The History and Evolution of Money

5/25/2021 The History and Evolution of Money | LifeMathMoney
The History and Evolution of Money

March 23, 2021
“In the beginning, God created the bank and the money. And the bank was without money,
and bailed out; and darkness was upon the face of the taxpayer.” – Genesis 1:1
Just kidding. The evolution of modern money is a long and interesting one and took place over
tens of thousands of years.
Contents [ hide ]
The Motivation
The Barter System
Commodity Money
Metallic Money
Gold Backed IOUs (Non-Legal Tender Paper Currency)
Legal
36 Tender Coinage
Paper Money
Adoption of Paper Currency in the United States
Fiat Money
Plastic Money
Digital Currencies
https://lifemathmoney.com/the-history-and-evolution-of-money/ 1/20
The Motivation
Humans are not self-sufficient. We cannot exist in isolation. In other words, we need things
other humans provide, and we provide things other humans need.
Let’s go back to the beginning. You’re a hunter-gatherer caveman. You hunt animals, maybe
catch some fish if you’re near a river or a lake or the coast, and then you bring the meat back
to your tribe. You have satisfied one of your needs – nourishment.
But hey, you have other needs too. For example, you have a biological need to seek sex and
reproduce. You see a cavewoman, who is physically weaker and thus needs protection and
someone to provide her with meat.
So what do you do? You regularly offer protection and some of that food you captured to one
of those cavewomen, and in exchange, she gives you sex and children.
Pretty simple right? You give something you have in order to get what you want. This
is called an exchange.
36
The “something” in an exchange can be anything – goods, services, or even just an agreement
to provide goods and services in the future (for example, “craft me a spear, and the first three
deer I kill with that spear will be yours”).
The Barter System

Well, over time, we stopped being cavemen who relied on hunting and gathering for food. We
took up agriculture.
Agriculture was a major change to human civilization – we could finally start settling down at
one place and grow our own food. We even learned to domesticate animals, so we didn’t need
to hunt for food.
Over time, as we settled down and formed society, something interesting happened. Our
wants increased, and our labor became specialized.
Instead of everyone doing everything, some people became farmers, some raised animals,
some become doctors, some became barbers, some became fishermen, other soldiers, etc. –
in other words, people started picking their occupations.
36
This was a good thing as it greatly increased productivity among people and increased the
quality of goods produced. Fishermen became extremely good at fishing as they spent most of
their days fishing, carpenters became very good at crafting furniture, potters made great pots,
etc.
The only problem was – how does the farmer get fish, how does the fisherman get pots, and
how does the potter get furniture for his house?
Here is the simple solution: they exchange their goods and services with each other
directly (remember, currency still hasn’t been invented yet). This is called the barter
system.
“In trade, barter is a system of exchange in which participants in a transaction directly

