The Evolution of Money: From Bartering to Banknotes to Bitcoin

What is money? Britannica defines money as a commodity accepted by general consent as a medium of economic exchange.” That concept of “accepted by general consent” is critical. Money is ultimately a social construct—it doesn’t work unless both parties in the exchange agree on the medium of value.

Deep dive
April 20, 2023
Lead Content Manager
The Evolution of Money

Money is a social tool for trade and commerce. The evolution of trade from a bartering system to a native digital currency in Bitcoin illustrates the degree to which money has changed throughout human history. Cryptocurrencies like Bitcoin are the next big step in the evolution of money, but to understand how important Bitcoin is, we first need to take a step back and look at the history of money.

Barter System: The Birth of Trade

Bartering is the direct exchange of goods or services without using money (such as trading a cooking pot for a pair of shoes). Evidence suggests that the barter system was used as far back as 6,000 BC.

The development of the barter system is the precursor of collaborative commerce, trade, and economics as we know it today. It enabled people to trade with each other, which helped communities become more complex over time by introducing greater collaboration and encouraging individuals to devote themselves to specialized trade.

However, the barter system was constrained by the coincidence of wants (or the double coincidence of wants), which refers to two people each having something the other wants. For instance, if you want to barter some bananas for a sack of beans, and the bean seller doesn’t want bananas, you’re out of luck.

You can offer to accept fewer beans or offer more bananas in the trade, but a successful exchange ultimately depends on the other party’s appetite for what you have to barter with. Making matters more complicated is that those bartered goods are often not durable and can only be traded for a limited time.

Commodities: The Expansion of Trade Beyond Immediate Localities

Eventually, the barter system gave way to the use of commodities, such as ax heads and knives, as money during the Bronze Age. Other commodities, such as cowrie shells, salt, and whale teeth, were used as money in different communities. The acceptability of different objects for trade was tied to the customs of specific regions.

This new evolution of money addressed the limitations of the double coincidence problem in the barter system by assigning a common measure of value to the exchange of goods. It didn’t matter if the bean seller didn’t want bananas; they would accept cowrie shells, knowing they could then easily use shells to trade for something else.

Commodities also helped extend the social sphere of trade with people outside of their immediate locales. Commodities were more durable and easier to transport than bartered goods. Therefore, merchants could embark on longer journeys outside their towns for trade.

Secondly, commodities offered a uniform measure of value. Merchants only needed to remember the price of their wares in a single commodity and wouldn’t have to negotiate an exchange rate for their wares against every other bartered good (how much cheese should one accept for this cut of cloth? How many eggs?). That uniform measurement simplified trading and increased exchange as a result.

However, while an improvement over the bartering system, commodities still had their limitations. They eventually deteriorated and were often difficult to transport in large quantities. Counting a commodity in large numbers was often imprecise, and a sudden windfall or natural disaster could significantly alter the supply dynamics.

Precious Metals: The Active Participation of Governments in Monetary Systems

Precious metals such as gold later emerged as a better form of money than commodities in the 6th century BCE. Commodities such as salt, tobacco, and wheat are perishable and tend to lose their value over time. In contrast, gold and silver don’t degrade over time, so they are a more stable medium of exchange. 

Secondly, despite their near-identical nature, commodities could vary in size and quality. Precious metals introduced standardized monetary values. People knew the expected weight of a gold bar, and they could verify if the gold bar had the expected weight.

Another important factor that solidified the use of precious metals as money was the active participation of monarchs in the new monetary system. Rulers started minting metal coins (gold coins and silver coins most commonly), such as Roman denarii or drachma in Greece, because it was a type of money that provided a uniform way to collect and account for taxes. It also helped them maintain their wealth and lifestyle. The central bank was born.

The centralization of money ensured that it was easily exchangeable as a money supply within a ruler’s domain and often outside of it as well. However, it wasn’t long before some rulers discovered that they could increase their wealth and their dominion’s purchasing power by adding cheaper metals into the mix—leading to the debasement of coinage. 

Paper Money (Banknotes): The Emergence of Centralized Monetary Authorities

The next step in the evolution of money was the development of banknotes, with the earliest records dating to the Chinese Thang dynasty around 807 AD. Moving precious metals around is inefficient: large quantities are too heavy. You need people or wagons to transport them in large quantities, drawing attention and making the traveling convoy a magnet for bandits.

As a solution, merchants started depositing their gold with notaries. The notaries, in turn, issued paper receipts in varying denominations as a unit of account the merchants could use for trade. 

