The history of money is long and varied. We will discuss important highlights of what money is and why people invented it, along with the consequences of money in society. At the end of this article is a list of five books for a more detailed look at life before money, how money was created, how it evolved and affected society, and how money is still changing our world today.
Barter or Debt
Before money people did not use barter as much as people expected they did.
There is a good reason for this. Two people having exactly what the other wants is rare. When it does happen barter can take place. However, barter comes with a second problem. Not only do two people need to have the exact items for trade, but they must be comparable in value.
The common belief that barter ruled in societies of antiquity is wrong. The evidence is clear.
If barter wasn’t the lubricant in exchange, what was?
Debt! Before money there was debt.
Elaborate credit systems were used before the invention of money, i.e. coins or paper money. That means accounting preceded money!
Accounting records allowed for trade between tribes. There did not need to be a current need for items or services from both sides at the same time. A coastal tribe could trade fish to an inland tribe without reciprocation until a later date when tools or other items were traded back in the other direction.
The same process took place between individuals. Often the credit systems devised allowed the trading of debt. I get a coat from John. I later give some leather to Frank, with Frank taking on the debt of paying back John. To close this simple loop, John gets game meat from Frank, satisfying and eliminating the circle of this debt.
Of course, it gets much more complicated. In a way, the early credit systems were elongated barter systems. Still, pure barter was rare. And once you establish a credit system the problems begin.
For example, what if I assign my debt to Frank and Frank is a deadbeat? And what happens when the balance of trade between tribes becomes woefully lopsided? Wars start that way. And they did. All too often. Then lives were traded and slavery undertaken.
David Graeber said it best, “A debt, then, is just an exchange that has not been brought to completion.”
When the side holding the debt (the creditor) wanted something for prior goods and services rendered and the debtor did not, or could not, provide a desired good or service, other demands were made. Chattel is a broad term identifying all goods, excluding real property (e.g. land). Chattel slavery is where human life is turned into a property. As you can imagine, a lot of undesirable things happen when you are no longer considered human, but mere property. But debt needs repayment.
Even our language echoes these earlier times.
The English “thank you” is derived from “think,” as in, “I’ll remember what you did for me.” “Much obliged” means “I am in your debt.”
Accounting entries and credit systems have plenty of problems. Identifying who owes to whom can get messy very fast. And that is where proto-money comes in.
Tally Sticks
Before coins and paper money there had to be a way to track who owes who. In small groups people can just remember who owes who. But as the number of people grows a better system is needed. Enter the tally stick.
The best way to understand tally sticks is with a story.
Let’s say John is a farmer in ancient Egypt. After the harvest John heads to the temple granary to store his 46 bushels of barley. The temple scribe records the deposit of barley and gives John a tally stick as proof of his 46 bushels of barley on deposit.
A tally stick was usually made of wood that could be broken into two pieces. When the pieces were lined up together it verified ownership and the amount of the claim. (See image above.)
John needs proof to claim his barley back. He gets half the tally stick and the temple keeps the other half. When John wants some or all his barley back he will need to bring his half of the tally stick. The temple keeps some of the gain for the priests and scribes with another amount potentially withheld for government officials.
What if John wants to sell some of his barley for a mule? Well, John would need to go to the temple granary, get his barley back, and give it to his neighbor that has a mule for sale. The neighbor then goes to the temple granary and deposits the barley, receiving a tally stick as his proof.
The tally stick eliminates the need to move barley out and back into the temple granary. John could hand the tally stick to his neighbor to complete the transaction.
But what if the mule is worth only five bushels of barley? Rather than moving barley around, a new tally stick can be created. A visit to the temple would allow a new tally stick for John with five fewer bushels of barley and a tally stick for the neighbor with the five bushels of barley indicated.
People would not want to lose of destroy their half of the tally stick to prevent a creditor from making a demand for more than owed.
The creditor had the opposite problem. A lost tally stick meant there was no proof of claim against the debtor.
Before money, scribes had a booming business. It was inconvenient to run to the temple for every transaction. Tally sticks also became cumbersome.
When transactions closed there was the issue of disposal. Tally sticks piled up fast. Tally sticks were used until relatively recent times because they worked so well as a credit system. In the U.K. tally sticks piled up. The government stopped using them in 1826 and decided to burn the tally sticks held by the government in 1834. Workers burned the tally sticks in a stove in the basement that spread, destroying both Houses of Parliament.
Tally sticks and similar strategies for trade, credit, and debt allowed for an expanded consumer society. These credit systems were a vast improvement from “I owe you” or transactions within small groups only.
The next step required the entire human race to lose its mind!
Shared Fantasy
Why did it take so long for people to invent money? It seems so natural to have a standardized medium of exchange. You give me a good or service and I give you money. But what exactly is money?
Money, as we use it today, requires a shared fantasy. It can also be called a shared illusion. Both terms encompass what money really is when it comes to trade.
The first forms of money were coins called specie. Specie was generally made of a precious metal, such as gold or silver. This is in marked contrast to the “fiat” money used today. Fiat, meaning, by decree, is money because the government or sovereign says it is money and what it is worth.
Why did people settle on specie as a form of money?
