History of money

History of Money
Table of Contents
1. The Origins of Exchange
o Bartering: The Double Coincidence of Wants
o From Commodities to Currency
2. From Barter to Coinage
o The World's First Gold Coin: The Croesus Stater
o The Economic Impact of Minted Coins
3. The Rise of Paper Money and Banking
o Johan Palmstruch and the Swedish Banking Crisis
o John Law and the French Financial Disaster
4. Central Banking and Modern Monetary Policy
o Central Bank Tools and Mandates
o Paul M. Warburg and the US Federal Reserve
5. Fiat Money
o The Mechanics of Fiat Money
o The End of Bretton Woods and the Modern Era
6. Modern Money: Credit Cards, Digital Currency & Crypto
o The Evolution of Credit Cards
o Digital Currency and the Dawn of Cryptocurrency
7. Historical Notes
o The Soviet Union's New Economic Policy (NEP)
8. Study Guide: Key Concepts and Timeline

1. The Origins of Exchange

The history of money is the story of how systems for exchanging goods and services have
developed over time. Money serves as a way to fulfill these functions indirectly, acting as a
universal medium of exchange. This is a significant improvement over bartering, which is
the direct trade of goods and services. For example, a farmer might trade a bushel of wheat
directly for a pair of shoes from a shoemaker. Historians believe bartering was the primary
method of exchange before money.

Bartering: The Double Coincidence of Wants

Bartering's biggest challenge is the "double coincidence of wants." For a trade to occur, both
parties must have something the other person wants at the same time. The farmer with wheat
might want shoes, but what if the shoemaker doesn't need wheat? This problem makes large-
scale, complex economies impossible. The invention of money solved this by creating an
intermediate item that everyone agrees has value, so a seller can accept money and then use it
to buy whatever they want from a third party. Early forms of money were often useful items
themselves, such as livestock, grain, or salt. These are known as commodity money. Over
time, items that were more portable, durable, and easily divisible, like cowrie shells or beads,
became popular.
From Commodities to Currency

A crucial distinction in economic theory is between money and currency. Money is an

intangible concept—a unit of account, a store of value, and a medium of exchange. It
represents purchasing power. Currency, on the other hand, is the physical or tangible
manifestation of that concept, such as a coin, a banknote, or even an electronic entry in a
bank's ledger. The invention of money is believed to be prehistoric, with its origins based on
logical inference rather than documented history.

Watch: A video on the history of bartering and early money systems.

[https://www.youtube.com/watch?v=R3n0j2XW_6s]

2. From Barter to Coinage

The use of minted coins was a significant step in the history of money, moving from simple
commodities to a standardized, government-backed form of value. The world's oldest known
and securely dated coin minting site was located in Guanzhuang, China, where spade coins
were struck around 640 BCE. These early coins were a critical move toward standardizing
exchange.

The World's First Gold Coin: The Croesus Stater

The Croesus Stater was the world's first minted gold coin, produced in Lydia (modern-day
Turkey) in the middle of the 6th century BCE. King Croesus of Lydia was renowned for his
unimaginable wealth, which was based primarily on the coins he minted. His kingdom was
blessed with the Pactolus River, which was rich in electrum—a naturally occurring gold-
silver alloy. The Lydians' great metallurgical triumph was developing a method to separate
this alloy into pure gold and pure silver. This allowed Croesus to produce coins in a
sophisticated, set denominational system of both metals, which had a uniform weight and
purity. His coins, featuring the symbol of a bull and a lion, became a trusted medium for
traders throughout the classical world. The gold-based monetary system of the Stater lived on
even after Lydia was conquered by the Persians in 546 BCE, influencing the entire ancient
Greek world around the Mediterranean. The name "Croesus" became synonymous with
fabulous wealth because his name was literally stamped on the most valuable and trusted coin
of its time.

The Economic Impact of Minted Coins

The introduction of a standardized and guaranteed form of money had a profound impact on
ancient economies. It facilitated long-distance trade by eliminating the need to weigh and test
the purity of metals with every transaction. It also made it easier for governments to collect
taxes, pay soldiers, and fund large public works projects. The concept of a sovereign entity
guaranteeing the value of a coin was a major step toward the modern idea of a national
currency.

Watch: A video about the history of coins and the Croesus Stater.
[https://www.youtube.com/watch?v=S01hT7V1B08]

3. The Rise of Paper Money and Banking

The development of banking systems and paper money was a crucial evolution, making
money more portable and efficient.

Johan Palmstruch and the Swedish Banking Crisis

Johan Palmstruch was a Swedish financier credited with introducing paper money to
Europe. In 1657, he founded Stockholms Banco, which was the first European bank to print
banknotes. At the time, Sweden's currency was based on heavy copper plates, which were
cumbersome to use for large transactions. Palmstruch's idea was to issue "credit notes" called
Kreditivsedlar in 1661, which were a more portable alternative. These notes were
redeemable for the full value in copper plates or silver coins at any time.