exchange goods or services for other goods or services without using a medium of exchange,
such 36
as money.” – Wikipedia
The farmer needs fish, so what does he do? He goes to the fisherman and makes an exchange
with him. He gives the fisherman a small wheat bag, and in return, the fisherman gives the
farmer some fish.
The potter barters some of his pots with the farmer and the fisherman to get some wheat and
fish. The barber, carpenter, etc. do the same thing – they offer their services in exchange for
the goods they want.
The exchange ratio (how much fish for how much wheat, how many haircuts for how many
fish, etc.) were determined based on demand and supply in that particular village. In a year
with bad rainfall, there will be little wheat available, and thus the fisherman will have to give
more fish to get the same amount of wheat, etc.
This system worked and was dominant for a long time – from prehistoric times to just a few
thousand years ago. It is still in use today in parts of the world where people have lost faith in
their government’s currency due to hyperinflation.
The barter system, however, has several limitations:
1. No common measure of value: Each good or service was pegged to several other goods
and services. For example, 1 bag of wheat could be exchanged for 2 fish, or 5 haircuts, or 4
pots, etc., and there was no unified measure of value.
Today we measure all goods and services with one common measure – the currency of that
particular country.
2. The need for double coincidence of wants: Both parties need to want what the other
has to provide. For example, if you were a potter and wanted fish – you better hope that the
fisherman needs pots. If the fisherman doesn’t want pots, you would have no option but to go
without fish.
3. Indivisibility of certain goods: Let’s say you have a goat that you want to exchange for
some pots. 1 goat buys 10 pots. But you only need one pot. So what now? You can’t chop the
goat into 10 parts and give the potter one of them – because that will kill the goat. You’re
stuck.
4. Lack of standards for deferred payments: For credit transactions, there can be many
disputes regarding the quality and value of the goods or services used in the final settlement.
For example,
36 let’s say you’re a barber and you agree with the farmer that you will provide the
farmer’s family with haircuts for one whole year, and at the end of the year, the farmer will
give you a horse from his stables.
Sounds good, right? Except when the year ends, the farmer gives you this old horse that’s not
got many years left. It’s still a horse, but it’s less valuable than a young horse. Because of
problems like this, it was challenging for people to do credit transactions.
5. Problems of storage: Let’s say you work hard as a fisherman and catch lots of fish. How
do you store wealth? You can’t just keep the fish for long periods because they’ll spoil. Food
and other perishable products spoil. There was a problem of storing wealth for long periods.
Commodity Money
As you might have guessed, many of the problems listed above are solvable by using a widely
consumed commodity that is always in demand and can be exchanged for other goods.
For example, the Romans used salt. Salt is easily divisible, non-perishable (can be stored for a
long period of time), limited in quantity (it was expensive and labor-intensive to produce), and
widely consumed by everybody.
36 A Salt Mine. Source: Detroitsalt.com
In Ancient Rome, salt had to be mined from the Earth and was hard to come by.
People would keep and store a reserve of salt in their homes for both day-to-day transactions
and future emergencies. Roman soldiers were partly paid in salt. This used to be called
“salarium” (sal means salt) and is the origin of the word “salary”.
Different places had different commodities that people used as money, some examples being:
Cattle in India
Salt in Rome
Tobacco in Virginia
Rice in Carolina
Cowry Shells in Africa
Sugar in Brazil
Tea in Mongolia
It is worth noting that just about anything can be “money” as long as enough people
accept it in exchange for their goods and services.
Money does not have to be backed by a government to be considered money.
This is a good system and builds on top of the existing barter system. However, it does have
its limitations:
1. Storage issues: Some forms of commodity money, such as cattle, are difficult to store in
one place. They also have to be maintained (fed and given water) and can’t be passively
stored. Some forms of commodity money like cowry shells are fragile and need to be stored
and transported carefully.
2. Difficult to transport over long distances: This is a general problem with physical
money.
3. No universal acceptability: The main problem with this form of money is that it’s not
universally accepted. Different climates affect the perishability of different commodities in
different ways, and different geographical locations have different levels of scarcity for
different commodities.
Salt was valuable in Rome (where it was scarce) but useless when trading with India because
India is a salt-rich country.
Butter made good commodity money in cold countries but was useless when trading with hot
36
countries.
4. Perishability: Some forms of commodity money, like cattle and food items (rice, tobacco,
sugar, etc.), deteriorate over time or get damaged by pests and lose value.
Metallic Money
Eventually, humans learned to dig deeper and found metal ores. Metals were used for many
things like making swords and shields, armor, and tools of all types (i.e. they had value in
use).
Metals were inherently valuable (since they had value in use), highly durable, divisible (and
unitable), fungible, homogeneous, and it was easy to verify their purity by melting them.
Eventually, people started using metals as money. (Note: Metallic money is just a form of
commodity money.)
Metals were scarce across the globe and weren’t too climate-dependent, so they had universal
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acceptability.
The downside to metals is that they are heavy.
Gold Backed IOUs (Non-Legal Tender Paper Currency)
Precious metals like gold were very valuable and had to be kept safe from thieves.
To prevent theft, people would leave their gold with a goldsmith.

