What is money? By definition,
it's something of value. But over the last 10,000 years, the
material form that money has taken has changed considerably—from
cattle and cowrie shells to today's electronic currency. Here,
get an overview of the history of money.
Today we value gold Kruggerands and paper Franklins, but
cattle and cowrie shells have also served as currency. Photo
credit: © Steve Sucsy (coin), Skip O'Donnell (bills), narvikk
(cow), Steve Goodwin (shells)/iStock
Editor's Note: The dates below mark the approximate
start of use.
In the Beginning: Barter
Barter is the exchange of resources or services for mutual
advantage, and the practice likely dates back tens of thousands
of years, perhaps even to the dawn of modern humans. Some
would even argue that it's not purely a human activity; plants
and animals have been bartering—in symbiotic relationships—for
millions of years. In any case, barter among humans certainly
pre-dates the use of money. Today individuals, organizations,
and governments still use, and often prefer, barter as a form
of exchange of goods and services.
9000 - 6000 B.C.: Cattle
Cattle, which throughout history and across the globe have
included not only cows but also sheep, camels, and other livestock,
are the first and oldest form of money. With the advent of
agriculture also came the use of grain and other vegetable
or plant products as a standard form of barter in many cultures.
1200 B.C.: Cowrie Shells
The first use of cowries, the shells of a mollusc that was
widely available in the shallow waters of the Pacific and
Indian Oceans, was in China. Historically, many societies
have used cowries as money, and even as recently as the middle
of this century, cowries have been used in some parts of Africa.
The cowrie is the most widely and longest used currency in
1000 B.C.: First Metal Money and Coins
Bronze and Copper cowrie imitations were manufactured by
China at the end of the Stone Age and could be considered
some of the earliest forms of metal coins. Metal tool money,
such as knife and spade monies, was also first used in China.
These early metal monies developed into primitive versions
of round coins. Chinese coins were made out of base metals,
often containing holes so they could be put together like
500 B.C.: Modern Coinage
Outside of China, the first coins developed out of lumps
of silver. They soon took the familar round form of today,
and were stamped with various gods and emperors to mark their
authenticity. These early coins first appeared in Lydia, which
is part of present-day Turkey, but the techniques were quickly
copied and further refined by the Greek, Persian, Macedonian,
and later the Roman empires. Unlike Chinese coins which depended
on base metals, these new coins were made from precious metals
such as silver, bronze, and gold, which had more inherent
118 B.C.: Leather Money
Leather money was used in China in the form of one-foot-square
pieces of white deerskin with colorful borders. This could
be considered the first documented type of banknote.
A.D. 800 - 900: The Nose
The phrase "To pay through the nose" comes from
Danes in Ireland, who slit the noses of those who were remiss
in paying the Danish poll tax.
806: Paper Currency
The first known paper banknotes appeared in China. In all,
China experienced over 500 years of early paper money, spanning
from the ninth through the fifteenth century. Over this period,
paper notes grew in production to the point that their value
rapidly depreciated and inflation soared. Then beginning in
1455, the use of paper money in China disappeared for several
hundred years. This was still many years before paper currency
would reappear in Europe, and three centuries before it was
"Potlach" comes from a Chinook Indian custom that
existed in many North American Indian cultures. It is a ceremony
where not only were gifts exchanged, but dances, feasts, and
other public rituals were performed. In some instances potlach
was a form of initiation into secret tribal societies. Because
the exchange of gifts was so important in establishing a leader's
social rank, potlach often spiralled out of control as the
gifts became progressively more lavish and tribes put on larger
and grander feasts and celebrations in an attempt to out-do
The earliest known use of wampum, which are strings of beads
made from clam shells, was by North American Indians in 1535.
Most likely, this monetary medium existed well before this
date. The Indian word "wampum" means white, which
was the color of the beads.
1816: The Gold Standard
Gold was officially made the standard of value in England
in 1816. At this time, guidelines were made to allow for a
non-inflationary production of standard banknotes which represented
a certain amount of gold. Banknotes had been used in England
and Europe for several hundred years before this time, but
their worth had never been tied directly to gold. In the United
States, the Gold Standard Act was officialy enacted in 1900,
which helped lead to the establishment of a central bank.
1930: End of the Gold Standard
The massive Depression of the 1930s, felt worldwide, marked
the beginning of the end of the gold standard. In the United
States, the gold standard was revised and the price of gold
was devalued. This was the first step in ending the relationship
altogether. The British and international gold standards soon
ended as well, and the complexities of international monetary
Today, currency continues to change and develop, as evidenced
by the new $100 U.S. Ben Franklin bill.
The Future: Digital Currency
In our digital age, economic transactions regularly take
place electronically, without the exchange of any physical
currency. Digital Currency in the form of bits and bytes will
most likely continue to be the currency of the future.