This innovation was initially very successful, but it contained a fatal flaw. The bank began to
issue more credit notes than it had copper plates in its vaults, essentially creating money "out
of thin air" to finance more loans. By 1663, this over-issuance of notes led to a loss of public
confidence, and people rushed to the bank to redeem their notes for metal. The bank could
not honor all the requests, leading to its collapse in 1667 and Palmstruch's imprisonment. The
bank's failure led to the founding of the Riksens Ständers Bank in 1668, which was later
renamed Sveriges Riksbank, the world's oldest surviving central bank. The new bank,
however, was forbidden from issuing banknotes for many years due to this cautionary tale.

John Law and the French Financial Disaster

John Law, a Scottish monetary reformer, was the originator of the "Mississippi scheme" in
France around 1718−1720. The French government was heavily in debt following the
extensive wars of Louis XIV, and Law proposed a new system of credit and paper money. He
was given permission to establish the Banque Générale, which issued banknotes and was
granted a monopoly on French colonial trade through the "Company of the West." Law's plan
was to use the profits from this trade to pay off the national debt. The value of the company's
shares soared as investors, fueled by a speculative frenzy, believed in the immense wealth of
the Louisiana territory. The bubble burst when investors tried to convert their paper money
back into gold and silver, revealing that the system was based on speculation, not real assets.
This event, known as the Mississippi Bubble, caused a massive financial crisis and left a
deep-seated distrust of paper money in France for many years.

Watch: A video on the history of paper money. [https://www.youtube.com/watch?

v=yC8gY3M5lE8]

4. Central Banking and Modern Monetary Policy

A central bank is the authority responsible for policies that affect a country's supply of
money and credit. It uses tools of monetary policy to influence short-term interest rates and
the money supply to achieve key policy goals.

Central Bank Tools and Mandates

Modern central banks, like the US Federal Reserve, have a variety of tools to manage the
economy. The three primary tools are:
  Open market operations: The central bank buys or sells government securities on
the open market. Buying securities injects money into the economy, while selling
them removes it.
 Discount window lending: The central bank lends money directly to commercial
banks at a specific interest rate, known as the discount rate. Lowering this rate
encourages banks to borrow more, increasing the money supply.
 Reserve requirements: The central bank sets the minimum amount of cash that
commercial banks must hold in reserve. Lowering this requirement allows banks to
lend more money, expanding the money supply.

The goals of central banks are often defined by a "mandate." For instance, the U.S. Federal
Reserve has a "dual mandate" of price stability (maintaining a sustained low rate of
inflation) and maximum employment. These two goals can sometimes be in conflict,
requiring the central bank to carefully balance its policy decisions. Another key challenge for
central banks is accounting for factors outside their control, such as globalization and
supply-side shocks (political instability, oil price changes). A debate also exists over whether
to use explicit inflation targeting or switch to a price-level targeting system, where
inflation would be kept at zero.

Paul M. Warburg and the US Federal Reserve

Paul M. Warburg was a key figure in the monetary reform movement in the United States in
the early 1900s. Born in Germany, he had firsthand experience with a more stable,
centralized banking system and saw the need for one in the U.S. He was a prolific writer and
speaker who advocated for the establishment of a US central bank to prevent the frequent
financial crises of the time. His proposals and ideas heavily influenced the creation of the
Federal Reserve System. He was sworn in as a member of the first Federal Reserve Board
in 1914 and served as vice chairman (or vice governor) from 1916 to 1918. In 1929, he
famously warned of the dangers of wild stock speculation, shortly before the stock market
crash, showing his deep understanding of financial markets.

Watch: A video explaining central banks and monetary policy.

[https://www.youtube.com/watch?v=mcUf1B5A_3A]

5. Fiat Money
The Mechanics of Fiat Money

Fiat money is a type of government-issued currency that is authorized by regulation to be

legal tender. Unlike commodity money, it is typically not backed by a physical commodity
like gold or silver. The word "fiat" is Latin for "let it be done," reflecting that its value is
based on government decree. The true value of fiat money, however, comes from the trust
that people have in it being accepted as a means of payment throughout an economy. They
trust that it will be accepted by merchants and other people as a means of payment for
liabilities.

The End of Bretton Woods and the Modern Era

The world was not always on a fiat money system. Following World War II, many major
currencies were tied to the U.S. dollar, and the dollar was, in turn, convertible to gold at a
fixed price under the Bretton Woods system. However, this system ended in 1971 when
President Richard Nixon announced that the U.S. would no longer convert dollars to gold.
This move, often referred to as the "Nixon shock," effectively shifted the world to a system of
floating fiat currencies. Since then, the value of major world currencies is no longer pegged
to gold or any other commodity but is instead managed by central banks and determined by
market forces. The task of keeping inflation small and stable is given to monetary authorities.
If an issuing government loses its ability or refuses to guarantee the currency's value, it can
lead to hyperinflation, a rapid and out-of-control increase in prices. Examples include the
Zimbabwean dollar and the German mark during the Weimar Republic in 1923.

