The history of money concerns the development of means of carrying out transactions involving a medium of exchange. Money is any clearly identifiable object of value that is generally accepted as payment for goods and services and repayment of debts within a market or which is legal tender within a country.
Many things have been used as medium of exchange in markets including, for example, livestock and sacks of cereal grain (from which the Shekel is derived) - things directly useful in themselves, but also sometimes merely attractive items such as cowry shells or beads were exchanged for more useful commodities. Precious metals, from which early coins were made, fall into both categories.
Numismatics is the study of physical money such as coins and paper money.
In Politics Book 1:9 (c.350 B.C.) the Greek philosopher Aristotle contemplated on the nature of money. He considered that every object has two uses, the first being the original purpose for which the object was designed, and the second possibility is to conceive of the object as an item to sell or barter. The assignment of monetary value to an otherwise insignificant object such as a coin or promissory note arises as people and their trading associate evolve a psychological capacity to place trust in each other and in external authority within barter exchange.
With barter, an individual possessing any surplus of value, such as a measure of grain or a quantity of livestock could directly exchange that for something perceived to have similar or greater value or utility, such as a clay pot or a tool. The capacity to carry out barter transactions is limited in that it depends on a coincidence of wants. The seller of food grain has to find the buyer who wants to buy grain and who also could offer in return something the seller wants to buy. There is no agreed standard measure into which both seller and buyer could exchange commodities according to their relative value of all the various goods and services offered by other potential barter partners.
David Kinley considers the theory of Aristotle to be flawed because the philosopher probably lacked sufficient understanding of the ways and practices of primitive communities, and so may have formed his opinion from personal experience and conjecture.
In his book Debt: The First 5000 Years, anthropologist David Graeber argues against the suggestion that money was invented to replace barter. The problem with this version of history, he suggests, is the lack of any supporting evidence. His research indicates that "gift economies" were common, at least at the beginnings of the first agrarian societies, when humans used elaborate credit systems. Graeber proposes that money as a unit of account was invented the moment when the unquantifiable obligation "I owe you one" transformed into the quantifiable notion of "I owe you one unit of something". In this view, money emerged first as credit and only later acquired the functions of a medium of exchange and a store of value.
In a gift economy, valuable goods and services are regularly given without any explicit agreement for immediate or future rewards (i.e. there is no formal quid pro quo). Ideally, simultaneous or recurring giving serves to circulate and redistribute valuables within the community.
There are various social theories concerning gift economies. Some consider the gifts to be a form of reciprocal altruism. Another interpretation is that implicit "I owe you" debt and social status are awarded in return for the "gifts". Consider for example, the sharing of food in some hunter-gatherer societies, where food-sharing is a safeguard against the failure of any individual's daily foraging. This custom may reflect altruism, it may be a form of informal insurance, or may bring with it social status or other benefits.
After the domestication of cattle and the start of cultivation of crops in 9000-6000 BCE, both livestock and plant products were used as money.
In the earliest instances of trade with money, the things with the greatest utility and reliability in terms of re-use and re-trading of these things (their marketability), determined the nature of the object or thing chosen to exchange. So as in agricultural societies, things needed for efficient and comfortable employment of energies for the production of cereals and the like were the most easy to transfer to monetary significance for direct exchange. As more of the basic conditions of the human existence were met to the satisfaction of human needs, so the division of labour increased to create new activities for the use of time to solve more advanced concerns. As people's needs became more refined, indirect exchange became more likely as the physical separation of skilled labourers (suppliers) from their prospective clients (demand) required the use of a medium common to all communities, to facilitate a wider market.
Aristotle's opinion of the creation of money as a new thing in society is:
When the inhabitants of one country became more dependent on those of another, and they imported what they needed, and exported what they had too much of, money necessarily came into use.
Many cultures around the world developed the use of commodity money, that is, objects that have value in themselves as well as value in their use as money. . Ancient China, Africa, and India used cowry shells.
The Mesopotamian civilization developed a large scale economy based on commodity money. The shekel was the unit of weight and currency, first recorded circa 3000 BC, referring to a specific weight of barley, and equivalent amounts of silver, bronze, copper etc. The Babylonians and their neighboring city states later developed the earliest system of economics as we think of it today, in terms of rules on debt, legal contracts and law codes relating to business practices and private property. Money was not only an emergence, it was a necessity.
The Code of Hammurabi, the best preserved ancient law code, was created ca. 1760 BCE (middle chronology) in ancient Babylon. It was enacted by the sixth Babylonian king, Hammurabi. Earlier collections of laws include the code of Ur-Nammu, king of Ur (ca. 2050 BCE), the Code of Eshnunna (ca. 1930 BCE) and the code of Lipit-Ishtar of Isin (ca. 1870 BCE). These law codes formalized the role of money in civil society. They set amounts of interest on debt... fines for 'wrongdoing'... and compensation in money for various infractions of formalized law.
