A Deep Dive Into The History of Money

Money has shaped human civilisation for more than 5,000 years. Simple shells transformed into complex digital currencies over time. Chinese artisans created the world’s oldest known coin minting site and started making spade coins around 640 BCE. People used natural objects like cowrie shells as early forms of currency around 1200 BCE.

The history of money features many fascinating chapters. People moved from trading shells and metals to using paper notes and digital payments, and the change has been remarkable. This article tells the compelling story of money’s development, its inherent value, and its ongoing transformation in our digital world.

What Makes Something ‘Money’?

Money is anything people accept as final payment for goods and services, according to economists. People have used many forms of money throughout history—from cowrie shells in Africa to stone wheels on the Pacific island of Yap. The true nature of money goes beyond what it looks like. Money’s value comes from what it does and the trust people place in it.

Three Main Functions of Money

Money stands apart from other commodities because it serves three main functions. It works as a medium of exchange by connecting buyers and sellers in their transactions. Unlike bartering, which needs both parties to want what the other has, money lets you sell to anyone and buy from someone else. 

Money also acts as a unit of account that measures the value of goods and services. You can compare prices, figure out costs, and keep financial records easily.

A store of value is money’s third vital role. It lets people keep their purchasing power over time. People can hold onto money until they want to buy something. While inflation can eat away at stored value, money still works better than keeping perishable goods.

Some experts discuss a fourth role: a standard of deferred payment that helps people agree on future payments, such as loans. 

Good money needs specific features: you should be able to divide it, carry it around, and trust that it will last. It must be scarce enough to hold value but stable enough to use. These qualities help money do its job correctly.

Trust as the Foundation of Monetary Systems

Money’s most basic feature is that its value comes from people’s trust rather than what it’s worth by itself. Today’s currencies are usually fiat money—they don’t have value on their own or represent tangible assets in a vault. Their value exists because governments say they’re “legal tender” and people believe others will take them as payment.

Central banks show how vital trust is. The Bank of England puts it simply: “The reason money works when you pay for things is because people trust in its value”. Many central banks make trust their priority—the Reserve Bank of Australia wants to be “trusted for our analysis, service delivery and policies”.

Trust shapes how monetary systems work in several ways. It keeps inflation expectations in line with central bank targets. Studies show that people who trust central banks tend to expect inflation rates closer to official goals. During recent price increases, people who trusted the European Central Bank didn’t raise their long-term inflation expectations as much as others.

Trust also protects central banks from political meddling. Research shows that when public trust drops, politicians try harder to push central banks toward looser monetary policies. About 10% of central banks face this pressure yearly, which shows why public trust matters so much.

Types of Money Through History

Money has taken three distinct forms throughout human civilisation. Each form reflects a different stage in our economic development and social organisation.

Commodity Money: Shells, Salt, Metal

Commodity money describes physical objects that hold both intrinsic value and serve as money. People first traded goods directly through barter, but specific commodities became accepted as exchange media over time. Cowrie shells are the most prominent example and represent the longest-used currency in history. These shells first appeared in China and later spread through Africa, Asia, as well as the South Pacific. People continued to use them until the mid-20th century.

Here are some notable examples of commodity money throughout history:

• Salt: This commodity became so valuable that the word “salary” comes from the Latin “salarium” – money Roman soldiers received to buy salt
• Livestock and grain: Early agricultural societies used cattle, sheep, barley, and wheat as money
• Metals: Ancient Greece and Rome used bronze, copper, iron, silver, and gold ingots as proto-currencies

The shekel emerged as the first standardised commodity money in ancient Mesopotamia around 2150 BCE. It worked both as a unit of weight and currency. King Alyattes of Lydia made a breakthrough by minting what experts consider the first official currency—the Lydian stater—in 600 BCE.

Representative Money: Gold-backed Notes

Complex societies found carrying large amounts of commodity money impractical. Representative money emerged as a solution. These certificates or notes represented claims on physical commodities stored elsewhere. Their value came from what they promised to pay, not the certificate’s material.

The world’s first paper money appeared during China’s Song Dynasty (960-1279). People called it Jiaozi, which was made from mulberry bark and silk and could be exchanged for goods. Ancient Chinese, Egyptian, and Indian commodity warehouses had already started issuing deposit certificates that worked similarly.

