presentation about history of money

History Cooperative

History of Money: Discovery and Evolution of Money

Money, in its various forms, has played a fundamental role in human civilization since the dawn of time. It is a medium of exchange, a unit of account, and a store of value that facilitates economic transactions and enables the functioning of societies.

The origins of money can be traced back to the early stages of human development when primitive societies relied on a barter system to exchange goods and services.

As civilizations advanced and societies became more complex, the need for a more efficient and standardized medium of exchange became apparent.

In the modern era, with the advent of digital technology and the internet has ushered in a new era of money with the rise of electronic forms of currency such as credit cards, online payment systems, and cryptocurrencies like Bitcoin. These digital currencies offer new possibilities for global commerce and financial innovation but also raise questions about security, regulation, and the future of money.

Table of Contents

History of Bartering

History of money is complex and before the advent of money, societies relied on barter systems for trade. In these systems, individuals exchanged goods or services directly, often in a straightforward “A-for-B” transaction. For instance, a carpenter might offer his services to a farmer in exchange for some of the farmer’s grain or milk. However, such transactions could pose challenges when immediate needs didn’t align. What would the carpenter do if he desired a muffin or a milkshake but the farmer didn’t require any woodworking?

To address these challenges, early societies often supplemented barter systems with informal credit-and-debt arrangements or gift exchanges. Within tight-knit tribes and communities, individuals supported each other, offering services without the necessity of immediate exchange. For instance, the farmer might provide grain and milk to the carpenter with the understanding that the carpenter would reciprocate whenever needed. This system fostered a sense of mutual support and cooperation.

However, as trade expanded beyond local communities to encompass interactions between tribes and civilizations, the limitations of direct barter became apparent. To facilitate trade across broader networks, traders began exchanging items of tangible value, such as spices, grains, livestock, or animal pelts. While this method enabled commerce beyond immediate communities, it had its drawbacks. For example, commodities like livestock or grains were bulky and perishable, posing challenges in transportation and storage. Additionally, their value could fluctuate with factors like seasonality or market demand, making them less reliable as mediums of exchange.

Ultimately, the evolution of trade necessitated a more versatile and universally accepted form of payment. This led to the emergence of currency, initially in the form of small, shiny objects. Cowrie shells, found abundantly in the Indian and Pacific Oceans, served as one of the earliest forms of currency due to their durability, uniqueness, and aesthetic appeal. Over time , various societies transitioned to using precious metals like bronze, silver, and gold for currency, minting coins stamped with symbols or seals to denote their value and authenticity.

However, the transition to metal currency didn’t eliminate all challenges. While metal coins were more portable and durable than bulkier commodities, they still had limitations. For instance, the value of coins could be subject to fluctuations in metal prices or scarcity. Additionally, transporting large quantities of metal coins posed logistical challenges, especially for long-distance trade.

These historical developments laid the groundwork for the eventual introduction of paper money, which offered greater portability and flexibility in trade. Initially appearing in China during the Tang Dynasty, paper money gradually gained acceptance as a convenient alternative to metal coins. However, its widespread adoption in Europe faced challenges, including concerns about authenticity, counterfeiting, and fluctuations in value.

READ MORE: A Full Timeline of Chinese Dynasties in Order

Despite these challenges, paper money eventually became a dominant form of currency worldwide, ushering in an era of modern banking and financial systems. From the gold standard to fiat currencies, the concept of money has evolved continuously, reflecting changing economic landscapes and technological advancements.

Evolution of Money, Its Inventor, and Production Process

Money, in its essence, is a medium of exchange that facilitates transactions between individuals or entities. It serves as a unit of account, a store of value, and a standard of deferred payment. The process of making money varies depending on its form. Historically, money has been made from various materials, including metals, paper, and even digital code.

In the earliest stages of human civilization, money was made in the form of small, shiny objects, such as cowrie shells . These shells were light, durable, and unique, making them suitable for use as currency. Later, as societies evolved, precious metals like bronze, silver, and gold were used to mint coins. These coins were stamped with symbols or seals to denote their value and authenticity.

With the advent of paper money, the production process became more sophisticated. Paper currency was initially introduced as promissory notes during the Tang Dynasty in China, around the 9th century. These notes were essentially IOUs, representing promises to pay the bearer a certain amount of precious metal upon demand. However, during the Song Dynasty in China, paper money evolved into printed currency issued by the government and backed by reserves of metal currency.

In modern times, money is primarily produced by central banks, which have the authority to issue currency and regulate its circulation. The production process involves designing and printing banknotes with various security features to prevent counterfeiting. Additionally, digital forms of money, such as cryptocurrencies, are created through complex algorithms and blockchain technology.

The invention of money is a complex and gradual process that evolved over thousands of years in response to the needs of human societies. Money, in its primitive forms, emerged as a solution to the limitations of barter systems, where individuals exchanged goods or services directly.

The exact origins of money are difficult to pinpoint, but the earliest forms of currency can be traced back to around 2000–1000 BCE. One of the first known forms of money was cowrie shells, which were used as currency in various societies across Africa, Asia, and Eurasia. These shells were valued for their durability, uniqueness, and aesthetic appeal.

The transition from valuable objects to standardized currency likely occurred gradually, driven by the need for a more efficient medium of exchange in increasingly complex economies. In ancient China, cowrie shells were used as currency as early as the 1700s BCE, as evidenced by inscriptions on bronze vessels mentioning transactions involving cowrie shells.

The invention of metal coins marked a significant milestone in the history of money. The earliest coins were made of bronze and served as a more portable and universally accepted form of currency. King Alyattes of Lydia is credited with commissioning the first official currency made of electrum, a silver and gold mix, in the late 7th or early 6th century BCE.

The five stages of money were:

• Bartering : Before the advent of money, societies relied on barter systems for trade. Individuals exchanged goods or services directly, but this method had limitations, particularly when immediate needs didn’t align.
• Commodity Money : To supplement barter systems, traders began exchanging items of tangible value, such as spices, grains, livestock, or animal pelts. These commodities served as early forms of currency but had drawbacks due to their bulkiness and perishability.
• Cowrie Shells : The use of cowrie shells as currency emerged around 2000–1000 BCE. These shells were valued for their durability, uniqueness, and aesthetic appeal, making them ideal for use as currency in various societies.
• Metal Coins : The invention of metal coins marked a significant advancement in the evolution of money. Coins made of precious metals like bronze, silver, and gold became standardized forms of currency, stamped with symbols or seals to denote their value and authenticity.
• Paper Money : Paper money emerged as a convenient alternative to metal coins during the Tang Dynasty in China, around the 9th century. Initially introduced as promissory notes, paper currency evolved into printed currency issued by governments and backed by reserves of metal currency.

First Metal Money: Coins

The transition from using cowrie shells as currency to utilizing precious metals marked a significant milestone in the evolution of money. In China, for instance, bronze cowrie shells were among the first forms of currency, while in other regions, bronze was fashioned into small knives and shovels for use as currency. Initially, these early coins were rudimentary chunks of metal, lacking standardized designs or markings. However, this changed when King Alyattes of Lydia, in what is now Turkey, commissioned the first official currency in the late seventh or early sixth century BCE. These coins, made of electrum, a mixture of silver and gold, bore the stamp of a lion, serving as the official seal.

King Alyattes ‘ reign, which spanned more than 50 years, facilitated various interactions with neighboring kingdoms through wars, trade, and royal marriages. One of his notable trading partners was the kingdom of Ionia, where he exchanged metals for cereal, addressing Lydia’s shortage of grains. Consequently, Alyattes’ introduction of precious metal coins, minted with a royal image, gained traction, particularly through Grecian traders, spreading across modern-day Greece, Asia Minor, and beyond.

Following Alyattes, his son Croesus continued the tradition of minting coins, favoring pure gold. These coins, known as Croeseids, held significant intrinsic value due to their composition of precious metal, enabling trade well beyond Lydia’s borders. However, Lydia faced defeat in an epic battle against Cyrus the Great around 540 BCE, leading to the adoption of coinage by the conquering Persian empire and its subsequent spread.

The use of coins as currency also emerged in other regions during this time, including the Roman Republic . Initially employed for trade with Greek neighbors, coins gradually gained acceptance as common currency within the Republic. Notably, the Romans contributed to the evolution of money by introducing the term “money,” derived from Juno , the patron goddess of the Roman Republic. The association between Juno Moneta, a temple dedicated to Juno, and the minting of Roman coins influenced the Latin language, with derivatives of “Moneta” used in various Latin-based languages.

Meanwhile, in Mesoamerica, particularly during the Classical Mayan period (200–900 CE), cocoa beans gained recognition as a form of currency among the Mayans. Murals and mosaics from this era depict Mayan kings accepting marked bags of cocoa beans as tax payments. The discovery of counterfeit cocoa pods further supports the notion of cocoa being used as currency. Even today, chocolate retains its value as a form of currency in many households.

First Paper Money

The inception of paper money, a key transformation in the history of commerce and economic systems, can be traced back to ancient China, specifically during the Tang dynasty around the ninth century. Initially, these notes served more as promissory notes or IOUs rather than the printed currency we recognize today. This innovation was born out of practicality; merchants and traders, weary of transporting heavy metals, opted to issue written promises to pay, contingent upon the mutual trust that these metals were indeed held in reserve.