It has long been assumed that metals, where available, were favored for use as proto-money over such commodities as cattle, cowry shells, or salt, because metals are at once durable, portable, and easily divisible. The use of gold as proto-money has been traced back to the fourth millennium BCE when the Egyptians used gold bars of a set weight as a medium of exchange, as had been done earlier in Mesopotamia with silver bars.
The first mention of the use of money within the Bible is within the Book of Genesis in reference to criteria of the circumcision of a bought slave. Later, the Cave of Machpelah is purchased (with silver) by Abraham, during a period dated as being the beginning of the twentieth century BCE, some-time recent to 1900 BCE (after 1985). The currency was also in use amongst the Philistine people of the same time-period.
From approximately 1000 BCE money in the shape of small knives and spades made of bronze were in use in China during the Zhou dynasty, with cast bronze replicas of cowrie shells in use before this. The first manufactured coins seems to have taken place separately in India, China, and in cities around the Aegean sea between 700 and 500 BC. While these Aegean coins were stamped (heated and hammered with insignia), the Indian coins (from the Ganges river valley) were punched metal disks, and Chinese coins (first developed in the Great Plain) were cast bronze with holes in the center to be strung together. The different forms and metallurgical process implies a separate development.
The first ruler in the Mediterranean known to have officially set standards of weight and money was Pheidon. Minting occurred in the latter parts of the 7th century amongst the cities of Grecian Asia Minor, spreading to Aegean parts of the Greek islands and the south of Italy by 500 BC. The first stamped money (having the mark of some authority in the form of a picture or words) can be seen in the Bibliothèque Nationale of Paris. It is an electrum stater of a turtle coin, coined at Aegina island. This coin dates about 700 BC.
Other coins made of electrum (a naturally occurring alloy of silver and gold) were manufactured on a larger scale about 650 BCE in Lydia (on the coast of what is now Turkey). Similar coinage was adopted and manufactured to their own standards in nearby cities of Ionia, including Mytilene and Phokaia (using coins of electrum) and Aegina (using silver) during the 6th century BC. and soon became adopted in mainland Greece itself, and the Persian Empire (after it incorporated Lydia in 547 BC).
The use and export of silver coinage, along with soldiers paid in coins, contributed to the Athenian Empire's 5th century BC, dominance of the region. The silver used was mined in southern Attica at Laurium and Thorikos by a huge workforce of slave labour. A major silver vein discovery at Laurium in 483 BCE led to the huge expansion of the Athenian military fleet.
The worship of Moneta is recorded by Livy with the temple built in the time of Rome 413 (123); a temple consecrated to the same goddess was built in the earlier part of the fourth century (perhaps the same temple). The temple contained the mint of Rome for a period of four centuries. The name of the goddess thus became the source of numerous words in English and the Romance languages, including the words "money" and "mint".
The discovery of the touchstone which led the way for metal-based commodity money and coinage. Any soft metal can be tested for purity on a touchstone, allowing one to quickly calculate the total content of a particular metal in a lump. Gold is a soft metal, which is also hard to come by, dense, and storable. As a result, monetary gold spread very quickly from Asia Minor, where it first gained wide usage, to the entire world.
Using such a system still required several steps and mathematical calculation. The touchstone allows one to estimate the amount of gold in an alloy, which is then multiplied by the weight to find the amount of gold alone in a lump. To make this process easier, the concept of standard coinage was introduced. Coins were pre-weighed and pre-alloyed, so as long as the manufacturer was aware of the origin of the coin, no use of the touchstone was required. Coins were typically minted by governments in a carefully protected process, and then stamped with an emblem that guaranteed the weight and value of the metal. It was, however, extremely common for governments to assert that the value of such money lay in its emblem and thus to subsequently reduce the value of the currency by lowering the content of valuable metal.
Gold and silver were used as the most common form of money throughout history. In many languages, such as Spanish, French, and Italian, the word for silver is still directly related to the word for money. Although gold and silver were commonly used to mint coins, other metals were used. For instance, Ancient Sparta minted coins from iron to discourage its citizens from engaging in foreign trade. In the early seventeenth century Sweden lacked more precious metal and so produced "plate money", which were large slabs of copper approximately 50 cm or more in length and width, appropriately stamped with indications of their value.
Gold coinage began to be minted again in Europe in the thirteenth century. Frederick the II is credited with having re-introduced the metal to currency during the time of the Crusades. During the fourteenth century Europe had en masse converted from use of silver in currency to minting of gold. Vienna transferred from minting silver to instead gold during 1328.
