In today’s world, money is an all pervasive, ever present object in our lives. We have bank cards in our pockets, loose change rolling around in the glove compartments of our cars, and far too many retirements and bank accounts to keep track of. But how did it get to this? Who invented money?
The typical story, as told by economists, is that the origins of our financial system lies within the barter system of ancient times. Person A grows potatoes, and takes them to a market where he trades them for everything he needs.
However, problems soon began to arise as it was difficult to decide how many potatoes were necessary to trade for a chicken. And what if the person with the chickens didn’t want any potatoes? So we all got together and started using coffee beans or shells as a way to trade our items. We started fixing prices against these objects. Eventually, metal coinage was made with the face of kings on them, and they began to be used. Eventually, we started creating ‘imaginary’ money in the form of credit, which we can use by swiping our bank cards. This sounds like a very convenient story. And it makes sense. However, there is little to no evidence to support it. And, if you dig a little bit deeper, it actually makes no sense at all.
The first thing that is useful to consider is the society people were living in. People would live in small towns, usually with some kind of church at the centre of it. In many cases, the church would even be the government. People’s entire lives revolved around the church, and they lived their lives in preparation for the eternity they would spend in either heaven or hell. So when the potato farmer needed a chicken, he would simply ask for it, and the chicken farmer would give him one. In return, when the chicken farmer needed potatoes, he would be given them. Nobody bothered to keep a record of these things. The potato farmer wasn’t going anywhere. If he gained a reputation of not giving people the potatoes they needed, he would very quickly find that people no longer gave things to him. Even worse, the priest at the church might tell him that he is damned to hell for all eternity.
So it is difficult, when we remove the complexities of bartering, why people would invent money. The answer for that really comes from the development of technology. When people began travelling more widely, and town became bigger, several things happened.
First, it became impossible to know everyone that was in your town. Secondly, and perhaps more importantly, people of different religions began to mix. Someone of the Islamic faith would not be deterred by a monk claiming that the Christian god would damn his soul to hell.* So, people needed to start keeping some kind of record book to record these debts.
As this system became even larger, and empires such as the Roman Empire came to rule over large areas, it was possible for people to start issuing physical representations of their debt. Consider it this way; the potato farmer (let’s call him Tom) travels to a far away town and takes some bananas from the townspeople. These townspeople often travel to Tom’s town, but never know who specifically will be making the journey. How would Tom know who was coming to claim the debt? So he gives them an item. For simplicity, we imagine a piece of parchment saying something to the effect of ‘Tom owes you for the bananas he took on this date.’ Therefore, no matter who comes to Tom’s farm, he will be able to give them potatoes in exchange for the bananas.
If however, the townspeople decide no longer to travel to Tom’s farm because the no longer need potatoes, they may exchange their bananas for Tom’s note with some other passing traveller. The note is given value by the understanding that Tom will give the bearer potatoes when they present it to him. This note can now circulate much like money.
However, the note will not circulate to people who do not know Tom. They may not be travelling to his farm, or they may simply not trust that he will give them potatoes. This gives us another hurdle to overcome.
The answer, again, comes from the development of society. People began putting their trust in governments to protect them. In order to do this, the government needs to get food. They may do this by issuing their own notes of ‘debt’ to people. Because these notes are redeemable by the government, they are assumed to be secure. And as long as the government is recognised, and they have good stability, the notes will have value and will circulate in a manner that we now understand as cash. In fact, our banknotes are literally just claims on a debt that the government owes to us, and if they every pay that debt back, then our entire economic system would come to a sudden stop.
Of course, over time, we have developed money. As it has become the standard to measure things in monetary terms, we have developed new ways for us to exchange money. We have bank cards, we can pay with our phone, we have PayPal. We also have very sophisticated ways or transferring between currencies. And in the last few years people have worked very hard to destroy our conception of currency by introducing the new cryptocurrencies.
*It is worth noting here that many of these developments pre date Islam or Christianity. However, people reading this today will be more familiar with these deities than the ones from ancient forgotten cultures.
There are many books that have been written on this topic. Below are a few of my favourites. The first, Debt: The First 5000 years inspired this blog post. Some other views on the subject can be found in Piketty’s Capital, and in Sapiens, which examines development of humankind.