Ep 001 - A Concise History of Money's Evolution
Nerd Cafe
Last updated
Nerd Cafe
Last updated
The concept of "money" predates standardized currencies, initially emerging as credit and the use of commodities with intrinsic value for exchange.
Credit as an early foundation: "I owe you one" evolved into units, laying the credit foundation.
Commodity Money: Items with intrinsic value served as a medium of exchange. Examples include grain, cattle, shells, salt, livestock, and even dried fish or tea bricks.
Cowrie shells were used in Africa and Asia, wampum beads in North America, and salt in parts of Europe.
In Mesopotamia, items like salt, livestock, or grain often served as early “currency.” By around 2150 BC, the shekel, a fixed weight of barley, became a standard unit of account.
Hammurabi’s Code (~1760 BC) formalized money's role, setting fines and debts in terms of silver and barley.
Function and Limitations: While commodity money addressed some limitations of barter by having intrinsic value and portability, divisibility and durability varied depending on the commodity. Durable commodities like shells provided a longer-term store of value, but their natural variation in size, texture, and quality limited their fungibility.
The introduction of metal coins marked a significant step towards standardized and easily portable money, streamlining trade and commerce.
Lydian Innovation: Around 600 BC, the kingdom of Lydia (in present-day Turkey) produced the world’s first official coins made of electrum (a natural gold-silver alloy) stamped with denomination marks. These were the first coins in the world, designed as small, easily transported ingots.
Spread and Adoption: Metal money and coins spread, adopted by empires like the Greeks and Romans for trade.
In China, the Zhou dynasty (c.600–300 BC) cast bronze “spade” and “knife” coins as portable currency.
Greek city-states issued standardized silver coins (e.g., the Aegina drachm) to unite commerce across the Mediterranean. Athens, in particular, benefited from rich silver deposits at Laurium.
The Romans later introduced the silver denarius (c.211 BC), which became the backbone of imperial commerce.
Advantages: Metal coins were durable, portable, and divisible into smaller denominations, simplifying transactions compared to barter. They provided a stable baseline against which other commodities and services could be measured and exchanged.
Money as a Social Institution: The sources emphasize that money is not merely an object but a social institution that requires a particular social and cultural system to function fully.
Paper money and promissory notes emerged to facilitate larger transactions and distant trade, initially relying on the backing of precious metals.
Chinese Origins: China pioneered paper currency, with "flying cash" promissory notes emerging during the Tang dynasty (~800 AD) and the state issuing printed paper money under the Song Dynasty (960–1279).
European Development: European banks used bills of exchange (transferable credit notes) to settle trade across borders. The first true European paper banknotes appeared in Sweden with Stockholms Banco in 1661, backed by precious metals.
Banking Evolution: Firms granting credit existed in the ancient world, but "banking" in the sense of lending the savings of others began in England with scriveners in the early 17th century. Deposit banking emerged later in England during the Civil War.
The Role of Italian Banking: Italian banking families, notably the Medici, played a significant role in the Renaissance, establishing private banking networks across Europe and innovating practices like double-entry bookkeeping, marine insurance, and the check. They circumvented the church's prohibition on usury by trading bills of exchange, which circulated as a form of paper money. The success of Italian banking demonstrated the ability to create new money by breaking through the physical limitations of specie.
The concept of central banks emerged to standardize currency issuance and manage monetary systems, leading to the widespread adoption of the gold standard in the 19th century.
Early Central Banks: The Amsterdam Wisselbank (1609) allowed merchants to deposit various coins and issue transferable receipts (01-chatgpt.pdf). England's Bank of England (est. 1694) was created to fund government debt and eventually monopolized note issuance.
The Gold Standard: By the 19th century, many nations pegged their currency to gold. Britain effectively adopted a gold standard in 1717. By the mid-1800s, a majority of world economies were formally on the gold standard.
Early American Banking: The United States saw the creation of its first commercial and central bank, the Bank of North America, in 1781, modeled after the Bank of England. It was a privately owned fractional-reserve bank with the privilege of having its notes receivable in taxes at par with specie. This was followed by the First Bank of the United States in 1791, supported by Alexander Hamilton to address a perceived scarcity of specie and issue paper money. The establishment of the First Bank of the United States led to significant debate regarding the federal government's power to establish a bank.
