Money is defined as "anything that is generally accepted as a means of purchasing goods and services." There are three classical functions of money: a unit of account, a medium of exchange, and a store of value.
Determining the price of goods and services, calculating the value of debts, and using money in accounting transactions express its unit of account function. Using money in the buying and selling of goods and services highlights its function as a medium of exchange. As a medium of exchange, money should be divisible, easily transportable, scarce, and difficult to counterfeit. The store of value function emphasizes its use for saving and as a means of wealth accumulation.
When talking about money, most people today think of banknotes. However, this is only one form of money. Anything that fulfills the classical functions mentioned above and is generally accepted can be considered money. Therefore, throughout history, money has appeared in various forms and continues to evolve. This article will provide a brief history of the stages money has undergone from its earliest forms to the present day.
The Early History of Money
In the early periods of history, people lived in small communities, producing their own needs. Naturally, in such an environment, there was no need for a tool like money. However, as humans continued to make discoveries and inventions, different professions began to emerge. Thus, the farmer who produced wheat and the baker who made bread, or the herder and the shoemaker who made shoes from animal hides, became different individuals. This development paved the way for the birth of trade.
1. The Barter System
The initial stages of trade involved the barter system, where goods and services were directly exchanged for other goods and services. Although this method might seem straightforward, it was far from simple. For a barter transaction to occur, people needed to find others who had what they wanted and wanted what they had, and they also needed to agree on exchange rates.
For example, a person with a sack of wheat who wanted a pair of shoes had to find someone willing to trade shoes for wheat. This required both parties to meet and agree on the exchange rate, which was often difficult. This is where the concept of money emerged to solve the complexities of the barter system.
2. Early Forms of Money
The first forms of money were not what we understand today. Initially, various types of exchange tools were used. Around 1600 BCE, shells (cowrie) were used as money in China. In addition to shells, many objects like rai stones, salt, tobacco, animal teeth, or beads were accepted as money in different regions over the centuries.
3. Standardized Coinage
The question of who first used standardized, inscribed, and state-stamped coins is debated. In 2021, Chinese archaeologists announced the discovery of a mint in Henan province, believed to have produced the first standardized coins around 640 BCE. However, it is known that around the same period, around 600 BCE, the Lydians, an ancient civilization in Anatolia, began using coins similar to modern ones. These coins, stamped with the symbol of King Alyattes of Lydia, are considered the first official coins.
4. Widespread Use of Coins
From these periods onward, the use of coins became widespread. Coins were made from precious metals like gold or silver, which were difficult to obtain, rare, and valued. The relatively easy transportation of these coins, their standard features, resistance to erosion, and often official status with royal symbols made trade more practical and efficient. This evolution of money significantly contributed to the development of economic systems.
Transition to Paper Money
Following the transition to coinage, the development of paper use led to the evolution of the concept of money. The earliest form of paper money, known today as banknotes, is believed to have been used during the Tang Dynasty in China in the 7th century CE. During this period, merchants, due to the risk and inconvenience of carrying large amounts of coins, began depositing their money with trusted individuals and receiving written receipts in return.
Over time, these receipts were used in transactions, endorsed on the back for transfers, and thus began functioning as money. On the other hand, the first official issuance of paper money is believed to have occurred around 1020 CE during the Song Dynasty in China. During this period, paper money known as "jiaozi" was widely used.
1. Spread of Paper Money
This transformation that began in China gradually spread to the rest of the world and led to the development of banking systems. In Europe, the first official banknotes were issued in 1661 by the Stockholms Banco in Sweden, and the establishment of central banks began in 1668 with the Swedish Riksbank. Besides, in Colonial America, the first paper money was issued in 1690. However, these paper notes had not yet evolved into what we recognize today; each issued note was backed by a specific amount of precious metal like gold or silver.
2. Gold Standard and Evolution to Fiat Money
This system continued until the 19th century when many countries linked their paper money to the gold standard. Each banknote represented a specific amount of gold. Although the gold standard system was interrupted by major events like the world wars and the Great Depression, the Bretton Woods Agreement in 1944 established the US dollar as the only currency directly convertible to gold, with other currencies pegged to the US dollar.
However, in 1971, US President Richard Nixon ended the US dollar's convertibility to gold, leading to another evolution in the concept of money. From then on, the value of paper money was no longer derived from the precious metal backing it. Instead, a piece of paper was supported by the government and accepted as having value by everyone, thus becoming fiat money.
The Digitalization of Money
Since the late 20th century, technological advancements have led to the development of banking systems, the widespread use of credit, and the digitization of money. Money no longer needs a physical form, such as shells, metals, or paper, to exist.
1. Early Credit Cards
Although the digitization of money gained momentum in the late 20th century, the first examples of bank/credit-like cards date back to the early 20th century. In the 1910s, large department stores and gas stations in the United States issued their own cards. However, due to world wars and the Great Depression, the use of these cards slowed down.
In the 1950s, cards issued by businesses such as travel, entertainment, and restaurants became widespread again. Later, these cards were integrated into the banking sector, leading to the emergence of today's bank and credit cards and initiating the process of digital money replacing cash. Since then, there has been a significant decrease in cash usage, while digital money usage continues to grow every day.
2. Technological Advances
By the early 2000s, developments in technology and the widespread use of mobile devices accelerated the digitization of money. Now, a person on one side of the world can transfer money to the other side within seconds. Moreover, most banking transactions are no longer monopolized by banks; numerous applications offer digital payment alternatives, from social media platforms to e-commerce sites, from telecommunications companies to technology firms.
3. The Emergence of Cryptocurrencies
About a decade ago, money began to undergo another transformation. Bitcoin, the first cryptocurrency, launched in 2008, introduced a new understanding of the concept of money.
Cryptocurrencies do not have any underlying asset or any government or institution that guarantees their value. These currencies also do not have a physical form; they are a series of digital code fragments. Therefore, the value of these assets comes from the value people attribute to them. This shows that if something is considered valuable, whether it is a shell or a digital code, it can serve as money.
Conclusion
Over time, the forms and usage of money have evolved in response to human needs and technological advancements. From shells to cryptocurrencies, the continuous transformation of money is likely to persist, shaping the future of financial systems.
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