We’ve come a long way from bartering with shells to using nifty rectangular papers to pay for the things we want.
But how exactly did we get the opportunity to stuff our wallets with green bills instead of worrying about having enough fish to trade for bread? Money has experienced an incredible evolution over the centuries, and this is how its development breaks down.
Guest post by www.UFXMarkets.com
Bartering
Way back in the day “” yes, even before your grandparents’ back-in-the-day stories “” money as we know it didn’t exist. If someone wanted a good of some sort that another person owned, bartering would be the way to get it. According to PBS, bartering is the exchange of resources or services for mutual advantage and has likely been going on since humans first walked the Earth.
When trading was common, certain bartered goods started developing monetary properties. These goods can be more frequently used to acquire other goods. For example, in an early British colony in Australia, rum started taking on value and was commonly traded. Bartering still couldn’t work, though, because those who “sold” goods might not have wanted what others had to offer.
Commodity Money
Some goods developed more worth because they intrinsically had more use to people. These items took on the role of currency because they were more widely accepted. Some examples throughout history include cattle “” one of the most used types of commodity money “” and shells. Cowrie shells started being used as early as 1200 B.C. in China and were the most widely and longest used currency in history.
To further illustrate commodity money, bread (which I think everyone can agree is very useful and very tasty) took on the form of currency in medieval Iraq. But using commodity money couldn’t work forever; its lack of absolute value (as it was still generally socially determined) made it difficult to trade commercially. Today, many of us don’t own cows, but we can still leverage the market by trading commodities online.
Coins
That’s right: some of the earliest currencies centered around coins, which are now just noise-makers in your pocket or purse. Some of the earliest forms of coins could be the bronze and copper cowrie imitations the Chinese made back in 1000 B.C. By 700 B.C., the Lydians started making rounded coins. Monetary gold gained a lot of popularity because it wasn’t easy to find, easily storable, and alloys could be measured to see how much gold they contained.
Standard coinage began when coins were pre-weighed and pre-alloyed so the value was determined in advance. However, making coins out of gold, silver, and copper didn’t last forever. Coins started taking on a representative value once other metallic alloys were used instead of the valuable ones. When paper money came along, coins’ significance and worth started to decrease. (Sound familiar?)
Paper Money
Continuing their trend of being first to do tons of things, China started using paper money during the T’ang Dynasty, which ran from 618 A.D. to 907 A.D. As centuries passed, paper money started taking on different value. Like coins, paper money began to have representative value, which means that silver or gold was still backing the amount on the paper and could be exchanged.
A step further than representative money is fiat money, which doesn’t have the support of any other commodity but has a forced value. An early American example is the production of Continentals created to finance the American Revolutionary War, though they quickly lost value because they had no backing. However, the U.S. eventually returned to fiat money indefinitely in 1971, and that’s the type of currency in use today.
Conclusion
While early forms of currency used to have intrinsic value that made people confident in using it to trade or purchase items, our current form of money is used with the understanding that the bills and coins will be honored. We owe our thanks to the Federal Reserve for maintaining this system, as confidence in the dollar is crucial for the stability of our currency.
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