The History of Money Before Bitcoin
April 28, 2020
Money has been invented countless times, in many parts of the world. The way we look at money today is the result of centuries of evolution, a purely psychological evolution.
Money is not really a banknote or gold coin. It is whatever man is willing to use as a means of obtaining a good or service. For this reason, money has not always been as we know it, but it has been many things and has changed many forms.
Its fascinating history will help us see more clearly the future and understand how cryptocurrency can fit seamlessly into the evolutionary process of economic exchange.
Money is the means of payment used to carry out a purchase or sale transaction. Usually, it is in the form of a material object, made out of metal or paper, that is given a conventionally recognised value.
Money is based on two fundamental principles:
- universal convertibility: there’s nothing money can’t buy, right or wrong. An enemy can become an ally, health disease, knowledge violence and vice versa.
- universal trust: money is an intermediary, a sort of neutral ambassador. As such, it enables two people who do not know each other to cooperate by trusting each other.
The issue of trust is the real key to reading and understanding money. While money was the first and greatest conqueror in history, for whom the worst cruelties and wars were waged, it also enabled millions of people to cooperate with each other in trade and industry.
In other words, money has been able to create, before anything else like religion and politics, a global human society.
Before Money: Bartering
The economy, in its primordial form, was based on barter and self-sufficiency.
Since the dawn of mankind, in fact, people have exchanged food, leather, utensils, jewellery and everything that could be used for living. Each family unit produced what it needed and exchanged what it lacked.
This system quickly proved to be ineffective. In fact, what a family had to offer might not serve the community or local merchants. Conversely, what communities and merchants offered may have been useless to a family.
Let’s imagine a hypothetical exchange between two men, where the first one wants eggs in exchange for a bison fur. In all probability, the second man would accept the exchange if they were in February, but we find it hard to believe that he would find this exchange interesting in the middle of August.
If this simple principle is backdated to a few thousand years ago, it is easy to imagine how, as trade progressed and crafts specialised, the oldest human societies felt the need to replace bartering with more articulated forms of exchange.
Therefore, people started trading goods not for their value of use (I give you an apple for an egg to eat what I cannot produce myself) but for their value of exchange (a sheep or a cow can produce milk and tomorrow they can be resold or slaughtered).
The obvious limitations of bartering have resulted in communities finding a more practical and neutral solution and finding an intermediate means of exchange.
Before arriving at gold and silver coins, money was many things: salt, shells, cattle, tobacco, stones. In comparison, the adoption of precious metals was not gradual but spread like wildfire.
Just think that in 1500, when the conquistadores landed in the Americas, the Aztecs still used cocoa and pieces of cloth as currency. In the same way, cowry shells have been used as money for 4,000 years throughout Africa, Asia and Oceania
This brings us back to our premises. Neither shells nor banknotes have any intrinsic value. They have value because man believes they have value. Actually they have nothing special, they are not made of a precious material.
Human beings trust that salt, oil, shells or a sheet of paper, which we call a banknote, are an instrument with which to buy something else. And since everyone else believes the same thing, even political authority, then it becomes a means of real exchange.
“Money is not a material reality but an invention of our collective imagination in which we have all placed our trust.”
Gold and Silver Coins
The idea of transforming precious metals into small circular discs arrived only in the 6th century B.C. in Turkey and only 200 years later it spread in the Hellenic world and in the south of Italy. All in all, only 2400 years have passed since money came to exist as we know it today.
Gold and silver coins have brought 3 great advantages:
- Each coin had the same weight, therefore the same value. Determining prices became much easier and the accounts were accurate. This function of money is called unit of account.
- The durability of precious metals compared to materials such as feathers or vegetables, made this type of currency a store of value. Consequently, it did not have to be spent immediately.
- The mark of the political authority over the currency certified its weight and therefore its value. This standard avoided scams or misunderstandings and provided a reference for all traders in the territory. As long as the people believed in the authority of the sovereign, the prince or the emperor, they also believed in his coins. The economic system merges with the political one, the faces engraved on the coins become a form of political propaganda.
The Origin of Banknotes
The first forms of banknotes were born, instead, in China about 2500 years ago as paper deposit receipts. These receipts represented a number of precious metals that the merchant could withdraw by presenting the banknote.
The diffusion of banknotes coincided with the birth of banks in Europe around the 18th century.
Since, with use, it turned out to be more convenient to hold paper banknotes than to convert them into heavy precious metals, banks decided to bet that people would continue not redeem them. Therefore they started issuing more banknotes than the metal they actually had. Thus allowing the banknotes to come into widespread use. Meanwhile, the banking system evolved towards a function of direct participation in the creation of new money.
– Commodity money was made of a precious material. It therefore had an intrinsic value of its own that was independent from its use as a means of payment. An example of commodity currency was gold and silver. – Representative money were banknotes that could be exchanged with a certain quantity of gold and silver (of equal value). – Fiduciary money has legal tender value but no intrinsic value. – Electronic or digital money is that in our bank accounts or credit cards.
What is the Gold Standard?
Until the 20th century, most national currencies remained linked to the value of gold, this was called “Gold Standard“. Every central bank, therefore, had a reserve of gold which gave the right to a certain amount of credit in the form of banknotes or deposits. In addition to being the natural evolution of the ancient monetary system, the principle of the Gold Standard provided a fixed exchange rate between different currencies, thus increasing stability.
The Failure of the Gold Standard: Fiduciary Money
From 1971 with the end of the Bretton Woods agreements, the currency that relied largely on its intrinsic value, mostly gold and silver, was declared inconvertible and began to be coined virtually. From that moment on, all coins became fiduciary, i.e. without an intrinsic value.
For example, a 100 euro note has no value in itself and does not correspond to any equivalent gold reserve, it is just a piece of paper. A 100 euro note is valid for its purchasing power, i.e. for the value of goods and services it can buy.
This means that modern currency is based on a trust system (and not on gold reserves). We give this trust to the institution that issues it, to the purchasing power of money itself and to the central bank that controls its inflation rate.
The Crisis of Fiduciary Money
The crisis of 2008 triggered an irreversible mechanism, because it represented a great crisis of confidence. The bankruptcy of Lehman Brothers and the collapse of the financial markets, which brought the world’s economy to its knees, sanctioned a profound loss of confidence in the banking system. This crisis has created the breeding ground for alternative systems such as cryptocurrency.