Metal based coins had the advantage of carrying their value within the coins themselves - on the other hand, they induced manipulations: the clipping of coins in the attempt to get and recycle the precious metal. A greater problem was the simultaneous co-existence of gold, silver and copper coins in Europe. English and Spanish traders valued gold coins more than silver coins, as many of their neighbors did, with the effect that the English gold-based guinea coin began to rise against the English silver based crown in the 1670s and 1680s. Consequently, silver was ultimately pulled out of England for dubious amounts of gold coming into the country at a rate no other European nation would share. The effect was worsened with Asian traders not sharing the European appreciation of gold altogether -- gold left Asia and silver left Europe in quantities European observers like Isaac Newton, Master of the Royal Mint observed with unease.
Stability came into the system with national Banks guaranteeing to change money into gold at a promised rate; it did, however, not come easily. The Bank of England risked a national financial catastrophe in the 1730s when customers demanded their money be changed into gold in a moment of crisis. Eventually London's merchants saved the bank and the nation with financial guarantees.
Another step in the evolution of money was the change from a coin being a unit of weight to being a unit of value. A distinction could be made between its commodity value and its specie value. The difference is these values is seigniorage.
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Paper money was introduced in Song Dynasty China during the 11th century. The development of the banknote began in the seventh century, with local issues of paper currency. Its roots were in merchant receipts of deposit during the Tang Dynasty (618-907), as merchants and wholesalers desired to avoid the heavy bulk of copper coinage in large commercial transactions. The issue of credit notes is often for a limited duration, and at some discount to the promised amount later. The jiaozi nevertheless did not replace coins during the Song Dynasty; paper money was used alongside the coins. The central government soon observed the economic advantages of printing paper money, issuing a monopoly right of several of the deposit shops to the issuance of these certificates of deposit. By the early 12th century, the amount of banknotes issued in a single year amounted to an annual rate of 26 million strings of cash coins.
In the 13th century, paper money became known in Europe through the accounts of travelers, such as Marco Polo and William of Rubruck. Marco Polo's account of paper money during the Yuan Dynasty is the subject of a chapter of his book, The Travels of Marco Polo, titled "How the Great Kaan Causeth the Bark of Trees, Made into Something Like Paper, to Pass for Money All Over his Country." In medieval Italy and Flanders, because of the insecurity and impracticality of transporting large sums of money over long distances, money traders started using promissory notes. In the beginning these were personally registered, but they soon became a written order to pay the amount to whoever had it in their possession. These notes can be seen as a predecessor to regular banknotes.
Bills of exchange became prevalent with the expansion of European trade toward the end of the Middle Ages. A flourishing Italian wholesale trade in cloth, woolen clothing, wine, tin and other commodities was heavily dependent on credit for its rapid expansion. Goods were supplied to a buyer against a bill of exchange, which constituted the buyer's promise to make payment at some specified future date. Provided that the buyer was reputable or the bill was endorsed by a credible guarantor, the seller could then present the bill to a merchant banker and redeem it in money at a discounted value before it actually became due. The main purpose of these bills nevertheless was, that traveling with cash was particularly dangerous at the time. A deposit could be made with a banker in one town, in turn a bill of exchange was handed out, that could be redeemed in another town.
These bills could also be used as a form of payment by the seller to make additional purchases from his own suppliers. Thus, the bills - an early form of credit - became both a medium of exchange and a medium for storage of value. Like the loans made by the Egyptian grain banks, this trade credit became a significant source for the creation of new money. In England, bills of exchange became an important form of credit and money during last quarter of the 18th century and the first quarter of the 19th century before banknotes, checks and cash credit lines were widely available.
The acceptance of symbolic forms of money opened up vast new realms for human creativity. A symbol could be used to represent something of value that was available in physical storage somewhere else in space, such as grain in the warehouse. It could also be used to represent something of value that would be available later in time, such as a promissory note or bill of exchange, a document ordering someone to pay a certain sum of money to another on a specific date or when certain conditions have been fulfilled.
In the 12th century, the English monarchy introduced an early version of the bill of exchange in the form of a notched piece of wood known as a tally stick. Tallies originally came into use at a time when paper was rare and costly, but their use persisted until the early 19th Century, even after paper forms of money had become prevalent. The notches were used to denote various amounts of taxes payable to the crown. Initially tallies were simply used as a form of receipt to the tax payer at the time of rendering his dues. As the revenue department became more efficient, they began issuing tallies to denote a promise of the tax assessee to make future tax payments at specified times during the year. Each tally consisted of a matching pair - one stick was given to the assessee at the time of assessment representing the amount of taxes to be paid later and the other held by the Treasury representing the amount of taxes be collected at a future date.