Published on October 21, 2015
Andreas Freund, PhD
Professional Tweener, Digital Business Reimaginer, Exponential
Strategist & Blockchain Practitioner
First off, and to set the record straight from the beginning,
no, I am not a Libertarian, and, no, I am not an Anarchist
either. I actually agree with Paul Krugman more than I disagree
with him. Sorry, Milton! On the question of money though,
I believe, Prof. Krugman and I are in different camps. And
that is quite ok.
So why am I writing about money? Well, in a recent series
in Pulse, I wrote about the Digital Revolution and its societal
consequences in the developed and the developing world. In
that series, I identified global wealth concentration as being
primarily driven by the Digital Revolution today, and overcoming
this global wealth inequality as the defining question for
humanity in the first half of the 21st century, besides Global
Warming. However, despite bringing more than a billion people
as consumers and entrepreneurs in developing countries online
since the turn of the century, this inequality persists. The
question is why? Diving deeper into the root causes, I identified
the current state of money as it exists today, and the systems
managing it, as one of the primary culprits of this inequality.
So why is money broken? And even if it were, why bother fixing
it, it still kinda works, doesn’t it? Good question! Let me
give you a simple example of why money is broken: If Kamal
wants to send $500 a month of the salary he earns in the US
working for a large IT service provider to his family in India,
he will pay on average $40 to send it, or about 8%. India
receives about $250 Billion of remittances every year. Based
on an average monthly salary in India of $295 a month, this
means that the current money system deprives India of nearly
56.5 million annual incomes. Nearly 4 times the size of the
In order to make sense of this astounding fact, let’s start
by reviewing a few things about money.
- Money has been around for about 10,000 years, give or
take – it is an old technology!
- Money was invented to solve a problem with bartering:
You want my horse, but I do not need the five sheep that
you are offering in exchange. In essence, money solved a
trade problem – Coincidence of Wants Dilemma, for academics.
- The main criteria of money are that it needs to be:
- easily stored
- difficult to counterfeit
- widely accepted
- Money was backed for the longest time by gold – the only
element to fulfill all money criteria amongst all elements,
at least more or less.
- Paper money is the only real technological money innovation
in the last few thousand years.
- Only over the last 40 or so years do we have Government-backed
paper money – effectively, a lot of little Government IOUs.
If you trust a government, you accept their currency, even
outside their country, see the US Dollar. Or, you do not
trust the government, and that has devastating consequences
for currency and economy, see the Bolivar and Venezuela.
- The idea of money being something physical is, therefore,
an illusion. It is all based on trust and that is based
on perception only!
- Our money has been primarily digital for about 50 or
so years … and very hackable as the first $1 Billion bank
heist in history in February of this year clearly demonstrated.
Ok, so what, you say? Well, this all would not be so bad,
except the bank heist, of course, if money, which was invented
to make trading easier, would not actually hinder trading.
But why would money hinder trade and thus economic growth?
Because today, we have a programmable infrastructure medium
called the Internet that allows us to exchange data with anyone,
anywhere, anytime, almost instantly. This is what Tom Friedman
in his famous book The World Is Flat called the “flattening
of the world”. This “flattening” was made possible by all
the fiber optic cables that were laid, and then had to be
written off after the dot.com bubble bust, making communication
a virtually free commodity. Bad for investors, but a boon
for almost all businesses that embarked on doing business
over the Internet after the bubble.
As a consequence of this flattening, much trading became
faster and borderless, or so it seemed. And this is where
the rub lies. The Internet allows me to receive from or provide
to you any service or good in pretty much real time, except
for money! We do not have a real-time value exchange protocol
as we have for information with the Internet! Therefore, moving
money is neither fast nor borderless, unless you live in a
developed country like the US or Europe, are the proud owner
of a Visa or Mastercard or similar Credit or Debit Card, and
buy and sell goods and services within the country. And even
then, it takes days for payments or money transfers to fully
settle. Yes, even though you pay Amazon right away, your money
does not hit Amazon accounts until a few days later and it
incurs a payment fee, for example 2%-4% for credit cards.
Guess who pays for these fees? Yes, you guessed it right,
it is you, through higher prices. These payment fees make
the payment banking function the most profitable function
of all banking. In fact, McKinsey in a 2014 study estimated
that global payment revenue for banks will reach approx. $2.3
Trillion in 2018 or 43% of all banking revenues!
But why is there so much friction in the movement of money
in the age of the internet, you might ask? The answer is basically
a combination of control and desire to maintain, if not expand,
current revenue flows causing immense resistance to change
-- $2.3 Trillion is not exactly chump change!
