A Brief History of Money: Or, how we learned to stop worrying and embrace the abstraction

Spectrum:

In the 13th century, the Chinese emperor Kublai Khan embarked on a bold experiment. China at the time was divided into different regions, many of which issued their own coins, discouraging trade within the empire. So Kublai Khan decreed that henceforth money would take the form of paper.

It was not an entirely original idea. Earlier rulers had sanctioned paper money, but always alongside coins, which had been around for centuries. Kublai’s daring notion was to make paper money (the chao) the dominant form of currency. And when the Italian merchant Marco Polo visited China not long after, he marveled at the spectacle of people exchanging their labor and goods for mere pieces of paper. It was as if value were being created out of thin air.

Kublai Khan was ahead of his time: He recognized that what matters about money is not what it looks like, or even what it’s backed by, but whether people believe in it enough to use it. Today, that concept is the foundation of all modern monetary systems, which are built on nothing more than governments’ support of and people’s faith in them. Money is, in other words, a complete abstraction—one that we are all intimately familiar with but whose growing complexity defies our comprehension.

Today, many people long for simpler times. It’s a natural reaction to a world in which money is becoming not just more abstract but more digital and virtual as well, in which sophisticated computer algorithms execute microsecond market transactions with no human intervention at all, in which below-the-radar economies are springing up around their own alternative currencies, and in which global financial crises are brought on for reasons difficult to parse without a Ph.D. Back in the day, the thinking goes, money stood for something: Gold doubloons and cowrie shells had real value, and so they didn’t need a government to stand behind them.

In fact, though, money has never been that simple. And while its uses and meanings have shifted and evolved throughout history, the fact that it is no longer anchored to any one substance is actually a good thing. Here’s why.

Let’s start with what money is used for. Modern economists typically define it by the three roles it plays in an economy:

It’s a store of value, meaning that money allows you to defer consumption until a later date.

It’s a unit of account, meaning that it allows you to assign a value to different goods without having to compare them. So instead of saying that a Rolex watch is worth six cows, you can just say it (or the cows) cost $10 000.

And it’s a medium of exchange—an easy and efficient way for you and me and others to trade goods and services with one another.

All of these roles have to do with buying and selling, and that’s how the modern world thinks of money—so much so that it seems peculiar to conceive of money in any other way.

Yet in tribal and other “primitive” economies, money served a very different purpose—less a store of value or medium of exchange, much more a social lubricant. As the anthropologist David Graeber puts it in his recent book Debt: The First 5000 Years(Melville House, 2011), money in those societies was a way “to arrange marriages, establish the paternity of children, head off feuds, console mourners at funerals, seek forgiveness in the case of crimes, negotiate treaties, acquire followers.” Money, then, was not for buying and selling stuff but for helping to define the structure of social relations.

How, then, did money become the basis of trade? By the time money makes its first appearance in written records, in Mesopotamia during the third millennium B.C.E., that society already had a sophisticated financial structure in place, and merchants were using silver as a standard of value to balance their accounts. But cash was still not widely used.

It’s really in the seventh century B.C.E., when the small kingdom of Lydia introduced the world’s first standardized metal coins, that you start to see money being used in a recognizable way. Located in what is now Turkey, Lydia sat on the cusp between the Mediterranean and the Near East, and commerce with foreign travelers was common. And that, it turns out, is just the kind of situation in which money is quite useful.

To understand why, imagine doing a trade in the absence of money—that is, through barter. (Let’s leave aside the fact that no society has ever relied solely or even largely on barter; it’s still an instructive concept.) The chief problem with barter is what economist William Stanley Jevons called the “double coincidence of wants.” Say you have a bunch of bananas and would like a pair of shoes; it’s not enough to find someone who has some shoes or someone who wants some bananas. To make the trade, you need to find someone who has shoes he’s willing to trade and wants bananas. That’s a tough task.

With a common currency, though, the task becomes easy: You just sell your bananas to someone in exchange for money, with which you then buy shoes from someone else. And if, as in Lydia, you have foreigners from whom you’d like to buy or to whom you’d like to sell, having a common medium of exchange is obviously valuable. That is, money is especially useful when dealing with people you don’t know and may never see again.

The Lydian system’s breakthrough was the standardized metal coin. Made of a gold-silver alloy called electrum, one coin was exactly like another—unlike, say, cattle. Also unlike cattle, the coins didn’t age or die or otherwise change over time. And they were much easier to carry around. Other kingdoms followed Lydia’s example, and coins became ubiquitous throughout the Mediterranean, with kingdoms stamping their insignia on the coins they minted. This had a dual effect: It facilitated the flow of trade, and it established the authority of the state.

Modern governments still like to place their stamp upon money, and not just on bills and coins. In general, they prefer that money—whether physical cash or digital—be issued and controlled only by official entities and that financial transactions (especially international ones) be traceable. And so the recent rise of an alternative currency like Bitcoin [see “The Cryptoanarchists’ Answer to Cash,” in this issue], which is based on a cryptographic code that allows for anonymous transactions and that so far has proved to be uncrackable, is the kind of thing that tends to make governments very unhappy.

The spread of money throughout the Mediterranean didn’t mean that it was universally used. Far from it. Most people were still subsistence farmers and existed largely outside the money economy.

But as money became more common, it encouraged the spread of markets. This, in fact, is one of the enduring lessons of history: Once even a small part of your economy is taken over by markets and money, they tend to colonize the rest of the economy, gradually forcing out barter, feudalism, and other economic arrangements. In part this is because money makes market transactions so much easier, and in part because using money seems to redefine what people value, pushing them to view things in economic, rather than social, terms.

Governments were quick to embrace hard currency because it facilitated the collection of taxes and the building of military forces. In the third century B.C.E., with the rise of Rome, money became an important tool for unifying and expanding the empire, reducing the costs of trade, and funding the armies that kept the emperors in power.

The decline of the Roman Empire, starting in the third century C.E., saw a decline in the use of money as well, at least in the West. Parts of the former empire, like Britain, simply stopped using coins. Elsewhere people still used money to balance accounts and keep track of debts, and many small kingdoms minted their own coins. But in general, the circulation of money became less central, as cities shrank in size and commerce dwindled…

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