First, coins were easier to make than tally sticks. Plus, coins could come in different weights (denominations). Paper money easily deteriorated so coins were the obvious choice.
Second, money needed some kind of limit or anyone could produce more as will. Gold and silver were limited in supply, with increases only available from mining.
Third, the precious metal had value similar to the coin so if the state ran into trouble your money still had value.
Then a leap was needed. People, as a whole, had to agree gold or silver in a certain weight had a certain value. Gold, in ancient times, was pretty. Bother gold and silver were used for jewelry and religious objects. There were other minor uses for these metals as well. But other than the antimicrobial value of silver, there was not a lot to lend value to these metals that could not be handled with other commodities. Plates and utensils made of gold or silver could also be made of jade or ivory or wood, or…
Pure gold does not tarnish. Silver is durable. And most people agreed to exchange goods and services for a certain amount of these metals. In certain communities it was agreed these were money.
No longer were massive ledgers required for trade. No longer was a trip to the temple needed. In effect, a transaction with money was an accounting entry without the need of a scribe. It was a virtual entry!
Specie came with its own set of problems. Then we expanded our shared fantasy to fiat money.
In reality, anything can be money if all parties involved share the fantasy. The fantasy requires all parties to believe other people will share in the fantasy.
Evolution of Money
Money developed at different times in different places. What was used as money also varied by location. In all instances, for money to work, there had to be a shared fantasy over what the value of money is. How many dollars to by that car? How much to buy a soft drink?
It seems so natural today to equate value with money, but money in and of itself has no real value unless we agree it has value. You can’t drive money, but you can buy a car with money if the buyer and seller agree what the money used is worth. U.S. dollars are recognized in many parts of the world. Outside India the rupee rarely has value, nor is it usable as a medium of exchange.
Here is a general progression of money in the Western world. Note that this is a generalization. Accounting records date back more than 7,000 years in Mesopotamia. The progression of money differed around the Middle East and Europe. Money evolved at its own pace and its own way when it came into existence.
- Debt was used in transactions most often, with barter possible in limited instances. Credit systems dominated trade. A transaction was exchanged for what David Graeber calls, “I owe you one.”
- Tally sticks allowed for greater flexibility. The first tally sticks were used 30,000 years ago from the Aurignacian. The tally stick was “money of account.” Credit systems were still used. Debt was still used. Barter was also used when appropriate.
- Specie was the first modern money. Accounting predates coinage by thousands of years. So before we had coins for money, we had accounting to track who owed whom what. Accounting also allowed for tracking of income and expenses. Double-entry bookkeeping traces back to Roman times, but was not documented until 1494 by Luca Pacioli.
- Fiat money expanded the shared fantasy of money. No longer is money only coins made of precious metals, it is made of paper bills and notes. Paper money was backed by gold or silver until most countries around the world changed to a fiat money based system. Credit systems still exists and are extensively used. Many of the fancy monetary tools we use today were created almost as soon as money came into existence.
Money is still evolving. We struggle with what money is and how it works. It becomes clear why so many struggle with keeping and growing money.
It is worth noting accounting existed before money. Money is not a store of value. The complete value of money is what we agree its value is. If you don’t believe this, take your local money to a foreign country and see how well it works when the fantasy is not shared. Money facilitates commercial transactions. But it is not a store of value. Money is a virtual accounting transaction.
Accounting led to money, which led to the written word.
Every transaction is an accounting entry by a scribe or a virtual entry. If I give a retail store money for items there is no scribe to record the transaction. Yes, modern technology enters a lot of data on the transaction, but that isn’t because of money. Money eliminates the need for an accounting entry. The exchange of money for a good or service is also a virtual debit and credit to the accounts of the transactors.
Once you understand money is an accounting entry you begin to see why, for the first time, the written word became necessary. Before, numbers and names were the bulk of what was needed to commence a transaction.
Money allows for certain behaviors impossible (or at least very difficult) to conduct without money. Money can be aggregated in a partnership to build a larger firm than an individual. Governments can tax and/or borrow to undertake large public works projects, build bigger and better weapons, and engage in war.
Borrowing money requires more than numbers and a name. Collateral needs identification. The terms of the loan also needs words. (How much is borrowed, for how long, at which interest rate.)
In my next article I will discuss why we keep having financial crises. The financial crisis is not a modern development. As soon as money took the stage, financial crises followed. Once you know why, you can use that knowledge to build and retain your financial wealth.
And, as you can see, a mere few thousand word article cannot give a full view on the history of money. Below are books for suggested reading.
Suggested Reading
Two books you really need to read now and are recommended for purchase:
Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann
Debt: The First 5,000 Years by David Graeber
This next book is also recommended for purchase and required reading. This book is shorter and includes some different information than the two books above.
Money: The Unauthorized Biography by Felix Martin
The last two books on our list are elective. The Dawn of Everything takes a different look at equality in societies around the world and through time. Globalizing Capital is a deep dive into the modern international monetary system. A library visit should do for most. Depending on your level of interest and seriousness about understanding money, you may wish to own.
The Dawn of Everything: A New History of Humanity by David Graeber and David Wengrow
Globalizing Capital: A History of the International Monetary System by Barry Eichengreen