Money originated around 7,000-8,000 BCE when primitive tribes began exchanging surplus goods to simplify trade. It evolved from barter items like livestock, shells, and metals into a universally accepted medium of exchange defined by societal agreement.
Main Stages in the History of Money
Money developed through four key stages:
- First stage – emergence using random commodities to perform money functions;
- Second stage – gold established as the universal equivalent (the longest stage);
- Third stage – transition to paper or credit money;
- Fourth stage – cash gradually replaced by electronic payments.
Gold and Silver as Money
Gold and silver best met the requirements for money due to their liquidity and universal acceptance. They emerged as early metallic money in the 13th century BCE as weighed ingots. Market development led to coins – standardized signs with fixed shape, weight, and metal content set by law.
Coins from natural gold-silver alloy (electrum) first appeared in Lydia in the 7th century BCE. In Rus, minting began in the 9th-10th centuries, mainly using foreign Arab and Byzantine gold and silver coins due to lack of local gold deposits. From the 11th century, silver and copper ingots circulated internally. The most common was a one-pound (about 400g) silver ingot called grivna. High value led to splitting it into two equal parts named ruble or “ruble grivna”.
Commodity Money
For early metallic money, the commodity value of metal in coins matched their nominal value stamped on the face.
This created a flaw in commodity money. If commodity value exceeded monetary value, coins would be melted for profit and vanish from circulation. From the 15th century, metallic money lost its full commodity basis, dividing into full-bodied (nominal equals metal value) and token (nominal exceeds metal value). Today, no country issues full-bodied metallic money.
History of Paper Money or Banknotes
Paper money (banknotes) arose from inconvenience of transporting, weighing, and assaying gold in trades. People deposited gold with goldsmiths for storage, receiving receipts in return. These receipts circulated as early paper money, with goldsmiths becoming proto-bankers.
Since stored gold was rarely withdrawn fully, receipts were initially full-bodied money, fully backed by gold. An enterprising goldsmith issued unbacked receipts as loans at interest, birthing the fractional reserve banking system. English goldsmiths pioneered this; later, states took over issuance.
In Russia, paper money appeared in 1766 by decree of Empress Catherine II as the ruble and its hundredth part, the kopeck. Today, like metal money, paper currency worldwide lacks commodity backing and cannot be exchanged for gold or precious metals. Money equivalents continue to evolve rapidly.
FAQ
What was the first true money?
Commodity items like cattle and shells served early, but standardized electrum coins from Lydia in the 7th century BCE marked the first widely accepted money.
Why did gold become the standard for money?
Gold’s durability, divisibility, scarcity, and universal value made it the ideal universal equivalent, dominating from the 13th century BCE onward.
How did paper money originate?
Goldsmiths issued receipts for stored gold in the 17th century, which circulated as notes; fractional reserves enabled lending beyond deposits, leading to modern banking.
