A Brief History of Money Throughout World History

Money is an idea that modern people rarely consider. Most think of it as the paper bills in their wallet or the numbers in their bank account. When one stops to consider what “money” is, the idea often becomes much more abstract than some paper bills or even some digits. The notable early twentieth-century British art historian Charles Seltman (1886-1957) perhaps offered the most concise and understandable definition as it relates to history:

“Metal when used to facilitate the exchange of goods is currency; currency when used according to specific weight standards is money; money stamped with a device is coin.”

The following article is a brief journey through the history of money from different cultures around the world. The purpose of this article is to hit the high points and hopefully touch on a few elements of money, currency, and monetary theory you may not know.

Following Seltman’s definition, currency came before money, and the first currencies were developed in the ancient Near East after the dawn of civilization in c. 3100 BCE. The Egyptians developed a system of measurement whereby measures of precious metals were used to determine the equivalent of nonmetallic goods. The deben was the standard, which equaled about 93.3 grams, and was a measure of copper, silver, or gold. After the 12th Dynasty (c. 1985-1773 BCE), the kite, which equaled about ten grams, was added to the system. Ten kites equaled one deben, and were only used for measurements of silver or gold. According to Seltman, the deben and kite were both currency and money.

Early Coinage

The monetary standards of the ancient Near East worked well for more than 2,000 years, but they were ultimately too cumbersome. The idea of placing a specific, standardized value on a gold, silver, bronze, or copper coin was first realized in the ancient Anatolian kingdom of Lydia. Located in what is modern west-central Turkey, Lydia became a powerful and wealthy country under its King Gyges (ruled 680-652 BCE). Gyges took advantage of local electrum deposits (a natural silver-gold alloy), which prospectors brought to the Lydian capital of Sardis. The electrum was then brought to a refinery where the gold and silver were separated and made into the world’s first official coined currency. The neighboring Greeks respected the Lydians for their business acumen and economic ideas, so they adopted the idea of coined currency.

In the sixth century BCE, the numerous Greek city-states began minting silver and gold coins called the drachma. But it was in the period before and after the Peloponnesian War (431-404 BCE) that the Greeks introduced many new monetary ideas. Perhaps one of the most important monetary ideas the Greeks introduced was banking.

Greek banking began in Athens during the Peloponnesian War and although it was initially quite different from the modern concept, it eventually evolved. The first bank was located within the Parthenon Temple and was used to fund Athens’s war against Sparta. Bullion and other gold donated to the temple were minted into coins and the temple also gave loans on interest. A regulatory board was installed to run the financial and monetary operations of the temple, which proved to be quite efficient. Eventually, other temples in other Greek city-states adopted the Athenian model of “sacred banks/treasuries” that funded government and private enterprises.

As the Greeks inherited their concept of money from the Lydians, the Romans did the same from the Greeks. The major difference between Greek and Roman money is that the Romans did not use the drachma as their monetary standard. Instead, the Roman standard was the silver denarius. The coin below the denarius in value was the bronze sestertius, four of which equaled one denarius. The next coin down in value was the copper as, four of which equaled one sestertius.

The next major step in the concept of money was paper currency, but before examining that, it is important to note that the evolution of money was not always even. There were some cultures that followed Seltman’s basic definition but did not use coin or paper currency. One notable example of this is the Kingdom of Kongo in Africa (14th century to 1914). The rulers of Kongo used different currencies, including pieces of iron, but the most important and widely used were the nzimbu shells. These were shells that were only found near the coast town of Luanda, which made them unique and valuable.

The Kingdom of Kongo also trafficked in human slaves, which unfortunately for hundreds of thousands of people, became another source of currency. The nzimbu shells served as a standard currency and money among the subjects of the Kongo Kingdom, but slaves were used in international payments. The kings of Kongo developed deep geopolitical relationships with Europeans, especially the Portuguese. The Kongo rulers wanted European weapons, but the Portuguese were not interested in shells, so they accepted humans as a form of currency. These forms of currency continued even as paper money was being developed in other parts of the world.

The Development of Paper Money

The concept of coin currency spread across the ancient Near East and Europe into East Asia, where new ideas developed independently. The idea of coined currency had likely developed independently and was standardized in the Qin (221-206 BCE) and Han (206 BCE-AD 220) dynasties. But just as the monetary systems of ancient Egypt and Mesopotamia were too unwieldy, the Chinese realized by the twelfth century CE that their coin currency was obsolete.

A combination of factors led the officials of the Song Dynasty (CE 960-1279) to adopt the world’s first paper currency. The devaluation of coined currency combined with the invention of the movable type press in the eleventh century were two of the major reasons. But new monetary theories also played a major role in the creation of paper money. Chinese economists argued that paper money should be viewed as a means of payment, not as a value itself the way coins were. This revolutionary way of viewing money led to the spread of paper currency throughout Asia and beyond.

