A Short History of Money

What kind of money do you use in your country?
How do people know how much money is worth?

Money makes the world go round," sang Liza Minelli in the hit musical Cabaret. But have you ever wondered just how long money has existed? The history of money is a fascinating one.

The word "money" comes from the Latin word moneta, which derives from the Temple of Hera the Moneta in ancient Rome. It was here that the Romans minted their money. However, the origins of money are much older. According to current records, the concept of money dates back at least 75,000 years. This speculation is based on a discovery in the Blombos Caves in South Africa. Like the Romans in the Temple of Hera, prehistoric peoples used the Blombos Caves to create their own money: shells of a pea-sized snail called Nassarius Kraussianus. These snail shells were turned into necklaces and used to trade.

Such shells form the earliest example of commodity money. Commodity money can include any commonly available commodity that has value. Apart from shells, this could be anything from livestock to whales' teeth. Spices were used as commodity money for hundreds of years. Even today, in the absence of other types of money, people have occasionally used commodities as money. In the Solomon Islands, shells are still in circulation. Turned into large necklaces, shells are then used during marriage proposals, where a father may charge twenty shell money necklaces for his daughter's hand in marriage.

The concept of commodity money helps us to understand how today's money was invented. Commodity money, as we have seen, derives from things considered valuable to the community. In some early cultures the principle of barter had been used. "We're both farmers; I grow wheat, you grow fruit. So let's trade my wheat for your fruit." However, there are problems with barter. For instance, we can only trade when fruit and wheat are both available at the same time. So the concept of money was born. Now I can buy your fruit with a couple of shells, which we both accept as having value. You in turn can use the shells to buy wheat. Simple.

So as we see, barter systems usually develop into a system of commodity money that is determined by value. Value is determined by either need or scarcity. In prisons, for example, cigarettes are often used as a system of currency. Why? Because they are scarce and prisoners don't have normal money. So cigarettes have a symbolic value over and above what they are worth as paper and tobacco. This example shows how money can be pretty much anything that people agree is tradable.

Moreover, what most forms of commodity money had in common was usability; easy to store, count and carry around. So, given these criteria, you can imagine what the next development in the history of money involved. Coins? Exactly. Gold and silver had been used as commodity money for thousands of years, usually in the form of rings or bracelets. However, it was the Lydians - who lived in an area that now lies in Turkey - who began making gold and silver coins around 560 to 660 BC.

Gold and silver became the standard commodities by which the value of other goods was decided. It was a short step from here to the birth of the next form of money: representative money. In this system, unlike commodity money, the material that the money is made of has little or no intrinsic value; unlike the kinds of currency used in the commodity system. Paper money is a good example of representative money. Such paper currency was originally backed by a bank's promise to redeem it for a given weight of precious metal, such as silver. This is the origin of the term British Pound; it was a unit of money backed by a pound of sterling silver. For much of the nineteenth and twentieth centuries, many currencies were based on representative money through the use of the gold standard. The price of gold determined just how valuable the piece of paper in your pocket was worth.

With time, people decided that using gold to determine value was a bad idea. Why not just let government determine that, say, this coin or bank note was legal tender? Hence the next development: fiat money. Fiat is Latin for "let it be done." In other words, money became valuable, not because it had a value like gold, but because governments and the law determined its worth. A recent example of fiat money is the European Euro.

The last chapter in the history of money (so far) is credit money. Perhaps a better name for this would be virtual money, since it is nothing you can get your hands on, and it's a very long way from that cave in South Africa. Try getting prehistoric man to understand the notion of credit.

As for the future, well, that's anyone's guess. Care to place your bets? I'll give you two shells...