The transition from these early forms of IOUs to the first recognized government-issued paper currency occurred during the Song Dynasty (960–1279), with the earliest notes emerging from Szechuan, the birthplace of China’s printing innovation. These notes, which could be exchanged for metal currency, marked the official advent of paper money, offering a new level of convenience and portability that metal currencies could not match. The widespread circulation and acceptance of these notes underscore the significant leap forward in the concept of money, further popularized by the accounts of Marco Polo, who, upon witnessing the efficiency and practicality of paper money during his travels in China, introduced the idea to the European consciousness.

The introduction of paper currency in Europe, however, followed centuries later, with Sweden taking the lead in 1661. This marked a significant moment in monetary history, as European nations began to explore the possibilities and challenges of paper money, encountering issues of trust, value, and counterfeiting that Chinese innovators had navigated centuries before. Despite the initial success of these notes, backed by the assurance of real coinage and the signatures of numerous officials, the European foray into paper currency soon encountered turbulence. The lack of standardized accountability and rampant counterfeiting underscored the delicate balance between the tangible value of metal coins and the abstract trust required for paper money’s acceptance.

This evolution from metal to paper currency illustrates a broader shift in the understanding and use of money. Initially rooted in tangible goods like cowrie shells, livestock, or metal coins, the concept of money has continuously evolved to accommodate the changing needs of commerce and trade. Paper money, despite its less durable nature, represented a significant advance in this evolution, offering a new form of currency that was both portable and, in many cases, more convenient for large transactions.

The Introduction of Banks and Currencies

The advent of banks and currencies represents a fundamental shift in the economic and social fabric of human societies, marking the transition from basic trade systems to sophisticated financial networks. This transformation was closely tied to the need for a stable, reliable means of exchange and storage of wealth, leading to the establishment of institutions that could facilitate these functions on a large scale.

Currency, in its most recognized form, emerged when societies began to standardize physical tokens of exchange, moving beyond the rudimentary barter systems that had dominated commerce for millennia. The invention of currency can be traced back to ancient civilizations , where the limitations of barter necessitated a more efficient medium of exchange. The earliest known currencies were minted in the kingdom of Lydia around the 7th century BCE, introducing the concept of standardized metal coins which bore official markings to signify their authenticity and value. This innovation provided a basis for the value of goods and services, enabling broader and more complex trade networks.

The introduction of currency was paralleled by the development of banking systems, which originated in ancient Mesopotamia and Egypt . Temples and palaces served as the first banks, safeguarding the precious metal wealth of individuals and facilitating transactions. These early banks played a crucial role in managing and loaning money, laying the groundwork for modern banking practices.

READ MORE: The Cradle of Civilization: Mesopotamia and the First Civilizations

As trade networks expanded and economies grew more complex, the need for centralized institutions to regulate and facilitate financial transactions became evident. This led to the formal establishment of banks, which not only safeguarded deposits but also began to issue their own currencies. This practice was important in the evolution of money, as it introduced the concept of paper money—initially as promissory notes that could be exchanged for gold or silver.

The invention of paper money in China during the Tang Dynasty (around the 9th century) and its formal issuance during the Song Dynasty marked a significant leap forward. Paper currency offered numerous advantages over metal coins, including ease of transport and the ability to represent larger values, thus supporting larger-scale economic activities.

The establishment of banks and the introduction of standardized currencies were closely intertwined developments that addressed the growing needs of expanding economies. These institutions not only facilitated trade and commerce by providing a reliable medium of exchange but also contributed to the development of financial systems that could support economic growth and stability. The creation of currency, whether metal or paper, laid the foundation for the economic structures we see today, enabling the accumulation, investment, and movement of wealth across global economies.

Types of Money

There are four primary types of money, each playing a unique role in the development and function of modern economies.

Commodity Money represents the earliest form of money, directly linked to the physical value of the commodities it represents, such as precious metals, salt, or even livestock. Its value is intrinsic, derived from the material it is made of or the commodity it represents. This form of money facilitated the initial shift away from barter systems, allowing goods and services to be traded more efficiently. However, the limitations of commodity money, such as perishability and the cumbersome nature of certain goods, led to the development of more practical forms of currency.

Fiat Money marks a significant evolution, characterized by its lack of intrinsic value; instead, its worth is derived from the trust and confidence placed in it by its users. This form of money is government-issued and is not backed by a physical commodity but by the stability and economic power of the issuing authority. The value of fiat money is essentially a matter of social convention and legal decree, exemplified by paper currency and coins in modern economies.

Representative Money stands as a bridge between commodity and fiat money, holding value because it represents a claim on a commodity that can be exchanged, such as a gold certificate or silver certificate. This type of money is backed by an actual physical reserve, a specific amount of the commodity on which it can be redeemed, thereby combining the practicality of paper money with the intrinsic value of the commodity it represents.

Digital or Cryptocurrency represents the frontier of monetary evolution, embodying the principles of fiat money but existing entirely in the digital realm. Powered by blockchain technology, cryptocurrencies like Bitcoin offer a decentralized, peer-to-peer approach to financial transactions. This form of money transcends traditional banking systems and government-issued currencies, providing a global, secure, and anonymous method of transaction.

The Gold Standard

One way to eliminate such disorder was for a central bank to adopt a gold standard. The gold standard directly based a country’s currency on a fixed amount of gold. At any time, the country’s bank notes could be redeemed for this amount of gold. Sound familiar? Yes, after more than 150 years of chaos, countries went back to what made Sweden’s initial notes so successful.

Starting in the 1870s, the gold standard was adopted by most of the countries in Europe as well as the US, Canada, Mexico, Japan, and others. Having a set system that allowed currencies to be easily valued against one another allowed trade and international investment to flourish.

Not all countries adhered to the gold standard as strictly as others, but things ran relatively smoothly until the onset of World War I. The Great War caused massive financial disruptions, due to suspended trade, plummeting tax revenues, war-time spending, and bank runs.

READ MORE: What Caused World War 1? Political, Imperialistic, and Nationalistic Factors

The gold standard was reinstated in many countries once the war was over, but the Great Depression proved its ultimate downfall just a little more than a decade later.

Modern-Day Money

At the onset of the Great Depression, bank runs were becoming increasingly common, and too many people were cashing out their paper for gold. England was nearly running out of gold in 1931, and after the head of the Bank of England suffered a panic attack, his subordinates did away with the gold standard .

The US soon followed suit, but only after FDR consulted his groundskeeper, who was also an “agricultural economist.” FDR’s other financial advisors, those who had not devised ways to get chickens to lay more eggs, thought the decision to end the gold standard might destroy Western Civilization as we know it.

Ironically, FDR, who abandoned the gold standard, appears on a gold presidential dollar.

Instead of money tied to gold, the world soon operated with fiat money, or money that has value because a government says it has value.

With the break from the gold standard, money became much more malleable. Interest rates could be manipulated, the money supply could be altered, and economies became things to tweak and manipulate. Some intrepid governments even started currency wars to boost their own exports and diminish the value of imports.

Currencies moved much more freely in relation to one another, and an entire market was born. The foreign exchange, or forex, market soon became the largest financial market in the world, with more than $6.7 trillion now changing hands on a daily basis.

Although the major players in the forex market are multinational corporations, banks, and governments, in the modern world anyone with a connection to the World Wide Web can choose a forex broker and trade currencies. People are making money by selling one currency in relation to another currency… over their phones. It’s incredible to think of when you consider we aren’t so far removed from cowrie shells.

Credit Cards and Debit Cards 

The narrative of money’s evolution reaches another significant milestone with the advent of Credit Cards and Debit Cards. These financial instruments have revolutionized the way individuals access and spend their money, offering unparalleled convenience and security. Credit cards, introduced in the mid-20th century, function on the principle of borrowing. They allow consumers to make purchases or withdraw cash up to a certain limit, with the understanding that the money will be paid back, along with any applicable interest or fees. This system not only facilitated easier spending and borrowing but also helped to build financial histories that could support future creditworthiness assessments.

Debit cards, on the other hand, are linked directly to one’s bank account, allowing for the immediate transfer of funds for payment. Unlike credit cards, they do not involve borrowing or accruing interest, as they utilize existing account balances. The introduction of debit cards represented a significant leap forward in banking convenience, enabling real-time access to funds without the need for physical cash or checks.

Both credit and debit cards have contributed to the dematerialization of money, shifting the perception and usage of currency from physical objects to digital transactions. This transition has been facilitated by advancements in technology and the global financial infrastructure, which have made electronic verification and processing of transactions possible almost instantaneously. As a result, these cards have become essential tools in modern commerce, empowering consumers with greater flexibility and control over their financial resources.

Online Payments

Online Payments further extend the digital transformation of money, encompassing a broad range of technologies and platforms that enable transactions over the internet. This includes direct transfers from bank accounts, payments made through websites or mobile apps, and transactions conducted using digital wallets. Online payment systems have dramatically expanded the scope of digital commerce, allowing businesses and consumers to engage in transactions across vast distances with speed and efficiency.

The rise of online payments has been propelled by the increasing ubiquity of the internet and smartphones, as well as the development of secure encryption technologies that protect sensitive financial information. This environment has fostered an ecosystem of payment gateways, merchant services, and fintech innovations that support a wide array of economic activities, from e-commerce and peer-to-peer transfers to subscription services and digital content consumption.

