Definition of Money

1: Something generally accepted as a medium of exchange, a measure of value, or a means of payment

-Merriam Webster

The concept of money is a technological breakthrough that allows two non-trusting parties to exchange resources in order to improve the current situation of both parties. Exchanging goods or services to the benefit of all is one of the simplest, yet important forms of communications in the development of humanity and civilization.

Surprisingly, money as a technology hasn’t really changed all that much throughout human history. From what I can see, there have only been 4 major innovations in money as a technology. I’m going to walk through what I see as some of the critical innovations and dates that get us to where we are today.

Invention: exchange physical items so that two non-trusting parties are both better off

Realistic depiction of bartering in ancient Sumeria

The invention of bartering is so old that historians don’t exactly know when it began. Archaeologists found evidence of bartering dating back to roughly 15,000 years ago based on examples of Anatolian obsidian distributed around a large area. Around 9,000 years ago, it was thought that communities would primarily exchange grains, cattle or surplus tools.

Bartering predates written language and requires no shared spoken language to work between two people who don’t know each other. Proto-writing as ledgers of account developed around 7,000 years ago in Mesopotamia. Along with written language, the Sumerians developed the concept of banking under the barter system. Temples would accept items in exchange for grain or other food. Barter was the major form of exchange for potentially longer than 15,000 years. People slowly came to the realization, however, that it was difficult to lug around cows and food when you needed to make large purchases, which spurred the first major innovation on money.

Innovation 1: exchanging non-edible scarce tokens in exchange for goods and services

Shells were the first tokens representing value exchanged as money

In around 1200 BC, civilizations around the Indian Ocean decided to use sea shells as tokens that represented value. Sea shells were the first version of “coins.” This was a massive leap of faith for early civilization, which was accustomed to exchanging items that they could physically use. Shells are pretty, and nice ones are difficult to come by, but you wouldn’t want to eat a shell, and you can only really make decorations out of them.

Using shells as tokens of value slowly transitioned to the use of round, flat coins made of precious metal, which were much easier to carry around and much more resilient after long periods of use. The first government issued coins came around in about 600 BC in modern day Turkey, about 600 years after shell “coins” made their debut. Coins made of precious metals ruled as the primary global monetary standard for over 2,000 years, until around 1000 AD in China, when banks experimented with the next major innovation.

Innovation 2: paper money as an IOU from a bank

Earliest example of paper money from China

Paper money is a fantastic innovation for a few reasons. It allowed people to transport large quantities quicker, and with fewer resources. Paper money represented value because it could be exchanged for “real money” like gold coins at banks. It was initially very difficult to counterfeit because printing technology was so new, and it could be transferred between people without the need for exchanging them at the bank for gold.

Paper money as a bank note took around 400 years to become widespread among Europe and Asia. Sweden was the first country in Europe to have a central bank issue paper currency in around 1661. During this time, banks figured out that people did not often need to come and make withdrawals of gold from their long term storage. Fractional reserve banking, the idea that banks could use customer deposits to lend out and only maintain a certain percentage of cash on-hand, was invented around 1609, with the one of the earliest examples of a bank becoming insolvent occurring at the bank of Amsterdam in the late 1700s.

The Fractional reserve method, central banks issuing national currencies, and investment banking and commercial/retail banking intertwined contributed to the inevitable global financial collapse in 1929. The Great Depression caused 9,000 banks to close down internationally, and caused the power and wealth of banks to centralize. In 1933, the US enacted the Glass-Steagal act, which aimed to separate investment banks and commercial banks to prevent risky investments from leading to another collapse. After World War II, The Bretton-Woods Act made the US Dollar the default global reserve currency, because it was a stable store of value, the US economy was intact, and the USD was still redeemable for gold. Paper Money as an IOU from a bank reigned for roughly 700 years.

Innovation 3: money as a faith-based suicide pact

The Nixon shock and real bills from hyperinflated currencies — Venezuela and Zimbabwe

In 1971, due in part to the increasing demand for USD and the inability of the US to maintain high enough gold reserves, President Nixon shocked the internationally community by removing the USD from the gold standard, causing it to float against other international currencies. This was not the first time that a country abandoned the gold standard, but since the USD was the global reserve currency at the time, this was the ultimate nail in the coffin for paper money as an IOU from a bank.

Paper money today has value because the population agrees it has value (faith), it is required to pay for taxes, and because if it did not have value, the global economy would come grinding to a halt (suicide pact). For examples of when populations lose faith in the currency, see Zimbabwe, Venezuela (today), and India (today). Floating money has not been a good store of value in the last 45 years; currencies have depreciated significantly since the 70’s. There are many reasons and arguments why inflation and/or currency depreciation is good for business and good for economies, but the point I’m making is that it is almost guaranteed that a Dollar or Euro today will have more purchasing power than it will in a year or two. This is how inflationary floating currencies work. It’s a hot potato. You want it, but you want to use it quickly before it depreciates.

In the last 45 years, major innovations in banking and technology play into the next innovation of money. In 1991, the World Wide Web was born. This allowed banks to move their ledger systems online and have moved floating money into the digital world. In 1999, the repealing of the Glass-Steagal act allowed banks greater freedom in their investment strategies. This is one of many causes of the 2008 housing bubble, and also a catalyst for the future of currency. Money as a faith-based suicide pact has been the global standard for only 45 years. The current monetary system is not normal when viewed from the context of all of human history.

Innovation 4: decentralized digital money as an internet protocol and reward for maintaining an immutable global ledger

This one is (surprisingly) not an original work of art. I found this by Googling “Bitcoin Network”

Satoshi Nakamoto, an anonymous person or group of people, released Bitcoin in 2009. Bitcoin is an open source protocol that facilitates transferring wealth instantly over the internet. The tokens (bitcoins) are released on a defined schedule based on electricity spent verifying and securing all of the transactions (mining), and the number of bitcoins that will ever exist is capped at 21 million.

Bitcoin has value in part because the participants of Bitcoin agree that it has value, it allows for near instant, permissionless global transfers, and it is a public ledger system that cannot be altered. No single government or central organization oversees the network, and anyone can contribute code to improve the system. Improvements are incorporated based on participants choosing to upgrade their software.

Bitcoin removes the need for a central authority to release or guard your wealth, and it is available to use 24/7 as long as you have access to the internet. Every 10 minutes, without fail since its creation and whether you believe in its success or not, a block of transactions is added to the ledger and the network becomes more secure. While many individuals focus on the price of each coin, a more interesting measure of Bitcoin’s growth and future success is the adoption rate, since it is a scarce digital resource that is made more stable and secure through adoption.

Conclusion

We are currently alive during the birth of a brand new innovation of money, one of humanities simplest, yet most important forms of communication. It’s weird, it’s different, and it’s natural to not trust it. I hope that by looking back at the history of money as a technology, you will take a moment or two to evaluate how the system works today, a shift of an old technology to a new platform, and how the system could work in the future, using the newest technology on the newest platform. Be skeptical of Bitcoin, but take a critical look at the currently adopted system. Support the system that has a brighter future.

How to exchange your currency for the newest innovation of Money:

USD Exchanges/Bitcoin banks: Coinbase, Uphold

Euro Exchanges/Bitcoin bank: Xapo, Bitonic

Be your own bank on your phone or computer: Android — Mycelium, iOS- Breadwallet, from a computer — Electrum