The goldsmith accepted gold deposits for a fee and issued I.O.U.s
(short for I owe you) for the weight of the gold.
Anyone could take an IOU note to the goldsmith and get their
gold back whenever they wanted. As trust in the goldsmith grew,
people would accept the IOU as payments as if it was actually
gold (instead of an obligation to give gold).
The IOUs derived their value from the gold the goldsmith was
obligated to exchange for them.
This is a form of paper currency and had some of the same

problems that paper currencies have today – debasement.
These goldsmiths eventually realized that not everybody came to claim their gold at one time,
and they always had a healthy balance of people’s gold deposited with them. They just started
creating fake I.O.U.s that wasn’t backed by any gold with them and spent these I.O.U.s.
Eventually, the ratio of the gold obligated to be repaid to I.O.U. Holders and the actual gold
they had in the vault kept deteriorating, and occasionally, the goldsmiths who feared being
caught and punished would disappear overnight along with all the gold in their vaults.
The IOU holders would be left holding worthless pieces of paper.
Legal Tender Coinage
36
Maurya Empire Punched Coin circa 315-310 BC. Source: Classical Numismatic Group, Inc. http://www.cngcoins.com
The problem with metallic money was that fraudsters would cheat the public either in purity or
weight.
Fraudsters would mix precious metals with less precious metals and pass them off as being
pure.
The governments of those times (kings, emperors, etc.) took it upon themselves to solve this
problem by taking control of metallic money minting.
The king’s mint would create coins and stamp them with the king’s emblem or whatever other
symbols the king saw fit. The emblem guaranteed the weight and purity of the metal used to
make that coin.
This improved trust and helped improve trade and commerce.
The only problem was: It was centralized.

36
The central authority (kings) were not fair and would debase the currency whenever they
needed money (this is a universal problem with centralized money).
Let’s say the king fought a war and lost. The war was expensive and had no spoils. The king
still needs to pay soldiers 1000 gold coins. But he checks his treasury and discovers that he
has only 800 gold coins with him. So what does he do?
He melts the 800 gold coins, adds in 200 melted copper coins, and uses that to mint 1000
“gold” coins – which are used to pay off his soldiers.
This way, the money supply kept increasing, and the value of precious metals in the coins kept
going down.
The rapid decline in the purity of Antoninianus, a Roman coin.
This practice of debasement is horrible for trade and the economy as it hurts trust in the
currency, deteriorates international trade, and causes inflation problems in the domestic
economy.
Paper Money
Paper money was invented by the Chinese. At that time in China, the official government
currency had a copper coin that had a square hole in between, so people could string them
together.
Rich merchants found it difficult to use these heavy strings of coins, especially for large
transactions – so they would leave their coins with a trusted agent who would record their
balance in a ledger and issue paper promissory notes, which could then be used as a currency.
When the final holder of the promissory note returned it to the agent, the agent would give
back the coins to the person. (Kind of like the IOUs above.)
Paper money was easy to store, easy to transport, easy to carry, easily divisible into
small units, and was not perishable.
36
Eventually, the Chinese emperors of those times realized the economic advantages of having a
paper currency (easy to make, easy to carry, etc.) and eventually issued a nationwide paper
currency standard backed by gold or silver. The currency note had an inscription stating its
value and a warning that counterfeiting was punishable by death.
This currency was legal tender (Legal tender is anything

recognized by law as a means to settle a public or private debt
or meet a financial obligation, including tax payments,
contracts, and legal fines or damages).
Once again, the recurring problem of centralized currencies

started to show: they printed too much of it.
Whenever the state needed money, they’d print more

currency. Eventually, this led to oversupply and hyperinflation.
The currency became worthless. Resultingly, China
discontinued the use of paper currency in 1455. The Chinese
would not adopt paper currency again for hundreds of years.
Song Dynasty Jiaozi, the world’s

earliest paper money.
What is the difference between Money and Currency?

