The History of Money: From Bartering to Bitcoin

At its core, money serves many different purposes. It is a medium of exchange; supposed to have the ability to buy goods and services. It is a store of value; it is supposed to hold its value over time so that goods and services can be purchased later. It is also a unit of account; it is meant to represent the value of something. Each of these uses could be an economics textbook itself. In this essay, I will detail the history and evolution of money and how “ultrasound” Ethereum solves the problems presented in the past.

Before modern money was first invented, people directly traded goods and services. This system was called bartering. For example, a farmer may trade a bushel of wheat for a jacket from a tailor. There would be no intermediaries to this transaction–it’s just the farmer trading with the tailor. This system worked very well for a long time. Interestingly, trading and bartering weren’t always instant. Instead of being repaid immediately, everyone in the village would know who traded what with who, and people would be held accountable. Oftentimes, people might be repaid in labor. For example, instead of the tailor repaying the farmer with a jacket, he/she might help the farmer rebuild his house.

It was all a trust-based system. You had to trust the person you were trading with to repay you. In addition, there was another inherent problem to this system of bartering and trading: it was highly impractical at a larger scale. As villages became towns, and towns became cities; it became more difficult to trade with people. It doesn’t make sense to carry bushels of wheat or jackets around with you to trade. Also, people weren’t always held accountable for not paying others back. However, there was one forgotten benefit to the system: the government didn’t have direct control over the value of your money.

There was no centralization in this system. However, due to the impracticalities, currencies began to emerge. Around 600 BCE was the introduction of the Mesopotamian shekel. The shekel was a silver coin, although various weights of silver were used in trade as early as 3000 BCE. At that point, any silver coin could be used as currency; it depended on the weight. There was intrinsic value to the shekel. Thus, it could be used interchangeably with other similar forms of money.

Before the Mesopotamian shekel, other coins existed. Most notably the ancient Greeks; whose coins were also made of precious metals such as gold and silver, or sometimes a mix of both called electrum. Coinage was a large step towards easier, and more reliable money. It allowed people to facilitate trade easily, and it made people’s money more reliable. It was a net positive for sure, and as time went by, many more civilizations began adopting coin money.

The next step toward better money was the adoption of bills. It is said that these originated in China during the Tang Dynasty in 907 CE. Originally, merchants left their heavy stacks of coins with trustworthy people, and they would receive notes certifying that people had those coins. Although this was more practical and easy, it meant that you had to trust that institution or person with your money. At the beginning of the Song Dynasty, the Chinese government began certifying specific deposit shops that could take your money and create notes representing it.

During the medieval period, a different system of government called feudalism emerged in Europe. Lords ruled over land protected by knights, and peasants did work on farms and provided goods and services. Many of these peasants had very little money and did not have a choice other than working on their lord’s land. There were two coins that were mainly used at the time: the Denarius and the Byzantine gold solidus. However, there were no complex financial systems like there were in Asia, China, and Africa.

While the medieval period may be seen as an unproductive time, there were a few notable events. First of all, the pound sterling was introduced, which interestingly still exists today, although with very significant changes (more on that later). Also, it was during medieval times that currency debasement began. Simply, currency debasement is lowering the value of a currency. In medieval times in Europe, countries such as Italy, France, and England began debasing their currencies by diluting the gold in their coins with silver. This is a problem on so many different levels, but I’ll also explain more about currency debasement later.

The Renaissance brought great cultural and technological innovation, especially in the banking industry. Advanced banking similar to what we have today emerged, with depositors’ money being lent out to people by the bank. Because there was the risk that the money would not be paid back, the bank paid interest on the depositor’s money. While banking created a safe place to store money, it also created a new dynamic: centralization of wealth.

The Medici family, also known as the House of Medici, owned a large bank and had great control. They also had many politicians and monarchs, such as Caterina the Queen of France, and Cosmino the Elder who was the ruler of Florence. Most of the reason why the Medici family had the most control is that they had a large bank, which funded many of their political excursions. This shows how finance can impact politics, and overall, the course of history that was influenced by the Medici bank.

