A Short History of Money

I’ve been feeling pretty ropey these last few days, with a dose of COVID keeping me from my normal activities. Reading my beloved history books has been keeping me occupied. My current read is “The History of Money by Jack Weatherford”, highly recommended if that’s your thing. Because I’ve nothing better to do, I thought you might find a little article on the subject of interest.

Let’s face it, the concept of a “store of value” is nearly as ancient as old Father Time, arising from our need to preserve today’s labor for tomorrow’s use. Before money existed, this was just about anything useful for survival. I think learning how we moved from trusting cattle to trusting central bankers tells more about human nature than any boring economics textbook.

In the very first barter systems, your wealth was perishable. Think grain, livestock, and gathered food. The first collective human brainwave was finding durable commodities, because you can’t exactly save three years’ worth of fish for your daughter’s wedding.

This is when commodity money entered stage left and took a bow, from around 9,000 BC to 1,000 BC. Development was erratic, not universal, but who’s counting? Early stored wealth needed intrinsic value and durability. Cattle and grain dominated in Mesopotamia, for example. Grain became Sumeria’s first unit of currency, recorded in the world’s first spreadsheet, carved in clay rather than Excel. Elsewhere, salt, shells, and furs emerged as money because they were desired, durable, and didn’t rot.

The next breakthrough came with precious metals, possessing handy properties: durability, the ability to split, portability, scarcity. Unlike cattle, gold wouldn’t wander off or require feeding. To my mind, that was a considerable improvement.

Sometime in the region of 3,000 BC, standardized metal weights, what we now call precious metal bullion, became common stores of value in the ancient world. You trusted the metal’s value to pay for your next temple construction, not the local warlord or king. Rarity, not the ruling mob, guaranteed value.

The next evolution was coined money in 600 BC. The Lydians, a kingdom in modern-day Turkey, stamped guaranteed weight onto shiny bits of metal. This introduced trust, the top dogs guarantee. It helped that the metal’s inherent value ensured its role as stored wealth. Basically, the king’s face said “trust this,” while the gold said “but even if you can’t, I’m still valuable.”

That just about wraps it up for the next 1,500 years or so, until I guess what we could call the “modern era,” when another more recognisable shift starts to occur: the change from intrinsic to extrinsic value, from metals with intrinsic value to paper with nothing more than an extrinsic promise to back its value up.

Taking a leaf out of the great merchant families’ use of promissory notes that had developed because the merchants couldn’t be arsed hauling tons of coins everywhere they wanted to trade, early banks started issuing paper receipts for gold stored in their vaults. The paper was worthless, although I guess it would be great for starting fires, but represented a claim on real value. Trust now depended on the issuer’s ability to redeem receipt notes. This worked brilliantly until someone issued more receipts than gold, discovering the art of lending out money you don’t actually have. The first person to try this wheeze was either a genius or desperate, quite possibly both.

To overcome this problem, a new idea was floated: the Gold Standard, from the 19th to mid-20th century. Currencies were pegged to specific amounts of gold. The note burning a hole in your pocket was a government promise: “This represents actual gold—but please don’t all ask at once.” When everyone did, it was called a bank run—not an ideal situation!

When the US ended gold convertibility in 1971, the world shifted to what is called fiat money: currency backed by nothing but government decree and collective trust. We essentially replaced “this represents gold” with “this represents governmental faith and credit, maintained through sound monetary policy.” It’s now trust all the way down. No gold required. Just faith in central bankers. You can see why central banks have become so important and stock markets hang on there every word.

I’m sure you’re getting bored reading this. Happily, we’ve arrived at the end of the road, or possibly not, I haven’t discussed the next great idea: Bitcoin and the vast array of cryptocurrencies. Quite frankly, I’m feeling too unwell to tackle that hotbed topic. I’m away for some tablets and a little lie-down.