Digital Currency

Although virtual currencies, such as bitcoin, have lost substantial value as of late, it seems clear that a digital world requires a digital currency. As we saw in the early days of European paper money, currency transitions aren’t always easy. There will be shenanigans. (Mooncoin, anyone?) But it seems certain that the money of tomorrow will bear very little resemblance to what we use today, and even less of a resemblance to what we’ve used in the past.

The Impact of Money throughout History

The impact of money throughout history is profound, influencing virtually every aspect of human civilization. From the earliest barter systems to the sophisticated digital economies of today, the evolution of money has been inextricably linked with the development of trade, the rise and fall of empires, the shaping of cultures, and the advancement of technology. Money, in its various forms, has served as a catalyst for social organization, economic development, and global interconnectedness, fundamentally transforming the way humans interact, exchange, and perceive value.

The introduction of standardized currency facilitated the expansion of trade networks beyond local communities, enabling the emergence of market economies and the specialization of labor. This, in turn, spurred innovation and the accumulation of wealth, laying the groundwork for the rise of cities and the establishment of nation-states. Moreover, the shift from commodity money to fiat currency and the subsequent development of banking and financial institutions have allowed for more sophisticated methods of investment, financing, and wealth management, further accelerating economic growth and innovation.

The control over the issuance and regulation of money has been a source of immense power for rulers, governments, and financial elites, often leading to social and economic disparities. Inflation, currency devaluation, and financial crises have periodically disrupted societies, highlighting the vulnerabilities inherent in monetary systems.

The Future of Money

Looking towards the future of money, it is clear that digital technologies are set to play a huge role in shaping its evolution. Cryptocurrencies and blockchain technology offer the potential for creating more decentralized, transparent, and secure financial systems. Digital currencies issued by central banks (CBDCs) are being explored as a way to combine the benefits of digital money with the stability and regulatory oversight of traditional fiat currencies. Furthermore, the rise of fintech innovations continues to democratize access to financial services, making it possible for more people around the world to participate in the global economy.

The future of money also poses significant challenges and questions. The digital divide, privacy concerns, cybersecurity threats, and regulatory issues are just a few of the complexities that societies will need to navigate. Moreover, the environmental impact of digital financial technologies, particularly energy-intensive cryptocurrencies, calls for sustainable approaches to the development of future monetary systems.

From Barter to Blockchain: The Evolution Continues

The evolution of money, from barter to digital currencies, showcases humanity’s progress in enhancing trade efficiency and economic inclusivity. This has not only transformed commerce but also societal structures and governance. Today, innovations like blockchain and cryptocurrencies signal a new era in finance, offering global access to financial services yet posing challenges in security, privacy, and sustainability. As we envision the future, it’s crucial to balance technological advancements with societal well-being, drawing from history to build a financial system that’s inclusive and sustainable for all.

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Humanities in Class: Webinar Series

A History of Money in Nine Slides

Simon Middleton (Fellow, 2019–20; Associate Professor of History)

February 16, 2021

What is money and where does it come from? If asked, most people would likely respond to these questions by pointing to the notes and coins in their pockets—or maybe their debit and charge cards—and muse on some connection between the “government” and printed money. Concerning origins, most would probably add that money developed more or less spontaneously in the market in response to the inconveniences of barter exchange. Both answers are wide of the mark: most money—meaning credit and value—is created by the banks and the myth about money’s spontaneous market origins is traceable as far back as Aristotle. In this session we will survey the actual history of money, beginning from its origins in Iraq/Syria in 3000 BCE through to its latest reformulation as Bitcoin. We will also consider how changing understandings of monetary forms and functions have been linked to major political and economic developments, from the collapse of the monarchy in the early modern era to the rise of capitalism and its troubles in the nineteenth through twenty-first centuries. We will do this in nine, straightforward, and easy to follow powerpoint slides. To check on the accuracy of the assumptions above, here’s a challenge for you: Before you come to the session, ask a friend or family member what they think money is and where they think it originates.

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UPDATE 12 JANUARY 2024: In Spectrum ‘s 2012 feature story, below, James Surowiecki called money in tribal economies “a social lubricant.” Or as the anthropologist David Graeber puts it in his 2011 book Debt: The First 5000 Years money helped “to define the structure of social relations.”

The view of “money” as a social structural agent and social lubricant has made a comeback in recent years, too. In November, in an interview with Rachel O’Dwyer, author of Tokens: The Future of Money in the Age of the Platform , she noted that digital mediums of exchange are increasingly doing double duty­—for the purposes that fit the classical definition of money, and for “something more,” as she puts it. O’Dwyer noted that people are also using digital monies to reward each other for socially valuable content online. “And this is something that really fascinates me about these tokens,” she said. “They’re money or money-ish, but they’re also a kind of social currency or social media.”

Meanwhile, technologies like the blockchain , stored value cards, and digital funds transfer services like Venmo came along and proved Kublai Khan’s theory, as noted below, that that “what matters about money is not what it looks like, or even what it’s backed by, but whether people believe in it enough to use it.” Shadow economies have sprung up across the globe that sidestep fiat currency like the U.S. dollar, the Chinese yuan, and the EU’s euro. Multinational corporate giants like Meta (corporate parent of Facebook ) are looking to establish their own currencies alongside government-backed money. Facebook failed with its Diem cryptocurrency coin, but another tech giant might soon pull it off .

Last month, as Spectrum reported, Bitcoin’s US $3 trillion worth of transactions in 2021 more than doubles what American Express processed. People are receiving the equivalent of salary payments in the form of Amazon gift cards . And as O’Dwyer notes in Spectrum ‘s November interview with her, EBT cards are taking the place of food stamps. Elsewhere, people are using the stored value on digital phone cards administered by wireless carriers as replacements for cash or debit cards. This enables them to carry out transactions even if they don’t have bank accounts and provides a measure of security against losses from pickpockets or armed robbers. — IEEE Spectrum

Original article from 30 May 2012 follows:

In the 13th century, the Chinese emperor Kublai Khan embarked on a bold experiment. China at the time was divided into different regions, many of which issued their own coins, discouraging trade within the empire. So Kublai Khan decreed that henceforth money would take the form of paper .

It was not an entirely original idea. Earlier rulers had sanctioned paper money, but always alongside coins, which had been around for centuries. Kublai’s daring notion was to make paper money (the chao ) the dominant form of currency. And when the Italian merchant Marco Polo visited China not long after, he marveled at the spectacle of people exchanging their labor and goods for mere pieces of paper. It was as if value were being created out of thin air.

Kublai Khan was ahead of his time: He recognized that what matters about money is not what it looks like, or even what it’s backed by, but whether people believe in it enough to use it. Today, that concept is the foundation of all modern monetary systems, which are built on nothing more than governments’ support of and people’s faith in them. Money is, in other words, a complete abstraction—one that we are all intimately familiar with but whose growing complexity defies our comprehension.

Today, many people long for simpler times. It’s a natural reaction to a world in which money is becoming not just more abstract but more digital and virtual as well, in which sophisticated computer algorithms execute microsecond market transactions with no human intervention at all, in which below-the-radar economies are springing up around their own alternative currencies, and in which global financial crises are brought on for reasons difficult to parse without a Ph.D. Back in the day, the thinking goes, money stood for something: Gold doubloons and cowrie shells had real value, and so they didn’t need a government to stand behind them.

In fact, though, money has never been that simple. And while its uses and meanings have shifted and evolved throughout history, the fact that it is no longer anchored to any one substance is actually a good thing. Here’s why.

Let’s start with what money is used for. Modern economists typically define it by the three roles it plays in an economy:

• It’s a store of value , meaning that money allows you to defer consumption until a later date. 

• It’s a unit of account , meaning that it allows you to assign a value to different goods without having to compare them. So instead of saying that a Rolex watch is worth six cows, you can just say it (or the cows) cost $10 000.
• And it’s a medium of exchange —an easy and efficient way for you and me and others to trade goods and services with one another.

All of these roles have to do with buying and selling, and that’s how the modern world thinks of money—so much so that it seems peculiar to conceive of money in any other way.

Yet in tribal and other “primitive” economies, money served a very different purpose—less a store of value or medium of exchange, much more a social lubricant. As the anthropologist David Graeber puts it in his recent book Debt: The First 5000 Years (Melville House, 2011), money in those societies was a way “to arrange marriages, establish the paternity of children, head off feuds, console mourners at funerals, seek forgiveness in the case of crimes, negotiate treaties, acquire followers.” Money, then, was not for buying and selling stuff but for helping to define the structure of social relations.

How, then, did money become the basis of trade? By the time money makes its first appearance in written records, in Mesopotamia during the third millennium B.C.E., that society already had a sophisticated financial structure in place, and merchants were using silver as a standard of value to balance their accounts. But cash was still not widely used.

It’s really in the seventh century B.C.E., when the small kingdom of Lydia introduced the world’s first standardized metal coins, that you start to see money being used in a recognizable way. Located in what is now Turkey, Lydia sat on the cusp between the Mediterranean and the Near East, and commerce with foreign travelers was common. And that, it turns out, is just the kind of situation in which money is quite useful.

To understand why, imagine doing a trade in the absence of money—that is, through barter. (Let’s leave aside the fact that no society has ever relied solely or even largely on barter; it’s still an instructive concept.) The chief problem with barter is what economist William Stanley Jevons called the “double coincidence of wants.” Say you have a bunch of bananas and would like a pair of shoes; it’s not enough to find someone who has some shoes or someone who wants some bananas. To make the trade, you need to find someone who has shoes he’s willing to trade and wants bananas. That’s a tough task.