Politics and money became even more tied together with the emergence of central banks. In 1668, Sweden unveiled the Riksdag, which was the first central bank in the world. The Riksdag’s job was to issue currency notes, and, for lack of a better word, control the financial markets nationally and sometimes internationally. 

England followed suit and formed its own central bank that issues currency notes as well in 1695. France followed, introducing its own central bank in 1800. The central bank would issue currency but with gold backing it. Each currency could be denominated as the amount of gold behind it. People simply thought about government-issued currency as notes representing some gold, and the government oftentimes allowed people to exchange their currency for a set amount of gold. This is called the gold standard for currency.

While central banks were always a bad idea that existed solely for the government to have more control (according to Saidefain Ammous, author of the Bitcoin Standard), at least there was some level of trust that your currency was backed by something. But slowly, governments began leaving the gold standard. They decided to not have anything behind their currency, and people couldn’t exchange their currency for gold. England left the gold stand in 1931, France left it in 1936, while the US government held on a little longer–until 1971. Almost all countries left the gold standard.

Let’s look at the ridiculousness of this decision. Now we have a currency that has nothing backing it. But what is even worse is the inflation. The government can print virtually unlimited money. Especially the United States—with reserve currency Some would argue that the government is backing the currency, but do government officials really add value to currencies, or do they just manipulate the markets to be reelected and stay in power? I believe the latter.

And many others realized this as well. In the midst of the Great Recession in 2008, pseudonymous Satoshi Nakomoto released Bitcoin. Bitcoin is a peer-to-peer digital currency with no trusted third parties. It was a large step towards sound money that couldn’t be manipulated or the intrinsic value diluted by the government or any third party in general.

Let’s take a look back at how this solves the problems presented in the past. First of all, there are no longer intermediaries for transactions, unlike when the bank had access to your money which you can write checks to transfer it. Crypto is trustless. Secondly, because all crypto transactions and smart contracts are on a secure ledger that anybody can see, crypto provides a much higher level of transparency while preserving user privacy by remaining pseudonymous with long strings of characters as wallet addresses.

Thirdly, crypto can be practical while remaining distributed and trustless. Scaling solutions such as the Bitcoin lightning network can allow millions of transactions per second, and Ethereum rollups can allow it to handle up to quadrillions, or potentially unlimited, transactions per second.

Basically, Bitcoin has a cryptographically secure ledger of transactions that all nodes store, called a blockchain. To create a transaction, you need to get a node to broadcast the transaction to the network, which will randomly choose another node to verify it. Bitcoin is entirely distributed. Nobody has the ability to make changes to the original source code. Bitcoin is also open-sourced; anybody can check the distribution of Bitcoins and audit the code.

However, Bitcoin simply did not have the complexity for sophisticated finance. On July 30th, the Ethereum network went live. Ethereum was first described as the “world computer”. Unlike Bitcoin, Ethereum has a specialized programming language that supports smart contracts–essentially immutable scripts on the blockchain. Ethereum has a native currency called Ether, which is used to pay fees charged by transaction validators. 

In 2020, Ethereum researcher Justin Drake began popularizing the term “ultrasound money”. The premise was simple: if sound money such as gold has a finite supply, then ultrasound money has a decreasing supply. However, if you have worked in traditional finance, or haven’t heard of crypto before, then you might be thinking: well, cryptocurrencies don’t have intrinsic value either, so why are they worth anything as money?

There are two answers to this question: the technical answer and the simple answer. The simple answer is that Bitcoin and other cryptocurrencies are backed by the hardware used to mine or stake the currencies. The technical answer is that the intrinsic value is the security of the network, which smart contracts, Defi (decentralized finance), layer 2s, and everything built on top of Ethereum rely on. Blockchains use a data structure called Merkle trees, which gets stronger with each transaction included in a block on the chain.*

Crypto is secure, trustless, distributed, pseudonymous, censorship-resistant, sound (or ultrasound) with intrinsic value behind it, and practical. Cryptocurrencies are simply better money. In conclusion, cryptocurrencies solve the problems with money presented in the past and are certainly the best path going forward.

