The History of Money

From Barter to Bitcoin

World currency notes
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The basic definition of money is anything that is commonly accepted by a group of people in exchange for goods, services, or resources. Every country has its own exchange system of coins and paper money.

Bartering and Commodity Money

In the beginning, people bartered. Bartering is the exchange of goods or services for other goods or services. For example, someone might swap a bag of rice for a bag of beans and call it an even exchange; or someone might trade the repair of a wagon wheel in exchange for a blanket and some coffee. One major problem with the barter system was that there was no standardized rate of exchange. What would happen if the parties involved couldn't agree that the goods or services being swapped were of equal value, or if the person in need of goods or services had nothing the person who had them wanted? No deal! To solve this problem, humans developed what is called commodity money.

A commodity is a basic item that's used by almost everyone in a given society. In the past, things such as salt, tea, tobacco, cattle, and seeds were considered commodities and therefore, were once used as money. However, using commodities as money created difficulties. For instance, lugging heavy bags of salt or dragging recalcitrant oxen around could prove practical or logistical nightmares. Using commodities for trade led to other problems as well, as many were difficult to store and could also be highly perishable. When the commodity traded involved a service, disputes also arose if that service failed to live up to expectations (realistic or not).

Coins and Paper Money

Metals objects were introduced as money around 5000 B.C. By 700 BC, the Lydians became the first in the Western world to make coins. Metal was used because it was readily available, easy to work with, and could be recycled. Soon, countries began minting their own series of coins with specific values. Since coins were given a designated value, it became easier to compare the cost of items people wanted.

Some of the earliest known paper money dates back to China, where the issuing of paper money became common from about 960 AD.

Representative Money

With the introduction of paper currency and non-precious coinage, commodity money evolved into representative money. This meant that what the money itself was made of no longer had to be of great value.

Representative money was backed by a government or bank's promise to exchange it for a certain amount of silver or gold. For example, the old British Pound bill or Pound Sterling was once guaranteed to be redeemable for a pound of sterling silver. For most of the 19th and the early part of the 20th century, the majority of currencies were based on representative money that relied on the gold standard.

Fiat Money

Representative money has now been replaced by fiat money. Fiat is the Latin word for "let it be done." Money is now given its value by government fiat or decree, ushering in the era of enforceable legal tender, which means that by law, the refusal of "legal tender" money in favor of some other form of payment is illegal.

Origin of the Dollar Sign ($)

The origin of the "$" money sign is not certain. Many historians trace the "$" money sign to either the Mexican or Spanish "P's" for pesos, or piastres, or pieces of eight. The study of old manuscripts shows that the "S" gradually came to be written over the "P" and looking very much like the "$" mark.

U.S. Money Trivia

Likely the earliest form of currency in America was wampum. Fashioned from beads made of shells and strung in intricate patterns, more than simply money, wampum beads were also used to keep records of significant events in the lives of Native American tribal people.

On March 10, 1862, the first United States paper money was issued. The denominations at the time were $5, $10, and $20 and became legal tender on March 17, 1862. The inclusion of the motto "In God We Trust" on all currency was required by law in 1955. It first appeared on paper money in 1957 on One-Dollar Silver Certificates and on all Federal Reserve Notes beginning with Series 1963.

Electronic Banking

ERMA began as a project for the Bank of America in an effort to computerize the banking industry. MICR (magnetic ink character recognition) was part of ERMA. MICR allowed computers to read special numbers at the bottom of checks that allowed computerized tracking and accounting of check transactions.

Bitcoin 

Released as open-source software in 2009, Bitcoin is a cryptocurrency that was invented by an anonymous person (or group of people) who used the name Satoshi Nakamoto. Bitcoins are digital assets that serve as the reward for a process known as mining and can be exchanged for other currencies, products, and services. They employ robust cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Records of these transactions are known as blockchains. Each block in the chain contains a cryptographic hash of the previous block, a timestamp, and transaction data. Blockchains, by design, are resistant to data modification. As of August 19, 2018, there were more than 1,600 unique cryptocurrencies available online, and the number continues to grow.