The History of Money

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Podcast Transcript

Money is a very strange thing. All of us use it. We spend it, earn it, and save it. We know it when we see it.

Yet, even some of the world’s best economists have a very hard time defining it. 

It has been around for thousands of years, yet there is still innovation being made with it today.

Learn more about the history of money, how it came about and how it developed over time, on this episode of Everything Everywhere Daily.

The history of money goes back thousands of years, but before there was money there was something else: barter.

Most economic historians are in agreement that bartering probably goes back as far as humanity does. If there were wandering nomadic bands of people, some of them might have acquired goods from one location they visited, like an obsidian knife. 

If they encountered another band of people, those people might have had things from some other place, like the seashore. They might have had shells or something that the first group didn’t have.

This form of exchange was simple, if inefficient. There are multiple problems with bartering. 

Suppose I don’t want what you have, or I don’t want as much of it as you have and you can’t divide it. If you have a cow, you can’t very well divide it into smaller units.

Goods can also be difficult to transport, and depending on what it is that is being traded, it also might be perishable. 

There is another closely related concept to bartering: debt.

I’m not going to go into too much detail because I covered much of this in a previous episode on accounting, but the evidence of debt actually dates back much further than the history of money.

Debt is nothing more than barter delayed over time. Instead of saying, I’ll give you one of these for one of those, debt is just saying, give me one of these and I’ll owe you one. 

This form of exchange was probably far more prevalent within communities than between them. 

This division between debt, perhaps consisting of marks on a bone, versus barter was the start of money as a unit of account vs a unit of exchange. More on this in a bit.

None of this is money as with think of it today. 

The idea of something that we think of as a unit of exchange probably developed with the rise of agriculture in Mesopotamia. 

When farmers in a community placed their grain in communal grain storage, they would be given a clay token. That token could then be used to withdraw the grain at some later date. 

Those clay tokens then had a value worth some set amount of grain, and it was a small step to exchange those tokens for something else. The recipient would have been willing to accept them knowing that they could be redeemed for a set amount of grain in the future. 

This was would have been the first sort of exchange where an object, the clay tokens, was representative of some other good. Trading a token that could be redeemed for grain was much easier than trying to carry around baskets of grain. 

This system was a huge step forward, but there were still big problems. 

For starters, only someone local could probably redeem the tokens for grain. No one far away would probably be willing to accept a grain token because it would be worthless to them. 

Also, clay is not a great medium for money. If you drop it, it could easily shatter. Also, it would probably be really easy to counterfeit.

Now that we are at the point in history where tokens have been introduced, I should get into what actually would make for a good theoretical form of money. 

For starters, it should be durable. Hardened clay that can crack and shatter isn’t very durable, nor is anything organic that can rot or decay.

It should be reasonably portable. Cattle and grain have been used as means of exchange, but they aren’t very easy to carry around. 

It should be fungible. One unit of money should be the same as another unit of money. This is why animal pelts were a horrible means of currency. One pelt can be of higher or lower quality than another. 

It should be verifiable. It should be difficult to counterfeit and easy to know if it is valid.

Finally, it should be scarce. If everyone had it and it was easy to acquire, then it wouldn’t have any value.

There was one thing that did meet most of the requirements I just listed, and it was adopted during the start of the bronze age: metal.

Metal is durable, it is fungible, it is relatively portable, and it’s scarce. 

The first metals used as exchange were literally just metal objects or tools, usually copper or bronze. 

However, other metals proved more useful as means of exchange. In particular, silver and gold. Silver and gold were even more scarce, and they didn’t really have any other practical use.  They didn’t make for good tools or weapons, and they were pretty, which meant that they were often used for jewelry or other adornments.

However, just using metal in and of itself didn’t solve the problem of verifiability. 

This was solved with the creation of coins. 

Coins are precious metals with a special imprint issued by some centralized authority.

The oldest coins which have been discovered are from around 600 BC. Coins seem to have been independently invented around the same time in China, India, and Greece.  It is entirely possible there was some earlier coin that spurred their invention in all these places, but if so, we haven’t found it.

Now, you might be wondering what people used when they didn’t have access to metal.

There were all sorts of different things which served as money around the world. 

One common thing which has been used as money was seashells.  Shells were portable, were relatively rare depending on the type, were somewhat fungible, and sort of durable.

These shells would often be formed into beads and tied together on strings.

In North America, the shells of the whelk sea snail were used as beads. This was known as wampum and it was used as currency in addition to jewelry and belts.

Similar beads were used in Africa. In both places, the beads had a relative scarcity which made them work as a form of money.

I should make a special point of talking about the currency which was used on the island of Yap in Micronesia. The money in Yap consisted of giant stone wheels. You might have seen photos of them because they were the largest coins in world history. 

The stone money was called “rai”.

You might be thinking that this would be a horrible form of currency. You can’t carry it around and it isn’t necessarily fungible. 

The reason why these giant stone coins worked is that they were very rare on the island. The stones were made out of limestone, and there was no limestone on Yap. To get the stones they would have to travel 280 miles to Palau, quarry the stones, and then transport them back to Yap on outrigger canoes.

Once they got back to Yap, the stones would be put in a prominent place on the island, and then everyone would know by public acclimation who owned them.

Yap was small enough that this form of social acknowledgment served as a form of money, which made the money incredibly portable. When the ownership of the rai would change hands, it would simply be acknowledged publicly, and now everyone would know that it was owned by a different person, and the stone never had to move.