Watch: A video explaining the concept of fiat money. [https://www.youtube.com/watch?

v=F3S019h2x3g]

6. Modern Money: Credit Cards, Digital Currency &

Crypto
The Evolution of Credit Cards

A credit card is a payment card that allows users to purchase goods, services, or withdraw
cash on credit, accruing debt that must be repaid later. A credit card differs from a charge
card (which requires the balance to be paid in full each month) and a debit card (which uses
funds directly from a bank account). The widespread adoption of credit cards in the late 20th
century transformed how people transact, moving away from cash for many purchases. They
are one of the most widely used forms of payment in the world, with over 7.75 billion in
circulation as of 2018. Many credit cards offer reward programs, such as cash back or
points, which can benefit consumers who pay their balance in full each month. However, a
2010 study by the Federal Reserve concluded that these programs can result in a monetary
transfer from poor to rich households, as the merchant fees that fund the rewards are often
passed on to all consumers through higher prices.

Digital Currency and the Dawn of Cryptocurrency

The development of computer technology allowed money to be represented digitally. This

transition began with early electronic funds transfers and has culminated in a world where
most money exists as digital currency in banks' databases. Digital currency allows for easier,
faster, and more flexible payments, and it has become the default form of money in many
parts of the world.

A major innovation in this field was Bitcoin, proposed in 2008 by an anonymous person or
group using the pseudonym Satoshi Nakamoto. Bitcoin was the first widely used
decentralized, peer-to-peer cryptocurrency. Its use of cryptography and a blockchain (a
tamper-resistant, public, and distributed ledger) solved the "double-spending" problem—a
challenge in digital currency where a single unit of money could be spent more than once—
without needing a trusted third party like a bank. The blockchain records every transaction
and is maintained by a network of computers. This innovation has led to the creation of
thousands of other cryptocurrencies, many with their own unique features and applications,
such as "smart contracts" on the Ethereum network.
Watch: A video on the rise of digital currency and cryptocurrencies.
[https://www.youtube.com/watch?v=d_k8S_y25-o]

7. Historical Notes
The Soviet Union's New Economic Policy (NEP)

Following years of war and civil unrest, which culminated in a period of extreme state control
known as War Communism, the Soviet economy was in ruins. In 1922, the government
introduced the New Economic Policy (NEP) as a temporary retreat from strict socialist
policy. The NEP reintroduced a measure of stability by allowing peasants to own and
cultivate their own land (while paying taxes) and permitting a degree of small business and
private commerce. The small businessmen who flourished during this period were known as
"NEP men." The policy was a huge success in stabilizing the economy and recovering from
the devastation of the preceding years. However, the NEP was always viewed as a temporary
measure by the communist government, which was ideologically opposed to private
enterprise. By 1928, under the leadership of Joseph Stalin, the government began to forcibly
eliminate the private ownership of farmland and collectivize agriculture, marking the end of
the NEP and a return to full state control over the economy.

Watch: A video on the New Economic Policy of the Soviet Union.

[https://www.youtube.com/watch?v=k_jH5U0WzRk]

8. Study Guide: Key Concepts and Timeline

Key Concepts

 Bartering: The direct exchange of goods or services without money. Its main
limitation is the "double coincidence of wants."
 Central Bank: A national authority that manages a country's money supply, credit,
and monetary policy to achieve goals like price stability and full employment.
 Commodity Money: Currency with intrinsic value, such as gold, silver, or salt.
 Croesus Stater: The world's first minted gold coin, from ancient Lydia. Its
standardized purity revolutionized ancient commerce.
 Cryptocurrency: A decentralized digital currency using cryptography for security,
such as Bitcoin.
 Fiat Money: Government-issued currency not backed by a physical commodity,
gaining its value from trust and regulation.
 Johan Palmstruch: The Swedish financier who created the first European banknotes
in 1661. His bank's failure became a cautionary tale about over-issuing paper money.
 Mississippi Bubble: A financial bubble in France in the early 18th century, centered
on John Law's company, which led to a major financial crisis.
 Monetary Policy: A central bank's actions to influence the money supply and interest
rates to achieve economic goals.
 Stockholms Banco: The first European bank to issue paper money, founded by Johan
Palmstruch.
 Bretton Woods System: A post-WWII international monetary system where the U.S.
dollar was pegged to gold, and other currencies were pegged to the dollar. It ended in
1971.
Timeline

 c. 640 BCE: First standardized metal coinage (spade coins) struck in China.
 c. 550 BCE: The Croesus Stater, the first gold coin, is minted in Lydia.
 1661: Johan Palmstruch's bank issues the first European banknotes in Sweden.
 1718−1720: The Mississippi Bubble, led by John Law, occurs in France.
 1914: Paul M. Warburg is sworn in as a member of the first Federal Reserve Board in
the United States.
 1922: The New Economic Policy (NEP) is introduced in the Soviet Union.
 1971: The Bretton Woods system ends as the U.S. dollar is no longer convertible to
gold.
 2008: Bitcoin, the first decentralized cryptocurrency, is proposed.