With a common currency, though, the task becomes easy: You just sell your bananas to someone in exchange for money, with which you then buy shoes from someone else. And if, as in Lydia, you have foreigners from whom you’d like to buy or to whom you’d like to sell, having a common medium of exchange is obviously valuable. That is, money is especially useful when dealing with people you don’t know and may never see again.

The Lydian system’s breakthrough was the standardized metal coin. Made of a gold-silver alloy called electrum, one coin was exactly like another—unlike, say, cattle. Also unlike cattle, the coins didn’t age or die or otherwise change over time. And they were much easier to carry around. Other kingdoms followed Lydia’s example, and coins became ubiquitous throughout the Mediterranean, with kingdoms stamping their insignia on the coins they minted. This had a dual effect: It facilitated the flow of trade, and it established the authority of the state.

Modern governments still like to place their stamp upon money, and not just on bills and coins. In general, they prefer that money—whether physical cash or digital—be issued and controlled only by official entities and that financial transactions (especially international ones) be traceable. And so the recent rise of an alternative currency like Bitcoin [see “ The Cryptoanarchists' Answer to Cash, " in this issue], which is based on a cryptographic code that allows for anonymous transactions and that so far has proved to be uncrackable, is the kind of thing that tends to make governments very unhappy.

The spread of money throughout the Mediterranean didn’t mean that it was universally used. Far from it. Most people were still subsistence farmers and existed largely outside the money economy.

But as money became more common, it encouraged the spread of markets. This, in fact, is one of the enduring lessons of history: Once even a small part of your economy is taken over by markets and money, they tend to colonize the rest of the economy, gradually forcing out barter, feudalism, and other economic arrangements. In part this is because money makes market transactions so much easier, and in part because using money seems to redefine what people value, pushing them to view things in economic, rather than social, terms.

Governments were quick to embrace hard currency because it facilitated the collection of taxes and the building of military forces. In the third century B.C.E., with the rise of Rome, money became an important tool for unifying and expanding the empire , reducing the costs of trade, and funding the armies that kept the emperors in power.

The decline of the Roman Empire, starting in the third century C.E., saw a decline in the use of money as well, at least in the West. Parts of the former empire, like Britain, simply stopped using coins. Elsewhere people still used money to balance accounts and keep track of debts, and many small kingdoms minted their own coins. But in general, the circulation of money became less central, as cities shrank in size and commerce dwindled.

The rise of feudal society also undercut money’s role. The basic relationship between master and vassal was mediated not by payment for services rendered but rather by an oath of loyalty and a promise of support. Land was not bought and sold; it belonged, ultimately, to the king, who granted use of the land to his lords, who in turn provided plots of land to their vassals. And feudalism discouraged trade; a feudal estate, or fief, was often a closed community that aimed to be self-sufficient. In such a setting, money had little use.

Money’s decline in feudal times is worth noting for what it reveals about money’s essential nature. For one thing, money is impersonal. With it, you can cut a deal with, say, a guy named Jeff Bezos , whom you don’t know and will probably never meet—and that’s okay. As long as your money and his products are good, you two can do business. Similarly, money fosters a curious kind of equality: As long as you have sufficient cash, all doors are open to you. Finally, money seems to encourage people to value things solely in terms of their market value, to reduce their worth to a single number.

These characteristics make money invaluable to modern financial systems: They encourage trade and the division of labor, they reduce transaction costs—that is, the cost incurred in executing an economic exchange—and they make economies more efficient and productive. These same qualities, though, are why money tends to corrode traditional social orders, and why it is commonly believed that when money enters the picture, economic relationships trump all other kinds.

It’s unsurprising, then, that feudal lords had little use for the stuff. In their world, maintaining the social hierarchy was far more important than economic growth (or, for that matter, economic freedom or social mobility). The widespread use of money, with its impersonal transactions, its equalizing effect, and its calculated values, would have upended that order.

Money’s decline didn’t last, of course. By the 12th century, even as the Chinese were experimenting with paper currency, Europeans began to embrace a new view of money: Instead of being something to hoard or spend, money became something to invest, to be put to work in order to make more money.

This idea came with a renewed interest in commerce. Trade fairs sprang up across Europe, frequented by a community of merchants who had begun to do business across the continent. This period also saw the emergence of a banking industry in the city‑states of Italy . These new institutions introduced a host of financial innovations that we still use today, including municipal bonds and insurance. The banks fostered the use of credit and debt, which became ever more central to the economy as kings borrowed to finance their military adventures and merchants borrowed to fund their long-range trades.

The invention of the bill of exchange , which laid the groundwork for the emergence of paper money in the West, also occurred during this period. The bill of exchange was a sort of precursor to the traveler’s check: a document representing a quantity of gold that could be exchanged for the real thing in a different city. Traveling merchants liked the bills because they could be carried around with far less risk (and exertion) than the precious metal.

By the 16th century in Europe, many of the ideas about money that shape our thinking today were in place. Still, money remained a physical thing—that thing being a piece of gold or silver. A gold coin wasn’t a symbol of value; it was an embodiment of it, because everyone believed that the gold had intrinsic worth. Likewise, the amount of money in the economy was still a function of how much gold and silver was available. The rulers of Spain and Portugal didn’t quite appreciate the limits of this system, however, which led them to plunder their New World colonies and accumulate vast hoards of precious metals, which in turn triggered periods of rampant inflation and enormous tumult in the European economy.

These days, countries have central banks to oversee their money supplies, as well as to set interest rates, combat inflation, and otherwise control their monetary policy. The United States has the Federal Reserve System , the Eurozone has the European Central Bank , the Maldives has the Maldives Monetary Authority , and so on. When the Federal Reserve wants to increase the money supply, it doesn’t have to go looking for El Dorado. Neither does it phone up the United States Mint and order it to start printing more dollars; in fact, only about 10 percent of the U.S. money supply—about $1 trillion of the roughly $10 trillion total—exists in the form of paper cash and coins.

Instead, the Fed buys government securities, such as treasury bills, on the open market, typically from regular private banks, and then credits the banks’ accounts with the money. As the banks lend, invest, and otherwise spend this new money, the overall money supply that’s circulating increases. If, on the other hand, the Reserve wants to decrease the money supply, it does the opposite: It sells government bonds on the open market, again typically to private banks, and then deducts the sales price from the banks’ accounts. The banks have less money to spend, and the money supply shrinks.

The sophisticated and relatively opaque machinations by which central banks keep economies afloat may make the Spanish Empire’s inflationary foibles look quaintly naive. But in fact the fine-tuning of monetary policy—the delicate juggling of interest rates, money supply, and other financial mechanisms so that an economy keeps expanding at a steady, manageable rate, without excessive inflation, unemployment, debt, or boom and bust cycles—is still a work in progress, as the ongoing economic woes in both Europe and the United States demonstrate.

Back to the 1600s: The view of money as commodity began to shift only with the widespread adoption of paper currency, which found the warmest welcome in the American colonies. In 1690, for instance, the Massachusetts Bay Colony issued paper money to fund a military campaign, and did so without explicitly promising to redeem the bills for gold or silver.

Later, during the American Revolutionary War, the Continental Congress printed “continentals” to pay for the new country’s war debts. These bills were in principle backed by gold, but so many were issued that their collective value far exceeded the available gold. When soldiers and merchants discovered they’d been paid in near-worthless scrip, it inspired a backlash against paper money; the U.S. Constitution , for instance, prohibited states from using any other money than gold and silver coins. It wasn’t until 1862, during the Civil War, that Congress finally passed a law allowing the government to print paper money, or “greenbacks.”

That’s not to say that paper money was unavailable before then. Even as the U.S. government minted nothing but coins, private banks, often called “wildcats,” began issuing what in effect became thousands of currencies. Like the wartime continentals, these bank notes were in theory backed by gold, but it was hard to know whether a bank actually had enough gold to back up its notes, bank regulation being pretty much nonexistent at the time. Unsurprisingly, the wildcat era was fertile ground for fraud. What is surprising perhaps is that most banks did a reasonable job of keeping their currency and their gold reserves in balance, and the U.S. economy grew briskly.

The Bank of England, meanwhile, took a far more sober approach. In 1821, it adopted the gold standard , promising to redeem its notes for gold upon request. As other countries followed suit, the gold standard became the general rule for developed economies. The discovery of major new gold fields over the course of the 19th century ensured that the money supply kept growing.

The gold standard, as it was intended to do, brought stability to prices and was enormously beneficial to property holders and lenders. However, it also brought deflation—that is, prices generally fell—because as countries’ populations and economies grew, their governments had no easy way to increase the money supply short of mining more gold, and so money in effect became more scarce. Deflation was hard on farmers and borrowers, who longed for a little inflation to help them with their debts; when money gradually loses some of its value, so, too, do people’s debts.

The gold standard also didn’t prevent economies from falling into recession, and when they did—as during the worldwide slump known as the Long Depression , which lasted from 1873 to 1896—adherence to the standard made it difficult to do any of the things that might have quickly set things right, like cutting interest rates or pumping more money into the economy. As a result, economies took a long time to recover from downturns.

Of course, clever financial minds will always find an end run around the rules. Having a gold standard, it turns out, didn’t completely limit the growth of money. Banks could still make loans against their gold reserves, and they did so freely. Economic historians now believe that the amount of paper currency in circulation dwarfed the actual amount of gold and silver that banks had on hand. And so, while money was still tethered to gold in people’s minds, it had already begun to become unhooked.