Appendix

*Merkle trees are complex but here is a simple description of them. Basically, a Merkle tree is a data structure to which each verified block is added to. First, the block is hashed—hashing is a type of encryption that cannot be reversed. Second, the block’s hash is combined with the hash of another block. With this, each block makes the network stronger and the earlier the transaction, the harder it is to alter the previous transactions.

If this doesn’t make sense, think of it as a Roman arch: the more weight added to it, the stronger it gets, and the harder it is to add or remove weight closer to the arch.

Source: https://www.codementor.io/blog/merkle-trees-5h9arzd3n8

Citations

Ammous, Saifedean. The Bitcoin Standard: The Decentralized Alternative to Central Banking. Wiley, 2021.

Bordo, Michael D. “A Brief History Of Central Banks.” Economic Commentary, Federal Reserve Bank of Cleveland, 12 Jan. 2007, http://www.clevelandfed.org/publications/economic-commentary/2007/ec-20071201-a-brief-history-of-central-banks.

“The History of Central Banks.” The Economist, The Economist Newspaper, http://www.economist.com/briefing/2017/04/27/the-history-of-central-banks.

“The History of Money.” PBS, Public Broadcasting Service, 26 Oct. 1996, www.pbs.org/wgbh/nova/article/history-money/.

Magazine, Smithsonian. “Making Cents of Currency’s Ancient Rise.” Smithsonian.com, Smithsonian Institution, 20 June 2017, http://www.smithsonianmag.com/history/making-cents-currencys-ancient-rise-180963776/.

Ritchie, Joshua. “The History of Money: How Our Currency Evolved from Pelts to Money.” MintLife Blog, Intuit, 7 Aug. 2009, mint.intuit.com/blog/investments/the-history-of-money/.

Beattie, Andrew. “The History of Money: From Bartering to Banknotes to Bitcoin.” Investopedia, Investopedia, 18 Sept. 2022, https://www.investopedia.com/articles/07/roots_of_money.asp. 

Szczepanski, Kallie. “The Invention of Paper Money.” ThoughtCo, ThoughtCo, 17 Oct. 2019, https://www.thoughtco.com/the-invention-of-paper-money-195167. 

F., Claudia. The Renaissance Economy: The Rise of Banking, https://study.com/academy/lesson/the-renaissance-economy.html. 

Neufeld, Jackson. Impact Of Banking In The Renaissance, IPL, 23AD, https://www.ipl.org/essay/Impact-Of-Banking-In-The-Renaissance-PKANRT7EACPR. 

“Banking in the Middle Ages.” End of Europe’s Middle Ages – Banking in the Middle Ages, University of Calgary, https://www.faculty.umb.edu/gary_zabel/Courses/Phil%20281b/Philosophy%20of%20Magic/Dante.%20etc/Philosophers/End/bluedot/banking.html. 

Riksbanken. “Sveriges Riksbank Is Founded.” Sveriges Riksbank, Sveriges Riksbank, https://www.riksbank.se/en-gb/about-the-riksbank/history/historical-timeline/1600-1699/sveriges-riksbank-is-founded/. 

Riksbanken. “The Tasks of the Riksbank.” And Research | Sveriges Riksbank, https://www.riksbank.se/en-gb/about-the-riksbank/the-tasks-of-the-riksbank/. 

Kagan, Julia. “Fractional Reserve Banking: What It Is and How It Works.” Edited by Somer Anderson, Investopedia, Investopedia, 30 Sept. 2022, https://www.investopedia.com/terms/f/fractionalreservebanking.asp. Nakomoto, Satoshi. “Bitcoin: A Peer-to-Peer Electronic Cash System.” Bitcoin, 31 Oct. 2008, https://www.bitcoin.com/bitcoin.pdf.

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1 thought on “The History of Money: From Bartering to Bitcoin

  1. Timothy,

    This is very well done.

    It almost makes me understand crypto-currency.

    Love,

    Grandpa George

    Like

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