The Suffolk System (A Private Central Bank): In New England, the Suffolk Bank acted as a "private central bank," bringing order to a myriad of privately issued banknotes by requiring country banks to redeem their notes at par or face having their notes accepted at a discount . This system enforced a degree of discipline on inflationary tendencies of country banks.
The National Banking System: The US Civil War led to the creation of the National Banking System, which centralized banking and tied national banks to the purchase of US government bonds. This system allowed for the pyramiding of credit on top of centralized reserves, increasing the potential for uniform inflation across the country.
The Roman Empire provides a case study of an empire organized around money, contrasting with previous empires that largely rejected it.
Money as an Organizing Principle: Rome built the world's first empire organized around money, promoting its use and structuring its affairs around this commodity. This differed from empires like the Egyptian and Persian, which relied more on government as the main organizing principle.
The Denarius and Juno Moneta: The Romans introduced the silver denarius, manufactured in the temple of Juno Moneta, the goddess of warning and patroness of the state. The word "money" derives from her surname "Moneta".
Financing through Conquest and Debasement: The Roman Empire initially financed itself through conquest and the appropriation of wealth from conquered lands. However, as conquests became less profitable, emperors resorted to debasing the coinage by reducing the precious metal content to produce more coins, leading to inflation.
The Downfall of the Classical Money Economy: The debasement of coinage and other factors contributed to the deterioration of the Roman economy, and the classical money economy collapsed completely by AD 476, giving way to a more rural, moneyless economy during the Dark Ages.
The dollar, in its various forms, has a fascinating history originating in a small Czech village and spreading globally.
Origins in Yakimov: The dollar's origin is traced to the Czech village of Yakimov in the early 16th century, where Count Stefan Schlick began minting silver coins called "joachim's thaler gulden," which became known as "tallers" or "thawlers".
The Maria Theresa Taller: The Maria Theresa taller, first struck in 1773, became particularly popular in North Africa and the Middle East and continued to be minted with the date 1780 long after the Empress's death, demonstrating its widespread acceptance as a currency.
Global Adoption: The name "dollar" spread globally, influencing the names of various European coins and eventually becoming the currency name for numerous countries across the world.
Trade Dollars and the Yuan/Yen: Trade dollars, especially the British trade dollar, facilitated commerce in the Pacific basin, and the Chinese term "yuan" (meaning round things) for these silver dollars became the name of the standard currency in China and Taiwan, influencing the Japanese "yen".
The transition to paper money, while offering convenience, also introduced new challenges related to trust, backing, and the potential for inflation.
Early European Paper Money: While Sweden issued the first European banknotes, France's experiment with John Law's Banque Générale and the Mississippi Company demonstrated the risks of issuing excessive paper money not fully backed by specie, leading to the collapse of the system.
Benjamin Franklin and Colonial Paper Money: Benjamin Franklin advocated for the use of paper money in the American colonies to address a perceived scarcity of specie, printing colonial currency despite British opposition.
The Continental Dollar: The American Revolution was financed with the issuance of "continentals," paper bills of credit that rapidly depreciated due to lack of sufficient backing.
The Power of Paper Money: The sources highlight the perceived "magic" of banking and paper money in increasing the money supply beyond the physical limitations of specie, enabling new commercial avenues. However, they also caution about the risks of systems based on trust, which can be undermined by government actions like defaulting on loans.
Modern monetary systems are characterized by central banking, fiat money, and increasingly, digital currencies.
Fiat Money: The evolution reflects a shift towards fiat money, valued by social convention rather than intrinsic value or backing by precious metals. The "Nixon Shock" in 1971, which ended gold convertibility, marked a significant step towards free-floating currencies.
Cryptocurrencies: The 21st century has seen the emergence of cryptocurrencies like Bitcoin (2009) and Ethereum (2015), which utilize blockchain technology for decentralized peer-to-peer payments and smart contracts (01-chatgpt.pdf). Bitcoin's rise highlights both innovation and controversy in debates about digital currencies' stability and future.
In Conclusion: The history of money and banking is a journey from simple commodity exchange to complex digital currencies and decentralized financial systems. It reveals a continuous human effort to create more efficient, portable, and reliable means of exchange, alongside the persistent challenges of trust, value, and the interplay between monetary systems, governments, and societal development. The sources underscore the social and institutional nature of money, its transformative power, and the recurring lessons about the risks of unbacked currency and excessive speculation.