What finally derailed the gold standard was World War I. Governments needed more money for their militaries than they had in gold, and so they simply began printing it. And though many countries tried to return to the gold standard after the war, the Great Depression ended that experiment for good.

The result? Currencies today are “fiat” currencies, meaning they’re backed by the authority of the issuing government, and nothing more. In the United States, for example, that means the government accepts only dollars as payment for taxes and requires its creditors to accept dollars in payment for debts. But if people were to lose faith in the dollar and stop accepting it in everyday transactions, it would eventually become worthless.

Many people find this situation unnerving, which is why there are perennial calls to return to the gold standard. The reliance on fiat money, we’re told, gives too much power to the government, which can recklessly print as much money as it wants. Yet the truth is that this has always been possible. Even with the gold standard, governments revalued their currencies from time to time, in effect dictating a new price for gold, or they ignored the standard when it proved too limiting, as during the First World War.

What’s more, the notion that gold is somehow more “real” than paper is, well, a mirage. Gold is valuable because we’ve collectively decided that it’s valuable and that we’ll accept goods and services in exchange for it. And that’s no different, ultimately, from our collective decision that colorful rectangles of paper are valuable and that we’ll accept goods and services in exchange for them.

The reality is that it’s a good thing that we’ve moved away from the gold standard and the idea that money needs to be tied to something else. In the first place, it’s honest: As soon as we left behind the habit of trading cattle for barley (both of which had intrinsic value), money became a social convention, and paper money just makes that convention obvious. These days, instead of worrying about where we’re going to find more gold and silver, we can focus on how to wisely manage the money supply for the greater good.

Second, and more important, abandoning the gold standard has given central banks much more flexibility in dealing with economic downturns. Recessions are downward spirals: Instead of spending and investing, people and businesses hold on to their cash, which shrinks overall demand, which forces businesses to cut back, which creates unemployment, which shrinks demand even more.

One solution is for governments to make up the difference by spending more. But it’s also important for interest rates to drop and for the money supply to increase, thereby making it easier for people to borrow money and helping overcome their reluctance to spend. Such actions are easier for the folks at the Federal Reserve and other central banks to pull off when they don’t have to worry about maintaining the gold standard. And recessions have been shorter and less painful since the gold standard was abandoned. Even the most recent global downturn, severe as it was, was minor compared to the Great Depression.

Of course, all this talk of central bankers tinkering with the money supply is precisely what critics of the fiat money system dread, because they believe it will inevitably lead to runaway inflation. And history does show that when a government massively and carelessly expands the money supply, it ends up with hyperinflation and a worthless currency, as happened in Weimar Germany in 1923 and in Zimbabwe just a few years ago .

But such episodes are rare. In the past 90 years, the United States and Europe have had just one sustained bout of high inflation—in the 1970s. That track record should engender some faith; on the whole, central bankers act responsibly, and healthy industrial economies aren’t prone to regular inflationary spirals. But that faith is apparently hard to muster; instead, it feels to many of us as if inflation is always about to soar out of control.

This irrational fear is ultimately a legacy of the way money evolved: We cling to the belief that money needs to be backed by something “solid.” In that sense, we’re just like Marco Polo—still a bit amazed by the thought that you can base an entire economy on little pieces of paper.

And yet we do. For more than 80 years, we’ve been living in a world in which money can be created, in effect, out of thin air. As we’ve already discussed, the central banks can create money, but so can ordinary banks. When a bank makes a loan, it typically just puts the money into the borrower’s bank account, whether or not it has that money on hand—banks are allowed to lend more money than they have in their reserves. And so with each home equity loan, car loan, and mortgage, banks add incrementally to the money supply.

There is, to be sure, something a bit eerie about all this, and periods like the recent housing bubble, when banks made an extraordinary number of bad loans, should remind us of the dangers of runaway credit. But it’s a mistake to yearn for a more “solid” foundation for the monetary system. Money is a social creation, just like language. It’s a tool that can be used well or poorly, and it’s preferable that we have more freedom to use that tool than less.

Over the course of history, the material substance of money has become less important, to the point that these days people talk easily about the possibility of a cashless society . The powerful combination of computers and telecommunications , of smartphones and social media , of cryptography and virtual economies , is what fuels such talk. And that progression makes sense because what matters most about money is not what it is, but what it does. Successful currencies, after all, are those that people use: They lubricate commerce, allow people to exchange goods and services, and thus encourage people to work and create. The German sociologist Georg Simmel described money as “pure interaction,” and that description seems apt—when money is working as it should, it is not so much a thing as it is a process.

This, perhaps, is what Kublai Khan understood seven centuries ago. It’s what we’re still trying to understand today.

• Bitcoin: The Cryptoanarchists' Answer to Cash - IEEE Spectrum ›
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The Invention of Money

By John Lanchester

When the Venetian merchant Marco Polo got to China, in the latter part of the thirteenth century, he saw many wonders—gunpowder and coal and eyeglasses and porcelain. One of the things that astonished him most, however, was a new invention, implemented by Kublai Khan, a grandson of the great conqueror Genghis. It was paper money, introduced by Kublai in 1260. Polo could hardly believe his eyes when he saw what the Khan was doing:

He makes his money after this fashion. He makes them take of the bark of a certain tree, in fact of the mulberry tree, the leaves of which are the food of the silkworms, these trees being so numerous that whole districts are full of them. What they take is a certain fine white bast or skin which lies between the wood of the tree and the thick outer bark, and this they make into something resembling sheets of paper, but black. When these sheets have been prepared they are cut up into pieces of different sizes. All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver; and on every piece a variety of officials, whose duty it is, have to write their names, and to put their seals. And when all is prepared duly, the chief officer deputed by the Khan smears the seal entrusted to him with vermilion, and impresses it on the paper, so that the form of the seal remains imprinted upon it in red; the money is then authentic. Anyone forging it would be punished with death.

That last point was deeply relevant. The problem with many new forms of money is that people are reluctant to adopt them. Genghis Khan’s grandson didn’t have that difficulty. He took measures to insure the authenticity of his currency, and if you didn’t use it—if you wouldn’t accept it in payment, or preferred to use gold or silver or copper or iron bars or pearls or salt or coins or any of the older forms of payment prevalent in China—he would have you killed. This solved the question of uptake.

Marco Polo was right to be amazed. The instruments of trade and finance are inventions, in the same way that creations of art and discoveries of science are inventions—products of the human imagination. Paper money, backed by the authority of the state, was an astonishing innovation, one that reshaped the world. That’s hard to remember: we grow used to the ways we pay our bills and are paid for our work, to the dance of numbers in our bank balances and credit-card statements. It’s only at moments when the system buckles that we start to wonder why these things are worth what they seem to be worth. The credit crunch in 2008 triggered a panic when people throughout the financial system wondered whether the numbers on balance sheets meant what they were supposed to mean. As a direct response to the crisis, in October, 2008, Satoshi Nakamoto, whoever he or she or they might be, published the white paper that outlined the idea of Bitcoin , a new form of money based on nothing but the power of cryptography.

The quest for new forms of money hasn’t gone away. In June of this year, Facebook unveiled Libra, global currency that draws on the architecture of Bitcoin. The idea is that the value of the new money is derived not from the imprimatur of any state but from a combination of mathematics, global connectedness, and the trust that resides in the world’s biggest social network. That’s the plan, anyway. How safe is it? How do we know what libras or bitcoins are worth, or whether they’re worth anything? Satoshi Nakamoto’s acolytes would immediately turn those questions around and ask, How do you know what the cash in your pocket is worth?

The present moment in financial invention therefore has some similarities with the period when money in the form we currently understand it—a paper currency backed by state guarantees—was first created. The hero of that origin story is the nation-state. In all good stories, the hero wants something but faces an obstacle. In the case of the nation-state, what it wants to do is wage war, and the obstacle it faces is how to pay for it.

The modern system for dealing with this problem arose in England during the reign of King William, the Protestant Dutch royal who had been imported to the throne of England in 1689, to replace the unacceptably Catholic King James II. William was a competent ruler, but he had serious baggage—a long-running dispute with King Louis XIV of France. Before long, England and France were involved in a new phase of this dispute, which now seems part of a centuries-long conflict between the two countries, but at the time was variously called the Nine-Years’ War or King William’s War. This war presented the usual problem: how could the nations afford it?

King William’s administration came up with a novel answer: borrow a huge sum of money, and use taxes to pay back the interest over time. In 1694, the English government borrowed 1.2 million pounds at a rate of eight per cent, paid for by taxes on ships’ cargoes, beer, and spirits. In return, the lenders were allowed to incorporate themselves as a new company, the Bank of England. The bank had the right to take in deposits of gold from the public and—a second big innovation—to print “Bank notes” as receipts for the deposits. These new deposits were then lent to the King. The banknotes, being guaranteed by the deposits, were as good as gold money, and rapidly became a generally accepted new currency.

