The History Of Money

If you have ever wondered how money came to be, then you are in the right place. This money history lesson is a great start to a financial literacy foundation.

Money has been a part of human history for almost 3,000 years. From the origins of bartering to modern money, this is how the system has evolved.

Bartering

Way back when bartering was used in lieu of money to buy goods. As early man began to rear domestic livestock, one of the earliest forms of barter included cattle, sheep, as well as vegetables and grain.  Bartering is the exchange of a good or service for another good or service. For example, a bag of rice for a bag of beans. However, what if you couldn’t agree what something was worth in exchange or you didn’t want what the other person had?  To solve that problem, humans developed what is called commodity money.

Commodity Money

A commodity is a basic item used by almost everyone. In the past, items such as salt, tea, tobacco, cattle, and seeds were commodities and therefore were once used as money. However, using commodities as money had other problems. Carrying bags of salt and other commodities was hard and commodities were difficult to store or were perishable.

Coins and Paper Money

Metals objects were introduced as money around 5000 B.C. By 700 BC, the Lydians became the first in the western world to make coins. Countries were soon minting their own series of coins with specific values. Metal was used because it was readily available, easy to work with and could be recycled. Since coins were given a certain value, it became easier to compare the cost of items people wanted.

Some of the earliest known paper money dates back to ancient China, where the issuing of paper money became common from about AD 960 onwards.

Representative Money

With the introduction of paper currency and non-precious coinage, commodity money evolved into representative money. This meant that what money itself was made of no longer had to be very valuable.

Representative money was backed by a government or bank’s promise to exchange it for a certain amount of silver or gold. For example, the old British Pound bill or Pound Sterling was once guaranteed to be redeemable for a pound of sterling silver.

For most of the nineteenth and twentieth centuries, the majority of currencies were based on representative money through the use of the gold standard.

Fiat Money

Representative money has now been replaced by fiat money. Fiat is the Latin word for “let it be done.” Money is now given value by a government fiat or decree. In other words, enforceable legal tender laws were made. By law, the refusal of “legal tender” money in favor of some other form of payment is illegal.

There you have it, the history of money and how we know it today!

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