The gold standard became an official representative money system in the 1870s. This system allowed people to convert paper currency directly into a fixed amount of gold. From 1882 to 1933, Americans could freely convert gold certificates into gold coins.

Related Article: The Rise of Tokenised Assets: A New Era in Investment

Fiat Money: Government-issued Currency

Fiat money marks the latest stage in money’s progress. Governments declare it legal tender, though it lacks backing from physical commodities. 

President Nixon’s decision to end US dollar convertibility to gold in 1971 led to today’s system of national fiat currencies. The United States had already moved away from the gold standard with the Emergency Banking Act of 1933. This act stopped citizens from exchanging their currency for government gold.

Fiat money helps governments manage their economies better. Central banks can more effectively control the money supply, adjust interest rates, and keep markets stable than previous systems. The value of fiat money depends on trust. Its value is determined by supply and demand dynamics as well as the stability of the issuing government. .

How Money Was Created and Controlled

Money’s production and control have changed remarkably through the centuries. The system evolved from local craftsmen to powerful institutions that manage sophisticated processes today.

Coin Minting and Early Centralised Production

The ancient kingdom of Lydia (modern Turkey) started producing coins around 600 BCE. Local craftsmen created the first standardised coins from gold, silver, and electrum mixtures. These early mints hired artisans who made each coin by hand. They heated metal blanks, placed them on anvils, and struck them with hammer-wielded dies. Through this detailed process, a skilled worker could make about 100 coins per hour.

Rulers learned that controlling coin production was vital. England’s Royal Mint opened in London in 1279 and brought scattered minting operations under the crown’s direct supervision. Many early minting operations were run by private entrepreneurs who paid the government while keeping their profits.

Paper Money Issuance by Banks and States

China created paper money in the 7th century. Sweden became Europe’s first country to print banknotes in 1661. American private commercial banks printed their notes from 1781 until 1935, while the government occasionally issued currency, too. The American Civil War brought a significant change when the federal government printed “greenbacks” (United States Notes) in 1861 to fund the war.

A unified national currency was established in 1863 and 1864 by the National Banking Acts. These acts let federally chartered banks issue notes secured by government bonds. This system had collateral damage—the currency supply couldn’t adjust to seasonal economic needs. The Federal Reserve Act of 1913 solved this by creating a more flexible currency system through Federal Reserve Notes, America’s only paper currency today.

Modern Central Banks and Monetary Policy

Sweden’s Riksbank opened in 1668, and England’s Bank of England in 1694. Both started as private institutions that helped fund government debt. These banks grew from private companies into public authorities responsible for economic stability.

Today’s central banks use advanced monetary policy tools to manage economies. They set interest rates, conduct open market operations, adjust reserve requirements, and handle crises with special measures like asset purchase programmes. The 2007-2009 financial crisis led many central banks to adopt new frameworks to spot and control systemic financial risks.

Central bank independence is vital. This freedom lets these institutions resist political pressure that could harm monetary stability. Banks can make decisions that help long-term economic health instead of short-term political gains.

Challenges in the Evolution of Money

The rise of monetary systems continues to face ongoing challenges that threaten their stability and functionality. These challenges have shaped how societies design, produce, and manage money throughout history.

Counterfeiting and Anti-Forgery Measures

Money has always attracted counterfeiters who target both low and high-value denominations. Counterfeiting serves as a political weapon to destabilise rival nations, beyond just personal profit—the British manufactured counterfeit Continental currency during the American War of Independence (1775-1783). British supporters distributed these fake notes throughout the colonies, which led to currency devaluation. Nazi Germany later planned Operation Bernhard to drop counterfeit pounds over Britain and create hyperinflation. The plans changed to using these fake notes to purchase war supplies instead.

Technology has reduced the time it takes for currencies to resist forgery. Europol reports that counterfeiters no longer need “years of skilled apprenticeship and access to expensive professional printing equipment” as production methods have changed from traditional to digital. Official guidelines state that possessing counterfeit banknotes knowingly is an offence, with no reimbursement available. The practice funds organised crime directly, damages national economies, and raises costs for businesses and consumers.