This system is still with us, and not just in England. The more general adoption of the scheme, however, was not a story of uninterrupted success. Some of the difficulties are recounted in James Buchan’s fascinating “ John Law: A Scottish Adventurer of the Eighteenth Century .” Law was the Edinburgh-born son of a goldsmith turned banker. He moved to London in 1692, where he observed the wondrous new scheme of government paid for by long-term debt and paper money. One of the most significant effects of the paper money was the way it stimulated borrowing and lending—and trading. Law had an instinctive understanding of finance and a love of risk, and it is tempting to wonder what would have happened if he had lent his services to the English government. Instead, on April 9, 1694, a different fate was set in motion. He killed a man in a duel, or brawl—the distinction, as Buchan explains, was not all that clear. “Duels then were not the tournaments of the Middle Ages or the affairs of honour of later years, governed by written codes of conduct and discharged at dawn with pistols in some snowy forest clearing,” he writes. They might be conducted “with rapiers or short swords in hot or barely cooling blood, sometimes with seconds drawn and fighting, and shading away into assassination and armed robbery.” Law was sent to prison to await a murder trial. He used his connections to get out, as prisoners of means did, and fled abroad as an outlaw.

Law spent the next few years knocking around Europe, learning about gambling and finance, and writing a short book, “Money and Trade Considered,” which in many respects foreshadows modern theories about money. He became rich; like Littlefinger in “Game of Thrones,” Law seems to have been one of those men who had the knack of “rubbing two golden dragons together and breeding a third.” He bought a fancy house in The Hague and made a close study of the many Dutch innovations in finance, such as options trading and short selling. In 1713, he arrived in France, which was beset by a problem he was well suited to tackle.

The King of France, Louis XIV, was the preëminent monarch in Europe, but his government was crippled by debt. The usual costs of warfare were added to a huge bill for annuities—lifelong interest payments made in settlement of old loans. By 1715, the King had a hundred and sixty-five million livres in revenue from taxes and customs. Buchan does the math: “Spending on the army, the palaces and court and the public administration left just 48 million livres to meet interest payments on the debts accumulated by the illustrious kings who had gone before.” Unfortunately, the annual bill for annuities and wages of lifetime offices came to ninety million livres. There were also outstanding promissory notes, amounting to nine hundred million livres, left over from various wars; the King wouldn’t be able to borrow any more money unless he paid interest on those notes, and that would cost an additional fifty million livres a year. The government of France was broke.

In September of 1715, Louis XIV died, and his nephew the Duke of Orleans was left in charge of the country, as regent to the child king Louis XV. The Duke was quite something. “He was born bored,” the great diarist Saint-Simon, a friend of the Duke’s since childhood, observed. “He could not live except in a sort of torrent of business, at the head of an army, or in managing its supply, or in the blare and sparkle of a debauch.” Facing the financial crisis of the French state, the Duke started listening to the ideas of John Law. Those ideas—more or less orthodox policy today—were wildly original by the standards of the eighteenth century.

Law thought that the important thing about money wasn’t its inherent value; he didn’t believe it had any. “Money is not the value for which goods are exchanged, but the value by which they are exchanged,” he wrote. That is, money is the means by which you swap one set of stuff for another set of stuff. The crucial thing, Law thought, was to get money moving around the economy and to use it to stimulate trade and business. As Buchan writes, “Money must be turned to the service of trade, and lie at the discretion of the prince or parliament to vary according to the needs of trade. Such an idea, orthodox and even tedious for the past fifty years, was thought in the seventeenth century to be diabolical.”

This idea of Law’s led him to the idea of a new national French bank that took in gold and silver from the public and lent it back out in the form of paper money. The bank also took deposits in the form of government debt, cleverly allowing people to claim the full value of debts that were trading at heavy discounts: if you had a piece of paper saying the king owed you a thousand livres, you could get only, say, four hundred livres in the open market for it, but Law’s bank would credit you with the full thousand livres in paper money. This meant that the bank’s paper assets far outstripped the actual gold it had in store, making it a precursor of the “fractional-reserve banking” that’s normal today. Law’s bank had, by one estimate, about four times as much paper money in circulation as its gold and silver reserves. That is conservative by modern banking standards. A U.S. bank with assets under a hundred and twenty-four million dollars is obliged to keep a cash reserve of only three per cent.

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The new paper money had an attractive feature: it was guaranteed to trade for a specific weight of silver, and, unlike coins, could not be melted down or devalued. Before long, the banknotes were trading at more than their value in silver, and Law was made Controller General of Finances, in charge of the entire French economy. He also persuaded the government to grant him a monopoly of trade with the French settlements in North America, in the form of the Mississippi Company. He funded the company the same way he had funded the bank, with deposits from the public swapped for shares. He then used the value of those shares, which rocketed from five hundred livres to ten thousand livres, to buy up the debts of the French King. The French economy, based on all those rents and annuities and wages, was swept away and replaced by what Law called his “new System of Finance.” The use of gold and silver was banned. Paper money was now “fiat” currency, underpinned by the authority of the bank and nothing else. At its peak, the company was priced at twice the entire productive capacity of France. As Buchan points out, that is the highest valuation any company has ever achieved anywhere in the world.

It ended in disaster. People started to wonder whether these suddenly lucrative investments were worth what they were supposed to be worth; then they started to worry, then to panic, then to demand their money back, then to riot when they couldn’t get it. Gold and silver were reinstated as money, the company was dissolved, and Law was fired, after a hundred and forty-five days in office. In 1720, he fled the country, ruined. He moved from Brussels to Copenhagen to Venice to London and back to Venice, where he died, broke, in 1729.

The great irony of Law’s life is that his ideas were, from the modern perspective, largely correct. The ships that went abroad on behalf of his great company began to turn a profit. The auditor who went through the company’s books concluded that it was entirely solvent—which isn’t surprising, when you consider that the lands it owned in America now produce trillions of dollars in economic value.

Today, we live in a version of John Law’s system. Every state in the developed world has a central bank that issues paper money, manipulates the supply of credit in the interest of commerce, uses fractional-reserve banking, and features joint-stock companies that pay dividends. All of these were brought to France, pretty much simultaneously, by John Law. His great and probably unavoidable mistake was to underestimate the volatility that his inventions introduced, especially the risks created by runaway credit. His period of brilliant success in France left only two monuments. One was created by the Duke of Bourbon, who cashed out his shares in the company and used the windfall to build the Great Stables at Chantilly. “John Law had dreamed of a well-nourished working population and magazines of home and foreign goods,” Buchan notes. “His monument is a cathedral to the horse.” His other legacy is the word “millionaire,” first coined in Paris to describe the early beneficiaries of Law’s dazzling scheme.

How did these once wild ideas become part of the very fabric of modern finance and government? Trial and error. It was not the case that smart people figured everything out at once and implemented it simultaneously, as Law tried to do. The modern economic system evolved, and evolution involves innovations, repetitions, failures, and dead ends. In finance, it involves busts and panics and crashes, because, as James Grant says in his lively new biography of the Victorian banker-journalist Walter Bagehot, “in finance and economics, we keep stepping on the same rakes.”

Bagehot (pronounced “badge-it”) knew all about those rakes. He grew up in the West of England in a family with strong links to a well-run local bank, Stuckey’s. After going to university and trying his hand at being a lawyer, he turned to journalism and to banking, the latter career paying for the former. He married the daughter of James Wilson, who had founded The Economist , in 1843—Bagehot became its third editor—and lived a life that was, from the outside, fairly uneventful. The interest in Bagehot comes from his dazzling, witty, paradox-loving writing, and in particular from his two key works, “ The English Constitution ” (1867), which sums up the unwritten order of Great Britain’s political institutions, and “ Lombard Street ” (1873), which explains how banking works. These books are still readable today, but they were of interest mainly to wonks until Ben Bernanke name-checked Bagehot as a crucial influence on the thinking behind the 2008 bank bailouts. That caused a revived interest, which led to the writing of Grant’s “ Walter Bagehot: The Life and Times of the Greatest Victorian .”

“Greatest” is a loaded word, especially since Grant—who is, among other things, the founder of Grant’s Interest Rate Observer —makes it clear that Bagehot was an unashamed misogynist and racist (“There are breeds in the animal man just as in the animal dog”) and an accomplished hypocrite. The last quality was useful from the journalistic point of view; Bagehot was brilliant at swapping sides without ever admitting that he had changed his mind. A Confederate victory in the Civil War, for instance, was “a certain fact,” and President Lincoln was “dishonest and foolish,” a settled view that didn’t preclude Bagehot from declaring, once the Union had prevailed, that “panic did not for a moment unnerve the iron courage of the American democracy.” His subsequent elegy for Lincoln is a genuinely lovely piece of writing: “Difficulties, instead of irritating him as they do most men, only increased his reliance on patience; opposition, instead of ulcerating, only made him more tolerant and determined.”

In a sense, this highfalutin hypocrisy and lack of principle is the point of Bagehot. His work on the English constitution focussed on a paradox: the pomp and circumstance of monarchy had an important function, he argued, precisely because the monarch had no real power. Bagehot’s work on banking similarly focussed on the difference between appearances and realities, specifically the gap between the air of solidity and respectability cultivated by Victorian banks and the evident fact that they kept collapsing and going broke. There were huge bank crises in 1797, in 1825, in 1847, and in 1857, all of them caused by the oldest and simplest reason of bankruptcy in finance: lending money to people who can’t pay it back.

