Published February 2011.
If you would like a new CD or simply a drink on your way home from school, you would probably go into a shop and buy one using coins or notes. (You might need to do a bit of saving first!) However, this way of paying for the things you want did not always exist.
Right from the start of the human race, people needed to obtain necessary items - food, basic clothing etc. They did this by bartering , a way of trading. Bartering is simply exchanging something that you have for something which you want from someone else. For example, if I were a farmer, I may give some corn to my friend, who was a butcher, in return for some meat.
This sounds all very fair, but what would happen if my friend the butcher already had enough corn? Then she wouldn't want to give me any meat. This makes things a little awkward...So, you can see that there were problems with the system of bartering. Something was needed that could be used by all people all of the time to exchange for goods.
There were other reasons why "money" developed. In many societies, there were traditions which required payments. For example, in some places laws stated that people who committed violence had to pay compensation. In fact the English word "pay" comes from the Latin "pacare" meaning to make peace. When a man got married, his family were expected to give some sort of payment to the family of the bride to make up for the fact that she wouldn't be there to help with all the domestic duties. Further examples are the taxes which many rulers imposed on their subjects, also the practice of religious sacrificing.
These customs, along with the disadvantages of bartering, meant that a slightly different way of exchanging developed at the same time in many parts of the world. In most societies, there was something which was regarded as valuable - usually this was found only in small quantities or was simply hard to find. People could then exchange this valuable item for something that they needed. The person who received the thing of value could then exchange it himself for whatever he wanted.
The first form of money, from as early as 9000 BC, was animals like cattle, sheep and camels. As people began to grow their own produce, grain and vegetables became the precious commodities. Around the Pacific and Indian Oceans in China and parts of Africa, cowrie shells were used from 1200 BC. In some parts of the world, the valuable item was beads or sharks' teeth or animal skins.
In 1000 BC, the Chinese were the first to use metal in their money. They made imitations of cowries out of bronze and copper, and used "tool" money, for example spades, knives and hoes.
For any of these items to be useful as money, they had to be easily stored, easy to carry around and durable (long lasting), in addition to having value. The metal tool money in China soon developed into discs of metal which were the first versions of coins. However, they were very easily copied and were made from metals which were not particularly valuable, making it difficult to buy expensive things.
In 500BC in Lydia, which is now part of Turkey, coins were made out of a mixture of gold and silver. The back was stamped to show it wasn't a fake and the use of precious metals meant that each coin had a value itself.
These coins had irregular shapes but they were standardised by their weight. There were coins of several different weights but it must have been hard to tell them apart. Historians assume that rather than being counted, the coins were weighed.
Due to the large number of different coin systems, the earliest form of banking in Greece was money changing. Another important service provided by these banks was lending money to people to pay for goods being carried on ships. In fact these weren't the earliest banks. In Egypt and Mesopotamia, central stores for grain had already been established. A receipt was given to show the amount taken out which could go to the person who deposited the grain, or to somebody who was owed. When the Greeks took over Egypt, the grain stores became even more advanced. A central store was established in Alexandria where information from all the stores around the country was recorded. Transfers became possible between two people's stores without any grain physically changing hands. But, with the invasion of the Romans, who preferred payments with coins, this banking system was forgotten.
Remember that the use of coins was in part due to them being convenient to carry around? Gradually coins began to be accepted as having the value written on them so there was no need to weigh them. Counting was much quicker and in the Middle Ages, this was used to the King's advantage. The metal used to make the coins was much cheaper than the amount they represented, so that a huge profit was made. This meant that coins were recalled at intervals to gather this income. New coins had to look very different from the old ones so that it was clear which were in current usage.
However, due to shortages of copper, money actually made from paper appeared also in China around 806 AD. The Chinese used paper money on and off for five centuries but stopped production when inflation rose out of control.
Paper money has taken (and still does take) many forms since then. During the English Civil War (1642-1651) the goldsmiths' safes were locked so that people had a secure place to leave valuables. Written instructions to the goldsmith to pay another person from a customer's "store" developed into what we now call cheques. The goldsmith would give his customer a receipt to say how much was deposited. The customer could show this receipt to someone he owed to prove that he was able to pay. This is the basic idea behind the banknote .
During the 18th and 19th centuries, representative money was common. This was paper notes which could only be exchanged for a particular item. In 1715, "tobacco notes" were issued in North Carolina, USA which could be exchanged only for a certain amount of tobacco. Later towards the end of the 19th century, gold and silver certificates were used in America.
Gold was used as the "standard" in European countries until the 1930s and in America until as late as 1973.
Nowadays we use what is termed fiat money which means that it can't be exchanged for just a single item. People accept this money in return for goods or services because they know that they themselves will be able to use it at a later date. Money now has no link at all with precious metals.
Of course with the technology we possess today, electronic money is commonplace. Money can be transferred from one person to another via standing orders or direct debits. Credit cards allow customers to pay for items before the money actually leaves their account. They will then be billed at certain times.
So, perhaps we are lucky to live in the times that we do. Just think... How would you persuade the man in the sweet shop that he'd like to have the trousers you've outgrown in exchange for a bar of chocolate?!
To find out more about how money developed, have a look at these fantastic sites:
You may also like to take a look at this collection of items that have been used as an alternative to money around the world.