The concept of paper money took longer to develop in Europe and likely did so independently of China. During the Crusades, the Knights Templar established banks in Europe and the Middle East that they used to fund their activities. The Templars also offered their services to Christian pilgrims. A European pilgrim could deposit coins in a European Templar bank where he was issued a paper note with the value on it. Once the pilgrim arrived in the Holy Land he could redeem the note at a Templar bank, minus a small service charge. This form of banking and paper currency would influence the banks of Venice and other Italian city-states. These Italian banks would become the foundation of the modern European banking system.

There were few changes to the development of money from the 15th century to the 19th century, other than paper currency becoming more ubiquitous. But as paper currency became more widely used, governments sought to tie their money to something tangible. In 1717, the monetary system known as the “gold standard” began in England. Most Western countries eventually joined the system, whereby governments issued paper currency that was backed by gold and set at a fixed exchange rate. Governments only needed to fix a legal value in their currency and then the monetary authorities would buy and sell gold according to the value they held.

All government banknotes were fully convertible to gold and individuals could export and import gold freely. The system worked quite well and would self-correct if problems arose. For example, if a country continually ran a trade deficit, gold would leave the country and the money supply would contract, driving down prices. The result would be increased exports and reduced imports, bringing trade back to equilibrium. The system also kept domestic inflation low. In addition to the United Kingdom, Germany, France, Spain, and Austria-Hungary being on the gold standard, Argentina, Japan, Russia, and the United States also joined. Eventually, though, countries found the temptation to devalue their currencies, leading some to leave the system. The final blow to the system was World War I. Nations largely funded their activities with debt, which was antithetical to the gold standard philosophy.

A Second Gold Standard?

World War I all but ended the classical gold standard, but it did not end the world’s geopolitical problems. Nor did it end the importance of gold. World War II began less than a generation later, partially due to economic problems, and as it was winding down, the Allied leaders decided to reimagine money once more. Western political and economic leaders met at the Mount Washington Hotel in Bretton Woods, New Hampshire for the “United Nations Monetary and Financial Conference” to decide how the post-war economy would look. Leading the conference was British economist John Maynard Keynes (1893-1946), who was by that time famous for his economic theories.

Keynes argued that the post-war system should follow his essential economic ideas, whereby controlling employment and increasing consumption was more important than controlling inflation. “Keynesian economics” as it became known, held that government intervention was fine and even expected to meet these goals. Keynes, though, was not a fan of “hard money,” or pegging currencies to gold or other precious metals.

A compromise was reached, whereby the nations party to the agreement would use the dollar for international transactions, but dollars could be converted to gold. This system, which became known as the “Bretton Woods System,” revived the gold standard to a degree. Although nations could cash their dollars in for gold bullion, individuals could not. And there was also no mechanism to limit the amount of dollars that were printed. By 1960, there were more dollars circulating in the world than there was in the US gold reserve in Fort Knox.

Despite this, the global economy in the West did quite well. Unemployment was low and things were more-or-less stable. Still, the Bretton Woods System was obviously subject to manipulation. Perhaps seething about the Americans inflating their currency, the French converted $150 million of gold reserves into gold in 1965. The French then left NATO in 1966 and the global Gold Pool in 1968, essentially ending their involvement in Bretton Woods.

With no mechanisms to stop speculative attacks, or to limit money printing, the Bretton Woods system collapsed in 1971. US President Richard Nixon announced on August 15, 1971 wage and price controls as well as a surtax on imports. He also announced that dollars could no longer be converted into gold, effectively ending the Bretton Woods system.

After the International Monetary Fund declared the Bretton Woods System officially dead in 1973, the world’s economies moved to “floating currencies.” In this post-Bretton Woods idea of money, currencies are valued against each other, which is determined by the market. Money was no longer backed by precious metals and is considered “fiat.” Fiat money has no tangible value and is only a measure of accounting. Although the concept of fiat money has changed very little in the past fifty years, the Computer Age has changed how it will be used in the future.

Governments are beginning to experiment with central bank digital currencies (CBDCs), which are currencies that are completely digital. Industrialized nations have largely moved to being “cashless” over the last thirty years, but the next step will be digital. Economists and government officials envision systems whereby citizens will use digital wallets for every transaction, including peer-to-peer transactions. There are certainly privacy concerns with this idea of money, which is ironically based on a money concept that places privacy on a pedestal.

When the world’s first cryptocurrency, Bitcoin, was introduced to the world in 2009, few knew what to think of it. The inventor of the technology, Satoshi Nakamoto, has never revealed himself to the public, if he even exists, and for years many thought it was a worthless scam. Today, Bitcoin has a market cap of over $850 billion and is gaining more mainstream acceptance. The monetary concept of Bitcoin has impressed some economists and government officials so much that they have used some of the basic technological ideas to create CBDCs.