The bottom line of the current situation is that today’s
global money system has so much inherent friction (cost and
speed) and risk-averse, conservative behavior (regulations)
that it shuts out most of the developing world and a significant
majority in the developed world. Therefore, we are not tapping
into the economic potential of billions of people who could
improve their lives through doing business with one another
in a frictionless way, even at the smallest of scales. For
example, if it costs less for a farmer in Africa to sell goods
in the market, he or she can sell more. In other words, we
leave trillions of dollars of global GDP growth on the table.
An innovation in how money works and how it flows could unlock
tremendous global economic and human potential. A simple,
back-of-the-envelope Econ 101 calculation shows this clearly.
If one could reduce the friction in global payments and remittances
by a factor of say 10x and, therefore, keep approx. $2 Trillion+
in people’s pockets and local economies, it would amount to
a de-facto global economic stimulus! The economic stimulus
or multiplier effect of $1 in additional spending in a developed
country is about $2 - $3 and in a developing country about
$5 - $10. This means that $2 Trillion less for banks would
stimulate between $4 Trillion to $20 Trillion worth of additional
global GDP growth. An economic no-brainer in my opinion!
So what should this money innovation look like to enable
this economic stimulus? Of course, it needs to fulfill all
the money criteria mentioned before, but also needs to be:
- Digitally exchangeable in real time – a value exchange
protocol similar to the current TCP/IP internet protocol
for data exchange
- Programmable – the rules of how a digital currency works
have to be encoded in software
- Backed by its participants
- Shared by its participants
- Managed by participant consensus
The first criteria is straightforward in the age of the Internet.
The other require a bit of explanation:
- Programmable means that the rules of the currency are
enshrined in software. In other words how it is created,
how fast does supply grow, how do you make it safe and secure,
what are the penalties, if you behave in a manner that is
not in the interest of currency stability are turned into
bits and bytes. This program or protocol is then automatically
enforced by computers running the digital currency software.
There are other benefits such as predetermining how funds
can be spent.
- Backed by its participants means that rather than relying
on a central entity such as a government backing the value
of a currency through its reputation and the economic soundness
of the country’s economy, the currency value is backed by,
at least a large number, if not all, of its participants
through a stake in the currency itself. This would ensure
participants in the currency to behave rationally since
they have something to loose, if they misbehave. A stake
could for example be an effort in maintaining the currency
system as so called Miners do in the cryptocurrency Bitcoin
or staking aka bonding a certain percentage of any value
exchange transaction into the currency for a period of time
– bonding period.
- Shared by its participants in this context means that
everyone in some form or another holds an encrypted digital
copy of everyone’s money – collective security. In other
words, if you manipulate a copy in a nefarious way for your
own gain, it is not worth anything unless you change a copy
not from just one, but from a majority of participants,
and change it the same way, at the same time.
- Managed by consensus means that a majority of participants
has to approve a change in the way the currency works –
currency protocol – before this change can be implemented.
- Trustless in this context means that someone does not
have to trust anyone personally using the currency to know
that they will behave in a trustworthy manner because the
currency protocol will detect and punish behavior that is
not in support of currency stability, such as shorting a
currency i.e. selling a currency that one does not currently
own or trying to double-spend or counterfeit the currency.
A currency fulfilling such criteria and enabled by the data
infrastructure of the Internet would:
- Reduce economic friction in terms of speed and costs significantly
for all participants enabling faster global development
and trading relationships
- Provide a stable trade currency for all participants insulating
individuals from bad decisions made by fiat currency governments
- Allowing stable economic relationships to emerge in developing
countries without government interference or corruption
- Disintermediate the very expensive “last mile” money distribution
system, in particular in developing countries where particular
entities such as pawn shops in the Philippines have evolved
as the de-facto money distributor in lieu of a stable banking
- Reduce friction in remittances, returning close to $50
Billion to local economies in particular in developing countries
- Make micro transactions by anyone and anything feasible,
such as monthly payments on a micro loan, a smart light
bulb buying the electricity it needs, or a self-driving
car itself paying a small road toll
The last point is important, if we want to realize the predicted
global GDP gains from the Internet of Things (IoT) of up to
$6.2 Trillion as quantified in a 2014 McKinsey study. Whereas
today there are about a billion payment transactions a day,
with IoT it will quickly approach one trillion and more. IoT
payments is currently truly the terra incognita of payments.
In fact, IBM in its 2014 IoT White Paper writes “Centralized
approaches to building an Internet of hundreds of billions
of things are not designed for business model endurance”.
