The Evolution of Money: the Past, Present, and the Future (Part 1)

Money! We deal with it every day; we trade it physically, trade it digitally, and spend our thoughts on it to generate more of it. But how many of you have researched the history of money? Even more important, how many have looked into its evolution? Moreover, will Crypto be the next staircase of evolution? 

Money can make a civilization, and it can also break one. It is undeniable that money plays a central role in everyone’s life today – whether they admit it or not. The introduction of money can be seen as the one final step that brought the world to where it is. The power of finance is everywhere we look – from the technology we use to the wars we fight. The big question everyone wants a simple answer to is: how did money come to be since the days of barter, and what is the future of money? Is cryptocurrency really the future of money after digital currency or is it just a fad?
In this article series, we will dig deep in detail to uncover the mysteries of money by looking at how it came about, and hopefully predict how it will evolve in the near future. First, we have to understand what money is and where it was first used.

Money’s Barter Origins

The history of money became a part of human history about 3,000 years ago, but going by the definition of money, it is justifiable to say that it had been in use a little longer than that. When people discovered that they could trade their surplus goods such as grains and hides for those they lacked, like salt and hoes, money was effectively a part of us. When early man began domesticating livestock and plants about 11,000 years ago, it spelled death to the hunting and gathering way of life and paved the way for more permanent settlements. Bartering sets the stage for money because of its most important property: exchange of value.
It became so popular before the money that it formed the backbone of the economy of Egypt 9,000 years ago. It was very easy for someone growing wheat, for instance, to trade several bales of his harvest with another who rears goats. However, the barter’s greatest weakness was that it was difficult to quantify, and business was only possible when a seller can find a buyer with the exact goods they are looking for in the right quantities. Yes, the barter was great, but its limitations were too great for it to be convenient. These drawbacks led to the gradual introduction of a new medium of exchange to replace barter.

Enter Cowrie Shells

As a medium of exchange, cowrie shells were more effective than barter. This currency caught on in Africa and East and South Asia.

Before coin money, Europe and Asia relied on precious metal currency. They used especially gold and silver. Travelers and merchants carried bars (ingots) and rings of precious metals around the world. While they stored value and acted as a medium of exchange, they were cumbersome and inconvenient. They needed weighing and quality verification by an expert every time a transaction took place.

Precious as they were, commodity currencies had great drawbacks. The most notable was liability to value fluctuations. They were not compact and were not directly convertible in all markets.

The First Coin

King Alyattes of the Lydian Empire (present-day Turkey), who ruled in the 7th century BCE, is credited with introducing the first functional coin money in his empire. Known as the Stater, the coin was a huge success since it was issued by a governing authority, which meant that it could be trusted by the subjects of that government and foreign traders. At this time, there was no requirement that the coin is made out of a specific metal, but the Lydian Stater met the basic requirements to be considered ‘money’.

The effects of the Lydian Stater coin were observable just a few years after its introduction. Commerce quickly progressed and became a part of the empire’s culture. Herodotus even recorded that the Lydians were the world’s first real merchants that connected the East and the West (Europe) thanks to ‘the spirit of commercial activity that the natives of Lydia possessed’. Before long, commerce prospered in the region, and with the truce in the war between the empire and its neighbors (including Greece and the Persians), it wasn’t long before King Alyattes was ‘technically expanding’ his empire as far as the Hellespont and the Bosporus (present-day Dardanelles Strait and the Black Sea).

Properties of Money

The Lydian Stater coin was a unique form of currency for many reasons.

1. A central governing authority issued the Lydian Stater, which was standardized and a legal tender. Whereas they came in somewhat irregular shapes, most of the coins were bean-shaped or oval but fairly consistent in weight. The design was unmistakable since they were minted in the capital, Sardis (the empire’s capital), using the electrum metal.
2. It stored value: Perhaps the most important characteristic of money is that it must be able to store value. When you have a certain amount of money in your pocket, you should go to bed and wake up in the morning with the value of the money still the same. This is one feature that the Lydian Stater had that most other currencies in use at that time did not. With this coin, holding money became the most effective way to store value.
3. It was a unit of account: Commerce boomed in Lydia with the introduction of the Stater coin for one simple reason: the coin was a yardstick with which economic transactions were measured. Merchants from all over could come to Sardis with their commodities with full knowledge of what to expect in payment should they find a buyer. They also knew that they could buy other items with the coins they received and not have to worry about how to do the conversion math.
4. It was a portable medium of exchange: As the Stater coin became popular, its demand within the Lydian empire and outside grew. In modern terms, the coin became more valuable because it was scarce. For money to be useful, it must be easy to carry and widely accepted. This acceptance must extend both within and outside a jurisdiction. The Lydian Stater is considered the first real money in human history because it had these features.
5. The Stater bridged representative and fiat money: Representative money is essentially a token or certificate exchanged for an underlying commodity. For instance, in Europe, merchants stored their gold or silver money in a vault with a third-party. Instead, they paid with a certificate showing the amount transferred in a transaction. Fiat money, however, does not represent an asset and has no intrinsic value. The Lydian Stater was a genius invention because it bore both the properties of a representative currency used in Europe and Asia at the time. Additionally, it had the fiat feature that arose from it being declared a legal tender by a governing authority.

The emergence of modern money

Functional and revolutionary as it was, the Lydian Stater had its drawbacks. However, it was a starting point for the money we use today. The Stater was limited in divisibility, meaning its value accrued due to scarcity but large transactions were difficult. One had to carry many oval-shaped coins that needed counting and even weighing to ascertain value. Around this time, the first money counterfeiters came into business. They minted the easy-to-replicate coins and passed them off as genuine electrum coins.
In this series of articles, we will dig deep to understand why this is. We will explore what properties newer money brought that changed the course of history. This includes commerce, way of life, globalization, and governance and power. We will also discover why the first middlemen needed commerce to grow beyond the extent allowed by coins. We will see why banks appeared and have never left.