells: Used as currency in Sindh (South Asia) and Africa until the 20th century, due to their abundance and ease of transport.
Salt: Highly valued in some regions, and salt caravans connected mining areas with desert regions.
Spices: Transformed into actual currency in trade between Europe and India, their value was often greater than their weight in gold.
Rental Economy and Storage
Commodity money allowed for the emergence of stores of value in temples and castles, where merchants stored metals or shells in exchange for official receipts, similar to a primitive bank deposit system.
The Emergence of Coins and the Development of Minting
Coinage was a crucial turning point, as it provided a stable and tradable standard for goods without the need to weigh them for each transaction.
Lydian Coinage: The First Official Experiment
Lydian Kingdom (600 BC): King Elias I minted electrum ingots (a mixture of silver and gold), stamped with the state emblem, facilitating their acceptance and circulation in Asia Minor.
The Role of Coinage in the Flourishing Trade: Exports and imports, especially wool and metals, increased, and those who owned Lydian minted ingots attained prestigious economic and social status.
Classical China and the Bronze Experience
The Zhou Dynasty and Bronze Tools: Miniature versions of tools and weapons were used as a medium of exchange, before the final standardization into round bronze coins (771–221 BC).
The Shift to Round Coins: Due to the problem of sharp objects and their potential use as weapons, the Chinese later adopted round bronze coins with central holes for ease of storage and carrying.
The Roman Empire and the Gold Standard
The Minting of Denarius and Aureas: During the Republic and Empire (3rd century BC–2nd century AD), the Romans minted silver denarii and gold aurias.
Global Expansion and Use: Roman agents roamed vast parts of Europe, North Africa, and the Middle East, contributing to one of the first international exchange standards.
Engineering Minting Techniques
The Hermetic Seal: To prevent tampering with metals by measuring weight.
Symbolic Designs: To enhance confidence in the value of the currency.
Paper Money Technology: From the Tang to European Markets
As trade volume grew and merchants needed more storage space and lighter handling, the paper money revolution emerged in China before reaching the West.
Tang Dynasty: Jiaozi, the First Paper Money
Jiaozi (618–907 AD): Issued directly by the emperor and backed by state treasuries.
Benefits of transportation and capital mobility: Reduced the burden of carrying heavy barter between Songzhou and Xi'an.
Song Dynasty and the Spread of Paper Money
Expansion of domestic markets: Provided local notes of various denominations (10, 50, 100, and 1,000 silk strands).
Strict central control: Avoided inflation by abolishing the old paper currency and replacing it with a new, numbered currency.
Arrival of Paper Money in Europe
Marco Polo (13th century): Described the first paper money at the court of the Great Khan, which encouraged Italian banks to experiment with early paper currency.
Bank of England (1694): Issued the first official banknotes in Europe, to meet the needs of financing military campaigns.
The Gold Standard and the Bretton Woods System
The Rise of the Gold Standard
19th Century: European and American countries adopted the gold standard to back banknotes, whereby any holder of a note worth X could exchange it for a specified amount of gold.
Benefits: Stabilized international exchange rates and controlled inflation.
World War I Crisis and Suspension of the Standard
1914–1918: Countries stopped issuing paper notes for gold to finance the war, leading to massive inflation.
Transition to free monetary policies to manage the money supply as needed.
Bretton Woods Agreement (1944)
Emergence of a fixed exchange rate system: The dollar was pegged to gold ($35 per ounce), and other currencies were pegged to the dollar.
The Role of the International Monetary Fund: Monitoring the monetary policies of member countries.
The collapse of the gold standard (1971)
Nixon's declaration: Suspension of the dollar's convertibility to gold, ushering in the era of pure fiat money.
Implications: Increased monetary policy flexibility and the emergence of free currency fluctuations.
Modern fiat money and 20th-century crises
The role of central banks in money management
The US Federal Reserve (1913–present): Interest rate controls and financial crisis management.
The European Central Bank (1998–present): Euro unification and increased monetary policy efficiency in the eurozone.
The Great Depression (1929–1939) and the monetary policy response
Expansion of public spending (New Deal): To offset the lack of aggregate demand.
Cutting interest rates: To provide economic stimulus.
Energy crises and inflation in the 1970s
Oil shock: Rising fuel prices and stagflation.
Control through tight monetary policies: Raising interest rates to contain inflation, leading to a temporary economic recession.
Digital Transformation: The Era of Electronic Payments
Bank Cards and SWIFT Systems
Credit and Debit Cards: Visa, Mastercard; facilitated global shopping and payments.
SWIFT Bank Transfer System: Connecting more than 11,000 global financial institutions.
Instant Remittances and Mobile Apps
Zelle, Venmo, and M-Pesa: Instant domestic and international money transfers.
Integration with Central Banks: Offering future CBDC services through official apps.
Central Bank Digital Currencies (CBDCs) and Their Prospects
The Chinese Digital Yuan (e-CNY) Experience
Field Trials: Hundreds of millions of digital yuan distributed in 20 Chinese cities.
Benefits: Reduced printing and circulation costs, increased financial inclusion.
European and American Projects
European Central Bank: Feasibility Studies for a Digital Euro to Enhance Cross-Border Payments.
Federal Reserve: Research on a Digital Dollar for Speedy Bank Settlements.
Regulatory and Technical Challenges
Protecting Privacy
Ensuring Cybersecurity
Integration with Existing Banking and Commercial Systems
Conclusion: Lessons from the History of Money and the Future of the Economy
Over the course of more than five thousand years, money has undergone radical transformations, from the barter system to today's paper money and the transformation of digital payments.
Key Lessons:
1. Innovation is in response to need: Every development has been designed to overcome the limitations of the previous stage.
2. Trust is key: Whether in bronze, paper, or digital systems, trust in centralized or decentralized regulation preserves the value of money.
3. Balancing flexibility and security: Achieving this balance is key to economic growth.
> One final piece of advice: Monitor monetary policy shifts and new financial technologies, as each generation carries its own monetary tools that shape the future of the global economy