Most people do not know the difference between money and currency.
Money is any item or verifiable record that is generally accepted as payment for goods and
services and repayment of debts, such as taxes, in a particular country or socio-economic
context. The main functions of money are distinguished as a medium of exchange, a unit of
account, a store of value, and sometimes, a standard of deferred payment. Any item or
verifiable record that fulfills these functions can be considered as money.
A currency in the most specific sense is money in any form when in use or circulation as
a medium of exchange, especially circulating banknotes and coins. A more general
definition is that a currency is a system of money (monetary units) in common use,
especially for people in a nation.
Money is intrinsically valuable and is a store of value. Currency is a monetary unit used
as a medium of exchange and usually refers to banknotes and coins. Currency itself has no
36
intrinsic value.
For example, gold is money since it fulfills all the criteria of money, including being a store
of value. But when you try exchanging gold for something, people will use a currency like
the Rupee to determine how much gold needs to be exchanged. For example, if one gram of
gold is worth ₹4,000 rupees, and you’re buying something that costs ₹10,000 – you will
give 2.5 grams of gold. The monetary unit used was Rupee.
Note: Gold was money, and gold coins were currency during the times of metallic money.
Adoption of Paper Currency in the United States

(Off-topic)
As trade, commerce, and prosperity grew in colonial America, a shortage of gold and silver
coins was felt.
On February 3, 1690, the Massachusetts Bay Colony issued the first paper money in the USA
(denominated in pounds). Printing money was an easy way to create money, as all that was
needed in its creation was ink and paper. Eventually, each colony (except Virginia) had issued
its own currency.
36
An eight pence note in Massachusetts state currency, issued in 1778
The paper currency (called colonial scrip) was denominated in pounds, and the value varied
from colony to colony. A Massachusetts pound was not equivalent to a Pennsylvania pound. All
colonial pounds were of less value than the British pound sterling.
However, the colonies printed too much of the paper currency, which caused inflation and
caused drastic declines in the value of these local currencies. People hoarded gold and silver to
protect their wealth from being inflated away.
The British parliament later put an end to the colonies printing money with a series of
Currency Acts.
Later, when America wanted independence and started the American Revolution. How did they
fund it? They created paper money. The states issued paper money, and the Continental
Congress issued its “Continental Dollar”.
36 Continental Currency $1 banknote
But soon, they printed too much of it, and both the State and Continental dollar became
worthless by the end of the war.
(Dear reader, are you noticing a pattern here?)
After the war, the USA created the United States Dollar, the one we use today.
It was initially based on the Gold Standard, i.e., its value was directly linked to gold. The
dollar was a representative currency and represented actual gold and silver the government
had in its vaults. (However, this is no longer the case.)
Gold kept by the government
As the economy fluctuated and problems arose that needed funding, the government printed
money, effectively reducing the amount of gold each dollar was worth.
For example, before the 1929 crash, one ounce of gold was to be worth $20. However, the
government had to print a lot of money in its attempts to get out of the great depression, and
in 1934, one ounce of gold was set to be worth $35.
Cutting this story short (which you can read more of here), many countries started cashing in
dollars for actual gold, which led to the collapse of the Gold Pool. In August 1971, the US
government put an end to the direct convertibility of gold to dollars. This was the Nixon Shock.
Effectively, the US dollar was now a fiat currency.
36
Fiat Money
Fiat money is a currency established as money by government regulation.
It is not backed by any physical commodity, nor is it made of any substance of value, so it
does not have intrinsic value and does not have value in use (inherent utility, like that of a bull
or a barrel of salt).
It has value only because a government maintains its value by controlling the money supply
through a central bank or because parties engaging in exchange agree on its value.
This is the system followed by virtually all countries today.
It has the same problem that all centralized currencies have: the people in control print too
much, inflating its supply, and the purchasing power (the amount of stuff each unit of the
currency
36 can buy) of the currency keeps dropping.
Plastic Money
Storing all these paper notes in your home is risky (they can be lost by theft, by fire, etc.) so
we now have these banks where we can keep our money in.
Moreover, it’s difficult to a lot of carry notes everywhere and have to make change, etc. It sure
would be nice if we could spend money directly from the bank, wouldn’t it?
Well, the bank gods have answered: With little plastic cards like debit and credit cards, you
can do just that!
ATM cards, debit cards, credit cards, etc. are all plastic money. They make it easier to do day
to day transactions, especially online.
36
Credit Card
Digital Currencies
Ever since computers and the internet became a thing, people have wanted to create a fully
digital currency.
Several attempts have been made, for example, E-gold, 12 years before Bitcoin.
There is an inherent difficulty with creating a digital currency that is unique to the digital
world: replication.
For example, if I give you a physical dollar, I have lost a dollar, and you have gained it. But if I
email you a file, you have the file, but I have an identical copy too. I have not lost the file. I
could just as easily send the same file to multiple people.
How do you create a system where if one person spends his digital currency, he can’t then go
and spend it again?
This is called the double-spending problem.
The way that early digital currencies were used to solve the double-spending problem was to
have a central organization that verifies the legitimacy of transactions.
36
You could send money to someone else, but that could only be done through the central
organization. If you tried to send that same money twice, the central organization wouldn’t let
you, since it knows that you’ve already spent the money.
This system works, but it is centralized and has a single point of failure: the central
organization.
Hackers would target the central organization of these early digital currencies, worried
governments would litigate and shut them down, and sometimes the parent company would
suddenly liquidate and make the system worthless.
What was needed was a decentralized system that solved the double-spending problem. A
decentralized system could not be targeted by a government (via litigation) or a hacker, and it
wouldn’t have a parent company by definition.
Enter Bitcoin.
Bitcoin is a decentralized digital currency that solved the double-spending problem using
blockchain and proof of work system and is all the rage today.
We shall be learning more about Bitcoin in our free crypto course.
That’s all for this piece!
Hope this helps.
Your man,
Harsh Strongman
P.S. If you’re here from the Teach Yourself Crypto course, I’m one of the authors. Do leave a
comment telling me how you found out about the course and a bit about your background. It
helps us target the curriculum better.
References (and recommended readings): Barter to Bitcoin by Ravin Aarya
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5/25/2021 The History and Evolution of Money | LifeMathMoney