In theory, all the money in circulation during the era of Victorian banking was backed up by deposits in gold. One pound in paper money was backed by 123.25 grains of actual gold. In practice, that wasn’t true. There were multiple occasions—usually linked to the cost of that old classic, war with France—when the government suspended the convertibility of paper money to gold. In addition, banks could print their own money. They often didn’t have enough gold to sustain the value of their notes, in the event of customers coming to the bank and demanding conversion. That phenomenon, the dreaded “bank run,” was a direct outcome of the fractional-reserve banking prefigured by John Law. A system in which banks don’t hold cash reserves equivalent to their outstanding loans works fine, unless enough people turn up at the bank and simultaneously want their paper money turned into its metal equivalent. Unfortunately, that kept happening, and banks kept going broke. The issues at stake were the same as those that had shaped the career of John Law, and which are on people’s minds again today: What is money? Where does it derive its value? Who finally guarantees the value of debts and credits?

Bagehot had answers to all those questions. He thought that money, real money, was gold, and gold alone. All the other forms of currency in the system were merely different kinds of credit. Credit was indispensable to a functioning economy, and helped make everybody rich, but in the final analysis only gold was legal tender, according to the strict definition of the term—money that cannot be refused in settlement of a debt. (U.S. currency makes sure you know it is legal tender: it says so right there on the front.) Bagehot loved a paradox, and this was one: all the credit in the system was essential to the economy, but it wasn’t really money, because it wasn’t gold, which underpinned the value of everything else.

So where was all the gold? In the Bank of England. The role of that once private company had evolved. Bagehot thought it was the Bank of England’s job to hold the gold, so that all the smaller banks didn’t have to. Instead, the smaller banks took deposits, made loans, and issued paper money. If they got into trouble—which they tended to do—the big bank would bail them out. Why shouldn’t all the other banks hold their own gold, and take care of their own solvency? Bagehot the banker-writer was completely frank about the reason. “The main source of the profitableness of established banking is the smallness of the requisite capital,” he wrote. The modern way of putting this would be to talk about the bank’s return on equity. The less equity the bank needed to keep as a margin of safety, the more money it could lend, and, therefore, the more profit it could make. Gold was essential in order to guarantee the currency, but the bankers didn’t want it taking up valuable space on their balance sheets. Better to let the government do that, in the form of the Bank of England.

We still have a version of this system, in which government guarantees underpin the profitability of banks. The central bank’s crucial role is to lend money freely at a time of crisis—to be what is called “the lender of last resort.” Grant, who admits to “a libertarian’s biases,” sees this doctrine as the seed of “deposit insurance, the too-big-to-fail doctrine, and the rest of the modern machinery of socialized financial risk.”

Like John Law and Walter Bagehot, I’m the child of a man who worked in a bank, and, as such, I had a banker’s-son question running through my mind as I read Grant’s entertaining book: what happened to Bagehot’s bank? The answer is that Stuckey’s was taken over by another bank, Parr’s, in 1909. Parr’s was part of the larger National Westminster Bank, which was taken over by the Royal Bank of Scotland, in 2000. R.B.S., as it is unaffectionately known in the U.K., grew through takeovers to become, in the early years of this century, the biggest company in the world, as measured by the size of its balance sheet. Then came the credit crunch, and the moment—the latest version of the old familiar one—when things turned out not to be worth what they were supposed to be worth. The biggest bank in the world came, according to its chairman, to within “a couple of hours” of complete collapse. The outcome was a huge bailout, and the nationalization of R.B.S., with costs to the British taxpayer of forty-five billion pounds. Not much about that story would have surprised John Law or Walter Bagehot. Maybe, though, both men—the man who almost bankrupted a country and the supreme advocate of bankers’ bailouts—would be amused to see just how little we have learned. As for the question of what to do about the bankers responsible for the crash, Kublai Khan would probably have had some ideas. ♦

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By Joshua Davis

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THE HISTORY OF MONEY: PAST TO PRESENT DAY (POWERPOINT PRESENTATION)

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Bring history to life in your classroom with this engaging and informative PowerPoint on the history of money. From ancient civilizations and their forms of currency, to the rise of coinage in the Middle Ages, this presentation covers all the key points in the evolution of money. It also delves into the gold standard, the end of the gold standard, the current monetary system, and the future of money.

Filled with colorful visuals and easy-to-understand explanations, this PowerPoint is perfect for middle and high school students, as well as for adult education and history enthusiasts. This resource is a great way to bring the history of money to life, and it will help students understand the important role money has played in shaping our world.

This PowerPoint includes:

Introduction to the definition of money and its importance in society

Pre-money societies, including the barter system and commodity money

Ancient civilizations and their forms of money, including Mesopotamia, Egypt, Greece, and Rome

Middle Ages and the rise of coinage, including China, India, and Europe

Paper money and its origins, including China and Europe

The gold standard, including how it worked and its impact on global trade

The end of the gold standard, including reasons for its demise and impact on the global economy

The current monetary system, including the Federal Reserve System and the role of central banks

The future of money, including digital currency and cryptocurrency

Conclusion, including a recap of key points and the significance of money in human history

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The history of money

Sep 29, 2021

Patricio Torres

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The history of money concerns the development of social and economic systems

the history of money uh, concerned to develop official, an economic system that provide at least one of the foods of money such as can be understood as many of trying worse indirectly, Not directly as we barter money is so nice. Money may take a physical form as coins and notes or makes it as a writing or electronic account. It may have in strict value by legally exhibition executable for something with strict value or only half nominal. The invention of money took place before the beginning of writing history. Consequently any study of how money first developed is mostly based on contractors and logical inference. The significant evidence established medicines were battered in that could be described as a milieu of exchange. This includes livestock and rank things directly useful in terms of but also mentally attractive eaten such as chorus channels, orbits were changed for more usual comedy to, to the complexities of dancing history. Uh, And since civilizations developing a different piece and not keeping accurate records or having the records destroyed And because the answer orient of economic system proceed writing, Uh morning of coming depend on the ability to record or count. The statistic was a significant development. The order of this day from the ruling national about 30,000 years ago regarding money of exchange. The youth of representative money historically historically for days in Beijing of coinage as well. In the Russian spirit of Egypt Babylon India and china. The templates and policies often had company in the dancing part of aged Babylon India and china. The temples and in places often had community where house which made use of clay tokens, not the material who served as evidence of a because these tokens could be really limit at the warehouse for the commodity they represent, they were able to be traded in the markets as if they were in the commodity of giving to workers as payment regarding the money of exchange. The user representative money. Historical. Well, I know the oldest form of money of chambery methods were also used in both barrel system and monetary system and the easter values of metal provisions. Yeah. Yes. The more answering example is with the community and its illustrated this transaction clearly first the age roots bronze was used. It was a heavy way of universe shirt Bronx using what was probably a The next historical state West Bronx in bars that had a £5 pre measured weight, which is where debate arise between if this is still the party system or no monetary system finally and mhm There is a clear break from the use of Bronx. M bartering to is on the table as as money because of light and measure of Bronx not intended to be used as anything other than good. And see we have been the most common form of money through all this story in many language such as spanish french a real and italy they were forcibly is directly related to work of money right back the work of money. The money I have to change to animals. Uh And goal and when you talk about gold, you said that the goal is money. The goal is related to metal coins. Paper money, we can change money for paper and plastic cards. Electronic electronic Monica is something that is safe and we are using this for these days that after that we come and Bitcoin money that you can translate and transfer some money using the cars. And you see the Bitcoin the crypto money of the morning is presented by the middle uh whether is represented by the metal coin or shell or piece of paper doesn't always have value and its value depends on the importance that money allow people to try goods and services indirectly is help communicate the price of God's price grading indoors and send correspond to a numerical amount in your possession in your pocket ports or wallet. And it's provide individual uh huh. Morning allow people to trade goods and services indirectly communicate the price of goods and provides the individual with a way to store. They was over the long term before money people acquire and change good through assistance of battering. Which involved the direct trade. The first generation of the world to use an industrial facility to manufacturing coins that could be used as a currency was in Europe in the region called Libya more than than Western Turkey in approximately X 600 before Christ the Chinese were the first to devise a sitting of paper money

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Debates about the nature and economic role of money are mostly informed by evidence from the 20th century, but money has existed for millennia. We argue that there are many lessons to be learned from monetary history that are relevant for current topics of policy relevance. The past acts as a source of evidence on how money works across different situations, helping to tease out features of money that do not depend on one time and place. A close reading of history also offers testing grounds for models of economic behavior and can thereby guide theories on how money is transmitted to the real economy.

Working papers are not edited, and all opinions and errors are the responsibility of the author(s). The views expressed do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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Trump’s Media Company Worth Nearly $8 Billion on First Trading Day

Trump Media & Technology Group, fresh from a merger with a cash-rich shell company, started trading on the Nasdaq, adding billions of dollars to the former president’s wealth.

By Matthew Goldstein and Joe Rennison

Former President Donald J. Trump’s social media company jumped on its first day of trading on the Nasdaq on Tuesday, giving the company an estimated market value of close to $8 billion, larger than established corporations like Mattel, Alaska Airlines and Western Union.

The biggest beneficiary of the market action has been Mr. Trump, who owns about 60 percent of Trump Media, making him the largest shareholder. His stake in the company — the parent of Truth Social, the online platform that is Mr. Trump’s main megaphone for reaching supporters and attacking critics — is worth about $4.6 billion on paper.

For many investors, investing is as much as a sign of support for Mr. Trump personally as it is for his relatively small, loss-making social media company, which describes itself as a platform that stands against censorship by Big Tech. Such was the frenzy on Tuesday that trading in Trump Media’s shares was briefly halted by the stock exchange shortly after it opened because of extreme volatility. After gaining as much as 40 percent, the stock eased toward the close, ending the day 16 percent higher.