Rai were only used for major purchases like a dowry or a canoe, and they could even increase in value if previous owners were virtuous.

Coins made of silver and gold were the preeminent form of money throughout Europe, Asia, and North Africa for over a thousand years. 

Because silver and gold were universal, it facilities international trade. Coins from some places might have been more trusted, but they could also be melted down if necessary.

The minting of coins actually became a significant source of revenue for the issuing authority. Money made by minting coins is known as seigniorage, and it is still a source of revenue for countries. Today would be the difference between the cost of printing or minting money vs the face value of the money. 

Another source of revenue for countries would be currency debasement. I went through this in my episode on inflation, but basically, by putting less precious metal into coins, they could pay off debts with less silver or gold. The downside is that it made the currency less valuable, and it would cause prices to rise.

The next big innovation in money occurred in the 8th century in China. As you can probably guess, it was the introduction of paper money. 

There were regional paper currencies introduced during the Tang Dynasty, but it became widespread during the 11th century Song Dynasty. 

The benefits of paper currency were that it was much lighter than metal and much cheaper to produce than mining silver or gold. 

Paper currency worked its way west over time. While it was adopted, it didn’t replace precious metals. It was usually used as a proxy for hard money.

Europeans adopted paper money into banknotes, where a person holding the note could exchange it for gold or silver at an issuing bank.

Many of these early banks were just goldsmiths who held reserves of gold, which later evolved into full-blown financial institutions.

The crusaders also established banks that allowed people to make deposits at one location, and use a certificate to make a withdrawal in another location. This was very similar to certificates that were issued by Islamic banks. Islamic Banking is an interesting enough subject to be worth an episode of its own in the future.

These certificates were the first checks. Written claims on deposits made in banks.

As the world entered the modern era, a system of payments between countries developed and it became more elaborate. 

I’m going to go into these international monetary systems in greater depth in future episodes on the gold standard, the Bretton Woods System, and the Petrodollar system. 

I wanted to do this episode first before I did those episodes. 

Before I end, however, I wanted to go back to something I said in the introduction; that economists have a hard time defining exactly what money is. 

Now to be sure, currency is money. If you have dollars, pounds, euros, yen, or rials, you have money. 

But we use currency for purchases less and less. If you use a debit card, you are paying from your checking account, and there is no currency involved at all. 

There are other assets people have as well that can’t quite as easily be used for purchases, but they could be if given more time. 

To solve this problem, most central banks have created a multi-layered definition of money. In the United States, this is the definition of money.

The lowest level is called M0. M0 is nothing more than the currency which is in circulation. This is all of the notes in coins that are floating around. 

The next level is called M1. M1 consists of M0 plus checking accounts, most savings accounts, money orders, and traveler’s cheques, not that anyone really uses traveler’s checks anymore. 

M2 is the next level. That consists of M1 plus any short-term cash investments, which include money market accounts, money market mutual funds, and certificates of deposit of under $100,000.

M2 is usually the money supply level that most economists and central bankers pay the closest attention to. 

However, there are more illiquid definitions. 

M3 is everything in M2, plus all larger certificates of deposit, plus larger institutional money market funds. 

Finally, there is M4, which is M3 plus all short-term corporate paper plus short-term treasury bonds, known as T-Bills.

Every country has slightly different definitions of money, but they are all pretty similar. 

You might be wondering, how much money is there? In the world today, if you add up all of the various forms of money in every country, it is estimated there is about $430 trillion dollars worth of money in total.

The total amount of currency in the world is about $90 trillion. If you search for the total amount of money in the world you will find widely varying estimates because of the different definitions, but the $430 Trillion estimate just made the most sense to me.

On top of all this, gold still has a place in the international monetary system.

Of course, innovation in money hasn’t stopped. There has been a great deal of effort put into the development of digital currencies, stable coins, and cryptocurrencies. All of that will most definitely have to be left for a future episode. 

The topic of money, let alone banking and finance, is an enormous one. However, it is also an important one. Parts of the monetary and financial system which might otherwise seem esoteric play extremely important parts in the world economy.


The associate producers are Thor Thomsen and Peter Bennett.

Today’s review comes from listener Ian Jurgens over at Podchaser. He writes:

I have rated 5 stars for Everything Everywhere on Podcast Addict.  I am happy to do it again here on Podchaser for such a noble cause.  There is so much that I have learned from Gary.  Either on things that I knew about, like the Holodomor, but was glad to have learned more about,  and, on things that I had no idea about, like Ignaz Semmelweis.  That episode was fascinating.  Especially since my best friend has a degree in biology and immunology and I had the opportunity to ask him about something that he wouldn’t have thought that I learned about.

I wonder if Gary takes requests.  There are many wonderful things for people to learn about my home state of New Mexico.  From White Sands, Carlsbad Caverns, and Chaco Canyon.  To Billy the Kid, Coronado, and Kit Carson.  It would be wonderful if Gary would be willing to pick a topic about New Mexico to expound upon.

I can’t say enough how much I love this podcast and the work that Gary puts into it.  I have binged all 663 episodes since I started listening just a little over 5 months ago.  Even the encores. Keep up the great work, Gary!

Thanks, Ian! I’ve actually been to all of the places you’ve mentioned in New Mexico. I think there are a lot of New Mexico themed episodes including Werner von Braun and the early space program, early pre-Columbian civilizations in the southwest like the Chaco Culture, and of course the Manhattan Project. 

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