The Barter System

“In trade, barter is a system of exchange in which participants in a transaction directly

The barter system, however, has several limitations:

36 A Salt Mine. Source: Detroitsalt.com

Money does not have to be backed by a government to be considered money.

The downside to metals is that they are heavy.

Gold Backed IOUs (Non-Legal Tender Paper Currency)

To prevent theft, people would leave their gold with a goldsmith.

This is a form of paper currency and had some of the same

The IOU holders would be left holding worthless pieces of paper.

Legal Tender Coinage

This improved trust and helped improve trade and commerce.

The only problem was: It was centralized.

The rapid decline in the purity of Antoninianus, a Roman coin.

This currency was legal tender (Legal tender is anything

Once again, the recurring problem of centralized currencies

Whenever the state needed money, they’d print more

Song Dynasty Jiaozi, the world’s

What is the difference between Money and Currency?

Adoption of Paper Currency in the United States

An eight pence note in Massachusetts state currency, issued in 1778

36 Continental Currency $1 banknote

(Dear reader, are you noticing a pattern here?)

Gold kept by the government

Effectively, the US dollar was now a fiat currency.

Fiat money is a currency established as money by government regulation.

This is the system followed by virtually all countries today.

This is called the double-spending problem.

We shall be learning more about Bitcoin in our free crypto course.

That’s all for this piece!

Hope this helps.

References (and recommended readings): Barter to Bitcoin by Ravin Aarya

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