Trump Media closed its merger with Digital World Acquisition Corporation, a cash-rich public shell company, on Monday.

“We do appreciate President Trump but it’s more about free speech,” said Mark Willis, 63, who lives in Indian Trail, N.C. and has been buying shares in the public shell company that merged with Trump Media ever since the merger plan was proposed in 2021. “We believe this is the only social media platform that is not heavily influenced by the government.”

Scott Lewczak, a graphic designer in Nokesville, Va., and another longtime shareholder, said he is going to make money on the big surge in the price of Trump Media, but that is not the point. He said his investment was to support Truth Social and Mr. Trump.

“Even if I lose every penny, I will fight to the end,” Mr. Lewczak said.

The investors who have piled into the stock of Digital World, and now Trump Media, have tended to be individuals, rather than investment firms and hedge funds.

By most traditional measures, Trump Media’s valuation is inordinately high. The company took in just $3.3 million in revenue during the first nine months of last year, all from advertising on Truth Social, and recorded a loss of $49 million.

That means Trump Media’s market value is nearly 2,000 times its estimated annual revenue. Investors sometimes assign lofty valuations to small, loss-making companies in anticipation of rapid growth — or a belief that other investors will continue to bid up a company’s shares, for whatever reason — but typically not on this scale.

Other social media companies trade at far smaller price-to-sales ratios than Trump Media: Reddit is around 10, Meta is 7 and Snap is 6, according to FactSet. High-flying tech stocks like the chipmakers Nvidia and ARM trade at price-to-sales ratios of about 25.

On a message board on Truth Social, created by supporters of the merger, some of these investors cheered on the stock-market debut of Trump Media.

“If anyone deserves to be a trillionaire, it is Donald J Trump,” one poster said. “Never bet against a billionaire with over a hundred million supporters who are determined to fix America and preserve freedom for all” said another.

Chad Nedohin, 40, who has been a vocal supporter of the merger on Truth Social, said in an interview that most people buying Trump Media’s stock are not focused on the valuation of the company but making sure Truth Social remains viable.

“You are looking at people who are investors and not traders,” said Mr. Nedohin, who lives in Canada and works as an engineer and a Christian worship leader. “We are seeing long-term holders who are MAGA and they are Trump’s base.”

Still, based on its trading patterns, Trump Media looks a lot like the so-called meme stocks — GameStop, AMC Entertainment and others — that were propelled to dizzying heights by armies of amateur investors during the pandemic. Meme stocks tend to trade more on emotion than fundamentals.

“It’s difficult to say how this will trade, but it definitely has the DNA of a meme stock, so we might see some extreme volatility,” said Kristi Marvin, a former investment banker and editor of SPACInsider, which gathers data on the market for special purpose acquisition companies.

Trump Media’s prospects met with skepticism on popular investment boards on the social media platform Reddit. “Do people really dare to buy this stock?” asked one poster.

Many of the publicly listed holders of the stock, with most filings dating to the end of 2023, are retail investment advisers who help facilitate trading on behalf of individual clients, and those contacted by The New York Times were broadly unwilling to express a view on Trump Media themselves.

“Our typical advice to our clients is that you are best owning a diversified portfolio,” said Kevin Grogan, chief investment officer for Buckingham Wealth Partners.

Digital World was founded as a special purpose acquisition company. The sole purpose of a SPAC is to raise money from investors and then merge with an operating business, which then becomes the publicly traded entity.

Any big investors that bought shares of Digital World or Trump Media would not be required to publicly disclose their holdings until the middle of May. Some big investors have shorted, or bet against, Trump Media shares, on the assumption that the company cannot continue to trade at such a heady price.

Trump Media, according to S3 Partners, a financial data company, is now the most shorted company to merge with a SPAC in the United States.

The merger between Trump Media and Digital World this week was completed as Mr. Trump faced a deadline to secure a bond to cover a big penalty imposed by a judge in a civil fraud case. But in a break for Mr. Trump, an appellate court reduced the amount that he would need to post, to $175 million from $454 million, and gave him more time to raise the money.

The appellate court’s action seemed to ease the pressure on Mr. Trump to try to tap his newfound Trump Media wealth. To do so, he would need the company’s new seven-member board to remove a restriction that prevents him from selling shares or using shares as collateral for six months.

The board may still vote to loosen that restriction if that is what Mr. Trump wants. He holds tremendous sway over the company: Besides owning about 60 percent of Trump Media’s stock, he owns a separate class of shares that gives him at least 55 percent voting power over any measure presented for a shareholder vote. And the company’s seven-member board is stacked with loyalists, including his eldest son, Donald Trump Jr.

But now that Mr. Trump no longer faces an urgent need to raise a large amount of cash, he might be content to let the six-month restriction on selling shares remain. From Mr. Trump’s perspective, the surging price of Trump Media’s shares gives him bragging rights on the campaign trail. One of his political calling cards has been to talk about his success as a businessman and his enormous wealth — something that’s easier for him to do since the merger.

The bigger challenge for Trump Media’s board is coming up with a strategy to increase the company’s business and expand the reach of Truth Social in order to justify the company’s valuation. Truth Social is a relative minnow in the social media universe and largely dependent on Mr. Trump’s posts for drawing traffic.

In merging with Digital World, Trump Media got a badly needed infusion of roughly $300 million in cash that Digital World had raised from investors. Without that infusion, Trump Media and Truth Social were looking at potentially shutting down.

And as a public company, Trump Media will be required to file periodic financial reports with the Securities and Exchange Commission and reveal in detail any deals it may strike with Mr. Trump.

“In a public company you have the scrutiny now of investors and regulators,” said Usha Rodrigues, a professor of corporate law at the University of Georgia School of Law. “Any stockholder now has standing to bring a lawsuit if they claim one of the company’s statements is misleading.”

Matthew Goldstein covers Wall Street and white-collar crime and housing issues. More about Matthew Goldstein

Joe Rennison writes about financial markets, a beat that ranges from chronicling the vagaries of the stock market to explaining the often-inscrutable trading decisions of Wall Street insiders. More about Joe Rennison

History of Money

Nov 16, 2014

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History of Money. Lydian Coin 700-637 B.C. Chinese Note 1368-1399. Greek Coin 400-344 B.C. New York Note 1776. Silver Certificate 1886. Reserve Note 1968. The Origin of the $ Sign. P. S. S. P. $. +. =. =. The word dollar is derived from the Spanish word dolar. Our Money.

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History of Money Lydian Coin 700-637 B.C. Chinese Note 1368-1399 Greek Coin 400-344 B.C. New York Note 1776 Silver Certificate 1886 Reserve Note 1968

The Origin of the $ Sign P S S P $ + = = The worddollaris derived from the Spanish worddolar.

Our Money Making Money Federal Reserve Notes or “dollar bills” are printed by the U.S. Bureau of Engraving and Printing in Washington, DC and Fort Worth, TX

Making Money – Our Currency Denomination Face Back 1 5 10

Making Money – OurCurrency Denomination Face Back 20 50 100

Legal Statement Seal Signature The Face of US Currency – Making Money

Our Money – A Closer Look $50.00

Our Money – Security Features Watermark Security Thread Color Shifting Ink

Our Money – Security Features Micro-printing Low Vision Feature Federal Reserve Indicators

Our Money – Security Features Serial Numbers Symbols of Freedom Portrait

QUIZ – Our Money • Money Unit Review Questions Answer the following questions. • Whose signature is on each Federal Reserve note? • Whose portrait is on the $20 bill? • Name two ways the United States protects its currency • from counterfeiting. • Who should you contact if you suspect you have been • given counterfeit currency? • True or False:The U.S. government plans to recall all • currency and replace it with the newly designed currency.

QUIZ – Our Money • Money Unit Review Questions Answer the following questions. • True or False: The Federal Reserve System prints all the • money in the United States. • What's the difference between representative money • and fiat money? • What are the three functions of money? • Who is credited with making the first paper money? • What were some of the commodities people used as • money and why? • Money replaced what system of trade?

QUIZ – Our Money Money Unit Review Questions ANSWERS • The signatures of the Secretary of the Treasury and the U.S. Treasurer appear on each Federal Reserve note. • Andrew Jackson is on the $20 bill. • The U.S. protects its currency by: • Printing intricate lines in the border and in the portrait. • Portrait watermark on denominations $10 and up. • Using a special “heavy” type of paper. • Printing small red and blue threads in the bill. • Weaving a polyester thread with the letters USA and the bill's denomination inside the flag star field. • Micro printing the words “THE UNITED STATES OF AMERICA” around the portrait. • Printing with ink that cannot be erased without adversely affecting the black coloring. • You should contact the Secret Service or local police if you suspect you have a counterfeit bill. . • False, old currency won't be recalled to put new currency into circulation. • False, the Bureau of Engraving and Printing is responsible for printing money. • Representative money can be redeemed for commodities such as gold or silver — fiat money cannot. • The three functions of money are: • medium of exchange • standard of value • store of value • The Chinese were the first to use paper money. • Pewter, gold silver, gems, furs, etc. were all used as money. They were used because they were scarce and valuable. • The system of money replaced barter.

NOTES • The following slides are to be used when printing the presentation for use on transparency. • They should replace slides 5 & 6 so you do not give away the answers. • 

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