The History of Money

Now that we’ve explored money as a tool to express and transfer value—built on the traits of scarcity, durability, portability, divisibility, fungibility, verifiability, and immutability—let’s take a journey through its evolution. Each step of money’s story has tested these ideal properties, exposing strengths and flaws alike.

Ancient Money

It’s actually a myth that societies bartered for extended periods of time before they started using money. Perhaps a few small tribes bartered for a short time on a small scale, but it wouldn’t take long before something naturally emerged and started fulfilling the role of money.

The oldest form of money we know of—and the oldest written record we’ve ever discovered—was a ledger in ancient Mesopotamia, literally carved into stone. Keep thtis in mind, as it will be important when we begin discussing Bitcoin.

Elsewhere, physical objects took over as money. In many landlocked tribes, seashells were the primary form of money, as they served as tangible proof of the work required to collect them.

Grain was also often used as money, but it doubled as food, which diluted its usefulness as money, and was susceptible to rotting in damp huts.

Salt required work to be obtained, and was often used for wages (fun fact: the Latin word for salt, sal, is the origin of the word “salary”), but it’s consumable like grain, and was also difficult to use for large purchases.

Rai stones—giant stone wheels used as money on the island of Yap—marked ownership while remaining stationary for generations, with islanders keeping a mental ledger of who owned what.

And in some regions in Africa, glass beads worn on necklaces were evidence of the hard work it took to create them, in a time and place where modern glass making techniques were unavailable.

Each form of money had its strengths, but none of them had all the ideal properties of money, so they were destined to fail eventually, when a better alternative was discovered.

As societies grew and mingled, and new technologies made it easier to acquire certain kinds of money, individuals and nations were often faced with the choice of using the inferior money they were accustomed to, or the superior money they had just learned about. Glass beads, for example, have fewer of the ideal properties of money than gold, and they were easy to create in more technologically advanced nations. Gold was better at retaining its value over time, so using it as money became the obvious choice for anyone who didn’t want to lose their hard work to a dying currency.

But gold came with its own set of drawbacks: its weight makes it difficult to transport over large distances, its coinage allowed for other metals to be mixed with it, and the coin’s edges could be shaved off and melted into more coins, thus debasing their value. Fun fact: that’s the original reason why coins were given ridges along their edges, so anyone could tell if the sides had been shaved.

So in the 17th century, banks stepped in with the best solution available at the time: lock gold in vaults and exchange them for redeemable paper notes. This effectively made gold as portable as paper, leading to soaring trade and prosperity for a time, but it introduced a new risk: those notes required everyone to trust that the banks would never debase the currency by printing more notes than the gold they represented.

Modern Money

In late 1913, the Federal Reserve was formed—a private bank that is not federal, nor does it hold any reserves—tasked by the U.S. government with printing bank notes and juggling the nation’s debt (learn more in The Creature from Jekyll Island, by G. Edward Griffin). This flipped the entire concept of money upside-down—once rooted in the work required to obtain certain objects, it now relied on promises from dishonest men in suits.

Then came the Bretton Woods Agreement of 1933, which pegged most of the world’s currencies to the dollar, which was backed by the U.S.’s gold reserves, albeit loosely. And then, in 1971, President Nixon cut the last link between dollars to gold, ushering in an era of pure fiat money (fiat is Latin for “by decree”). No longer tied to anything that needed time and energy, dollars could be created out of thin air by those in charge, while you must continue working for them.

This shift turned every dollar into a symbol of debt, not wealth, each representing part of a loan the U.S. government owes the Federal Reserve. The whole system is held together by trust, yet those in charge of it have proven time and time again to be some of the most untrustworthy people in the world.

Today, central banks can print all the money they want—both physically and digitally—leading to inflation and rising prices for the masses, but those who print the money, and those close to them, get to spend it before prices rise, a phenomenon known as the Cantillon Effect. Eventually—as we’ve seen in the Weimar Republic, Zimbabwe, Venezuela, and many other places—inflation gets out of control, and even a wheelbarrow full of $100 bills will barely buy you a sandwich.

Almost all dollars today—roughly 95%—are digital, just entries in a bank’s internal ledger, layered over fiat’s foundation of empty promises. And banks, firms like Visa, and even governments stand between you and your hard-earned wealth. They can freeze your account and block your payments, and ever since a few legal tweaks that were made in 2020, when you give your money to a bank, it legally belongs to them. You no longer own the money, but merely an account, which the bank can still shut down at any time, and for any reason.

Leading up to the 2008 financial crisis, many banks recklessly pursued wealth at their customers’ expense, issuing loans to home buyers who were unlikely to ever pay it back. What consequences did the banks receive for behaving so irresponsibly? They were bailed out, their higher management took extended vacations, and everyone else is still paying for their mistakes through higher prices that result from inflation.

That was when an anonymous individual—or possibly a group—calling themselves “Satoshi Nakamoto” came up with a solution to the fiat system. They announced to a group of cryptography and freedom enthusiasts, known as “Cypherpunks”, their plans to create a better form of money, which they called Bitcoin.

This radical new form of money would not be run by a powerful few, but defined by rules that everyone can verify, opt-in to, and help enforce. It’s a return to the very earliest known form of money—a ledger, but for the digital age—but powered by every individual who chooses to run it. It’s a chance for us to entirely remove the need for trust in our economic system forever.

A Side-by-Side Comparison

The chart below compares ancient and modern monies, from ancient stone ledgers to dollars, according to those seven desired qualities of money. This lineup shows why some monies dominated for centuries while others faded in mere decades.

We’ve explored ancient monies and unpacked how the fiat system works today. Next, in An Introduction to Bitcoin, we’ll explore how Bitcoin fixes the problems born of old monetary systems, and why it might just be the best type of money humanity has ever had, and the last type we will ever need.