Is this vision Science Fiction? Not really. A digital cryptocurrency
such as Bitcoin has all the traditional required attributes
of money such as scarcity, divisibility etc. It can also be
exchanged in (quasi) real time, it is (somewhat) programmable
and it is backed by its participants, in particular the Miners
investing a lot of equipment and electricity in maintaining
the Bitcoin network. Furthermore, it is shared by its participants
as everyone holds a copy of the bitcoin Blockchain, its public
currency and transaction ledger. Bitcoin is also trustless,
but not in the sense mentioned above, since the bitcoin protocol
does not punish nefarious behavior towards the currency, but
rather makes the identity of all participants (pseudo) anonymous.
Is Bitcoin the answer then? Not quite. The bitcoin blockchain
that underlies Bitcoin, the currency, lacks some key aspects
such as the ability to manage high transaction volumes, extensive
programmability, a programmatic way to punish “bad” behavior
towards the currency and a consensus mechanism to change the
underlying protocol as evidenced in the “hard Bitcoin fork”
that happened in September. In addition, Bitcoin, the currency,
still lacks wide acceptance. This means that governments and
today’s money system’s participants are not embracing Bitcoin
as a currency such as the US Dollar because of banking compliance
concerns and legal issues surrounding the usage of Bitcoin
in illegal activities such as drug trafficking. Even though
on closer inspection those fears would be unfounded, if Bitcoin
currency exchanges had enforced the proper banking regulation
compliance, especially around AML, from the beginning. This
is being rectified as we speak, and proper regulation accounting
for the unique nature of Bitcoin is under way such as in New
York State where the first Bitcoin Exchange license was recently
I remain very optimistic that by combining aspects from different
cryptocurrency/blockchain protocols such as Ethereum, Ripple,
Bitshares, Tendermint etc. with proper anonymity protocols
which already exist such as Hawk and Enigma, one can readily
fulfill all the above money criteria from a technology and
cybersecurity point of view. In addition, by helping regulators
understand the unique value proposition of digital cryptocurrencies,
the Bitcoin and other communities will be quickly legitimized,
and trust in cryptocurrencies will increase world-wide. The
building blocks are all there, they just need to be assembled
This brings me to the “what to do about it” part. As you
might have realized by now, the biggest beneficiaries of a
global, open, shared real-time digital cryptocurrency backed
by its participants are the ones with the least voice in global
affairs, the people in developing countries. Though the developed
world would undoubtedly benefit too – just ask Walmart if
they would like to not pay 2% to 4% credit card processing
fees which, in the end, the consumer pays through higher prices
In order to advance towards the goal of greater economic
prosperity for the planet, our new currency needs a respected
global sponsor and early participant – not an owner or single
backer, as I explained above. Such a sponsor/participant could
be the IMF or the World Bank or the UN. The advantages for
such organizations to endorse and participate in a global
digital cryptocurrency are numerous:
- Improved effectiveness of economic stimulus, development
or bailout loans such as easier administration and tracking
and verification of the flow of funds until their point
of use. This prevents corruption and ensures that more of
the money reaches actual people rather than disappears in
opaque government systems.
- Stabilization of economies as the currency is not controlled
by a single entity.
- Promotion of open trade to stimulate further economic
growth in particular in developing countries.
- Reduce international money laundering and improve security
through the transparency of the money system itself at any
point in time.
- Built-in and programmatically enforced transparency controls
from currency inception.
- Making it easy for an individual anywhere and at any
time to participate in the global economy as long as they
have a cell phone.
Despite appearance to the contrary, even big banks or large
corporations, as sponsors and participants, would benefit
from such a currency:
- Real-time payments increase cash-flows.
- Wining the 3 billion+ un- or underbanked of the world
as new customers.
- Tap into the IoT economy through payments as a new revenue
source and leveraging the constant data stream from devices
and sensors together with Big Data analytics to create new
on-demand real-time products such as Supply Chain Financing,
Asset Financing, Insurance and on and on.
- Reduce a banks compliance risk and reduce associated
costs such as meeting reserve requirements through an open,
shared and cryptographically secured currency ledger, where
they do not have to hold funds on behalf of clients. This
would enable banks to mutate from the steward of your money
to your financial advisor that helps you manage your money
that you yourself hold and control.
This might sound like a pipe dream. However, it sounds less
crazy since in some regions of the world a cryptocurrency
such as Bitcoin has become the de-facto currency such as in
Bueno Aires. In addition, banks are already under assault
from FinTech start-ups that are not necessarily overly concerned
with banking compliance and offer compelling value propositions
to their customers such as Abra or Xapo. In fact, it would
be in the economic interest of banks and large corporations
to participate in such a digital currency, if one simply assumes
that banks and others are no different than the taxi or hotel
industry and that they will be disrupted sooner rather than
We can only try to spread this message together, and hope
to convince banks and others that we are in this together,
and that everyone will benefit, if governments and banks cede
currency control to the individual empowered by powerful decentralized