The Treasury discovered that these tallies could also be used to create money. When the crown had exhausted its current resources, it could use the tally receipts representing future tax payments due to the crown as a form of payment to its own creditors, who in turn could either collect the tax revenue directly from those assessed or use the same tally to pay their own taxes to the government. The tallies could also be sold to other parties in exchange for gold or silver coin at a discount reflecting the length of time remaining until the taxes was due for payment. Thus, the tallies became an accepted medium of exchange for some types of transactions and an accepted medium for store of value. Like the girobanks before it, the Treasury soon realized that it could also issue tallies that were not backed by any specific assessment of taxes. By doing so, the Treasury created new money that was backed by public trust and confidence in the monarchy rather than by specific revenue receipts.
Goldsmiths in England had been craftsmen, bullion merchants, money changers and money lenders since the 16th century. But they were not the first to act as financial intermediates; in the early 17th century, the scriveners were the first to keep deposits for the express purpose of relending them. Merchants and traders had amassed huge hoards of gold and entrusted their wealth to the Royal Mint for storage. In 1640 King Charles I seized the private gold stored in the mint as a forced loan (which was to be paid back over time). Thereafter merchants preferred to store their gold with the goldsmiths of London, who possessed private vaults, and charged a fee for that service. In exchange for each deposit of precious metal, the goldsmiths issued receipts certifying the quantity and purity of the metal they held as a bailee (i.e. in trust). These receipts could not be assigned (only the original depositor could collect the stored goods). Gradually the goldsmiths took over the function of the scriveners of relending on behalf of a depositor and also developed modern banking practices; promissory notes were issued for money deposited which by custom and/or law was a loan to the goldsmith,i.e. the depositor expressly allowed the goldsmith to use the money for any purpose including advances to his customers. The goldsmith charged no fee, or even paid interest on these deposits. Since the promissory notes were payable on demand, and the advances (loans) to the goldsmith's customers were repayable over a longer time period, this was an early form of fractional reserve banking. The promissory notes developed into an assignable instrument, which could circulate as a safe and convenient form of money backed by the goldsmith's promise to pay. Hence goldsmiths could advance loans in the form of gold money, or in the form of promissory notes, or in the form of checking accounts. Gold deposits were relatively stable, often remaining with the goldsmith for years on end, so there was little risk of default so long as public trust in the goldsmith's integrity and financial soundness was maintained. Thus, the goldsmiths of London became the forerunners of British banking and prominent creators of new money based on credit.
Demand deposits are funds that are deposited in bank accounts and are available for withdrawal at the discretion of the depositor. The withdrawal of funds from the account does not require contacting or making any type of prior arrangements with the bank or credit union. As long as the account balance is sufficient to cover the amount of the withdrawal, and the withdrawal takes place in accordance with procedures set in place by the financial institution, the funds may be withdrawn on demand
The first European banknotes were issued by Stockholms Banco, a predecessor of the Bank of Sweden, in 1661. These replaced the copper-plates being used instead as a means of payment, although in 1664 the bank ran out of coins to redeem notes and ceased operating in the same year.
Inspired by the success of the London goldsmiths, some of which became the forerunners of great English banks, banks began issuing paper notes quite properly termed 'banknotes' which circulated in the same way that government issued currency circulates today. In England this practice continued up to 1694. Scottish banks continued issuing notes until 1850. In USA, this practice continued through the 19th Century, where at one time there were more than 5000 different types of bank notes issued by various commercial banks in America. Only the notes issued by the largest, most creditworthy banks were widely accepted. The script of smaller, lesser known institutions circulated locally. Farther from home it was only accepted at a discounted rate, if it was accepted at all. The proliferation of types of money went hand in hand with a multiplication in the number of financial institutions.
These banknotes were a form of representative money which could be converted into gold or silver by application at the bank. Since banks issued notes far in excess of the gold and silver they kept on deposit, sudden loss of public confidence in a bank could precipitate mass redemption of banknotes and result in bankruptcy.
The use of bank notes issued by private commercial banks as legal tender has gradually been replaced by the issuance of bank notes authorized and controlled by national governments. The Bank of England was granted sole rights to issue banknotes in England after 1694. In the USA, the Federal Reserve Bank was granted similar rights after its establishment in 1913. Until recently, these government-authorized currencies were forms of representative money, since they were partially backed by gold or silver and were theoretically convertible into gold or silver.
The latest development in money uses cryptology to ensure trust & fungibility in a theoretically tamper-proof decentralized ledger called a blockchain. The first successful cryptocurrency is Bitcoin, and since its inception hundreds of other crypto-backed coins have been introduced. The system is more akin to tally sticks and other types of ledger-based money than to coinage, despite the name.