- A widely-accepted method of payment
- A common means of account that standardises prices and costs
- A store of value
Underlying money's numerous shapes is this fundamental trait: to be useful, money needs to be valuable.
Primitive societies bartered farm crops, animals, prisoners, cutting tools, weapons, and other valuable materials for goods that they needed. Central governments and religious temples also collected these same goods as tax payments or tributes.
As tribes moved into domesticated lands, people became more specialised in their labour, and used new tools to unlock the land's potential. Landlords and labourers saw increases in their production. This growth in production resulted in an abundance of tradable commodities, which became useful as pseudo-currency.
Pseudo-currencies lingered for a long time. In 18th century America, several states still used commodities, such as corn and wheat, as legal tender, partly to facilitate deals with Native Americans.2
Money's agrarian origins have shaped the language of business. The word capital originates from cattle, and is derived from the same Latin roots that translate to "wealth in cattle."
The Limitations Of Barter
For a barter exchange to occur, two requirements had to be met: (1) you found a counterparty who wanted your goods or services, and (2) you, in turn, wanted his goods or services. This system imposed limitations on one's ability to trade. For example, a farmer could not trade milk for sandals with a shoe merchant who possessed his own dairy stock: but he could trade universal tokens exchangeable for any good or service. Thus was born liquid, denominated "cash".
Secondly, without a common system of account, there were difficulties in offering precise amounts to trade. For example, a fisherman offering 10 units of fish for a goat will get nowhere with a shepherd who thinks his goat is worth 50 fish. Some of the practices used to overcome this problem have echoes in common parlance. For example, Salary is derived from the Latin word sal, meaning "salt": merchants in Africa mined slabs of pure salt which were easily cut into standardised sizes, and the exact measurements enabled more precise barters.1
Also, people did not necessarily have tradable goods to barter just when they needed to obtain other goods. Money's function as a store of value originally came about to enable people to obtain goods today in return for a promise to supply an agreed quantity of goods at some point in the future. Eventually, these promises themselves became tradable goods – the forerunners of today's "banknotes".
Religious And Ceremonial Value
Many anthropologists believe that the earliest currencies—such as gold, precious stones and other artefacts—were originally used in religious and ceremonial settings. They argue that the social value of these ritualised items eventually carried over towards trading purposes. For example, the inhabitants of Fiji used whale teeth for ceremonial purposes, and as money.
Religious and ceremonial rituals are conducive of trust and reliability—characteristics that are also essential when it comes to money and financial systems. The words money and monetary come from the Latin moneta, which means "mint." Moneta is a surname of the Roman goddess Juno, the protector of funds, in whose temple the first Roman coins were minted. Rome's minting operation was associated with the temple, and to build up trust in a new monetary system, Roman officials promulgated the view that the empire's treasury was protected by the gods.
The theological symbols found in many of today's global currencies trace their roots to ritual uses of money. For example, on the U.S. dollar bill, you can find "In God We Trust" as well as the Eye of Providence (the all-seeing eye on top of a pyramid).
Coins For Armies
The invention of coinage took place in a time when ancient societies—and their population centres—began to fight with their neighbours over limited land and resources. Silver and gold held properties, such as their rarity and shiny material that gave these metals near-universal appeal.
Around 600 B.C., the king of Lydia (near Greece) minted the first Western coins, mainly to pay for the army3. Interestingly, the use of coin-cash was a result of military—not financial—necessity. Soldiers and military suppliers demanded payment in gold or silver, and kings were often forced to comply.
For large transactions, it also became impractical to purchase in bulk using commodities such as livestock or grain. As societies grew in scale – along with their armies - it became increasingly difficult for rulers to find merchants who would accept payment for military equipment in the form of 500 cows or 5,000 bags of beans. Using valuable commodities such as gold and silver became a convenient way of paying for large quantities of goods.
Metals As Money's Raw Material
But as society expanded, so did its need for money. And gold and silver are intrinsically in short supply – indeed, their value is partly a function of their rarity. States that-issued gold or silver coins required constant access to new sources of these metals—such as mines, plunder, and trade surplus. A society's ruling class was often incentivised to conquer other empires to ensure continued access to the raw materials that comprised these shiny, metallic currencies.
The need to compensate ever-growing bureaucracies and armies often led to an ill-conceived policy: the debasement of official coins. Debasement, where the coin's composition of gold or silver is decreased, led to high inflation, lack of trust in the financial system, and in some cases, economic and national disaster.
For example, in ancient Rome, the denarius comprised 95 percent silver at the time of Augustus Caesar. Nearly three centuries later, it contained just 0.5 percent silver. Eventually, the empire's own tax collectors refused to accept state-issued Roman coins, and instead demanded tax payment in the form of farm crops, poultry and other physical goods.
Abundance And The Risk Of Inflation
An artificially expanded money supply—such as an oversupply of gold and silver, or excessive printing of paper notes—doesn't increase buying power. Rather, such an oversupply can bring negative macroeconomic consequences.
For example, the Incas of South America possessed a bounty of gold and silver that were used exclusively for religious and ceremonial rites. But concurrently, in 16th-century Spain, gold and silver were used as money. When the Spanish Conquistadors fought and conquered the Incas, the ensuing import of abundant gold and silver into Spain led to high inflation in Spain, as more money chased a limited amount of goods and services.
The value of currency rises and falls in response to the quantity in circulation and society's demand for it. When inflation is high and the value of currency is falling, people often revert back to traditional stores of value —such as land, gold, cattle and oil—to protect themselves from loss of wealth.
As it has throughout history, money continues to adapt with the times. Today, money wears the mask of the digital age. Cryptocurrencies such as Bitcoin exploit the capability of computers and mobile devices to communicate with each other instantaneously using worldwide electronic networks. As transaction processing goes online, the use of physical cash is declining, replaced by distributed ledger technology and e-money.
But some things never change. Inflation, debasement and lack of trust can destroy the value of modern digital currencies, just as they did the currency of ancient Rome. Businesses can keep on top of currency fluctuations by reading the runes of today – the economic indicators that tell us the health of an economy. Watch this video for information on the economic indicators to keep an eye on, especially if your business is dealing with multiple currencies and international payments:
- Jack Weatherford, "The History of Money," Random House, 2009.
- Glyn Davies, "A History of Money," University of Wales Press, 2002.