Paper notes didn’t have intrinsic value in the same way metallic money does, but they were more practical. Not only did this make trade safer and less logistically complicated, but it encouraged travel across long distances. As Marco Polo recorded, paper money was used extensively for trade across the Mongol empire, stretching from Central Asia to India.

This paradigm shift from precious metals to paper currency also expanded the functions of money and birthed banking as a financial service. Notaries discovered they had a massive store of value and could now become lenders, doling out the deposited gold for interest. Historically, the issuance of paper money was handled by private enterprises, but over time governments took control of issuing banknotes as legal tender to reduce counterfeiting, collateralize the currency with government guarantees, and manage monetary supply.

Before 1933, all the banknotes in circulation were tied to precious metals: they were backed by gold in a reserve bank. The gold standard helped keep currency values stable because the exchange rate was always pegged against a fixed amount of gold. However, in 1933, the U.S. went off the gold standard because it was economically unsustainable, limited the actions of the Federal Reserve System, and left the U.S. monetary system at the mercy of other countries with more significant gold deposits.

By 1944, more than 40 other nations also left the gold standard through the Bretton Woods Conference, and the U.S. dollar effectively replaced gold as the global reserve currency. Today, the U.S. dollar is backed by faith in the U.S. government, and with so many other currencies pegged against the dollar, the fate of the global economy practically rests on the U.S. government.

Credit Cards: An Increasingly Digitized Banking System

As paper currencies abstracted away precious metals (which had in turn abstracted away physical labor), the next innovation in money came with the creation of the credit card. The first credit cards were initially issued by businesses in the 1930s, allowing borrowers to shop more easily on credit at their stores, and in the 1950s, banks began issuing credit cards. Consumers suddenly had access to revolving credit. The debit card followed in the 1960s, making it easier for bank customers to access their existing money.

In 1994, the Stanford Federal Credit Union introduced the first online payment system, followed by the launch of PayPal four years later. In the 2000s, paying for things with different forms of digital services became easier to do—using programs like Apple Pay for tap payments from mobile devices and apps like Venmo for person-to-person transactions. All of these evolutions made it easier for consumers to spend money, and made it easier for them to spend that money digitally, setting the stage for the first wholly digital currency.

Bitcoin: The Decentralization and Disintermediation of Money

The issue with a “dollar backed by faith,” as the US dollar is today, is that faith is a precarious ledge on which to balance the global economy. Faith in the U.S. government backs the American dollar, and it’s the U.S. government’s responsibility to regulate the financial system (and the commodities and services within it). The U.S. government’s failure to regulate the financial system, the bankruptcy of Lehman Brothers, and the credit crisis, among other factors, led to extreme stress in the global economy, resulting in the 2007-2008 global economic meltdown.

Bitcoin was conceptualized in 2008 as a response to the global financial crisis and introduced the concept of decentralized money beyond the control of any government or bank. Bitcoin triggered a paradigm shift in the future of money because its invention of the “blockchain” solved the double-spend problem for digital currencies and created a secure public ledger that allowed strangers to trade with each other in a space that anyone could join and anyone could verify. 

Bitcoin relies on mathematics and code and has no central authority. Economists have debated its stability, but impressively, the currency has been consistently resilient to attacks, shocks, and stress for more than a decade. Bitcoin has a fixed maximum supply of 21M BTC, and holders can be confident that no one will suddenly alter the playing field and, for example, change the maximum to 22M, pocketing the new 1M themselves. No government can seize your Bitcoin nor prevent you from buying it. 

In other words, Bitcoin is natively digital money and aligns with the future of finance as the global economy continues to become increasingly digitized. According to the World Economic Forum, about 70% of the new value created in the global economy over the next decade will be generated from digitally enabled business models. Significantly, because Bitcoin does not need intermediaries or controllers, that lack of intermediaries reduces transaction costs and speeds up transaction times relative to fiat money.

Discover how the future of finance can be built on Bitcoin in a conversation with Bitcoin educator Dan Held:

Bitcoin Presents New Opportunities for Developers in the Future of Money

Bitcoin has given people the newest evolution of money and changed the face of macroeconomics. Still, we’ve only just started scratching the surface of how Bitcoin could become a core part of the global economy. New Bitcoin projects enable many different use cases, including Decentralized Finance (DeFi) on Bitcoin. Bitcoin DeFi will create new ways to earn, spend, invest, and use Bitcoin to create a more connected global economy, one in the hands of its users.

Stacks provides developers with the programming layer to build smart contracts for the Bitcoin ecosystem. At Hiro, we create developer tools and documentation for Stacks so that you can build applications for Bitcoin. Want to learn how Bitcoin evolved from a digital currency to a vibrant ecosystem of builders? Download our free ebook on Bitcoin's evolution:

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