Currency Wars and Economic Manipulation

Countries sometimes devalue their currencies to gain trade advantages, creating what experts call currency wars or competitive devaluations. When the Great Depression struck in the 1930s, many countries stopped using the gold standard. They devalued their currencies in what economists call “beggar thy neighbour” policies to export unemployment to trading partners. Trading partners retaliated, which caused US exports to these countries to drop by up to 33%.

Former Brazilian Finance Minister Guido Mantega declared that a global currency war had started in 2010. New tensions emerged in 2013 when Japan’s policy announcements worried the Eurozone. Similar concerns arose in 2015 after the European Central Bank’s quantitative easing programme. Other nations often intervene after these devaluations to protect their export competitiveness.

Inflation and Loss of Public Trust

High inflation damages public confidence in monetary institutions severely. Isabel Schnabel from the European Central Bank points out, “Our currencies are stable because people trust that we will preserve their purchasing power”. Restoring inflation to target levels becomes harder when this trust fades.

Studies show that people who trust central banks have inflation expectations that align better with official targets. People with less trust tend to adjust their inflation expectations more dramatically when economic conditions change. The trust factor became crucial when inflation reached 10% in 2022. The Eurobarometer survey showed that 41% of respondents considered inflation one of their country’s most pressing issues.

Zimbabwe’s hyperinflation in the late 2000s shows what happens when monetary trust disappears completely. Citizens abandoned the Zimbabwe dollar and switched to more stable currencies like the US dollar. Central banks worldwide focus on maintaining price stability as their core mission.

The Digital Age and the Future of Money

Digital transactions now dominate today’s financial world and have changed how people handle money daily.

Bank Deposits and Digital Ledgers

People keep almost all their money as digital entries in bank databases. The public in Australia holds virtually all their money in bank deposits. A two-tier monetary system exists where central banks provide basic services while private banks handle customer interactions. Digital ledger technology makes shared payments more streamlined, especially for cross-border settlements. These ledgers create clear, permanent transaction records that boost security and optimise operations.

Rise of Mobile and Contactless Payments

By 2023, mobile payments will account for 35% of all credit and debit card transactions throughout Australia, reflecting their quicker growth. These systems use near-Field Communication (NFC) technology, which lets customers tap their phones or watches on payment terminals. Digital wallets like Apple Pay, Google Pay, and Samsung Pay store card information securely and enable quick transactions without physical cards. Contactless payments are more secure than traditional magnetic-stripe cards through encryption and tokenisation.

Cryptocurrencies and Decentralised Finance

Decentralised finance (DeFi) marks the most important development of financial systems. It aims to remove intermediaries through peer-to-peer blockchain networks. By 2024, over 560 million people worldwide—about 6.9% of the global population—will use cryptocurrencies. DeFi applications provide financial services without centralised authorities and offer lower fees, negotiable interest rates, and broader accessibility. These systems face challenges with security vulnerabilities, regulatory uncertainty, and high energy consumption.

Legal and Economic Implications of Digital Money

Central banks worldwide are learning about Central Bank Digital Currencies (CBDCs), with many projects in research stages. CBDCs would work as legal tender issued by central banks, unlike cryptocurrencies. Mass withdrawals from commercial banks during financial stress remain a concern with CBDCs. Tokenisation of financial assets presents a great chance, with forecasts suggesting 10% of global GDP could be tokenised by 2027. Regulatory frameworks must balance innovation against risks to monetary sovereignty and financial stability as this development continues.

Conclusion – History of Money

Money has changed remarkably over thousands of years. It adapts to society’s needs while keeping its basic functions intact. The rise from cowrie shells to digital currencies shows human creativity and our basic need to exchange things easily. Money does more than just exist as physical tokens—it works as a way to trade, measure value, and store wealth.

Money will keep changing as technology advances. Cryptocurrencies and central bank digital money could be the next big shift. However, before everyone starts using them, they face big technical and legal challenges.

Money’s history tells us about human civilisation. It shows how we think abstractly, need trusted organisations, and always try to make things work better. This ongoing trip reflects how we adapt and create solutions to one of society’s basic needs: a reliable way to trade value.