History of Money Pt. 1
From Bartering to Central Banking
Introduction
As someone working in the crypto industry, I often encounter the same questions from friends, strangers, and coworkers: “Isn’t crypto just a Ponzi scheme?”, “What’s the real-world use case of Bitcoin?”, “What’s backing crypto?” These are all legitimate questions, but I believe they stem from a deeper gap in the broader public’s understanding of what money even is, how it came to be, and where it’s headed. It’s tough to understand a solution like Bitcoin when most people don’t fully grasp the problem it’s trying to address.
That's why I'm starting this series—to help bridge that gap for myself and others, and to explain it as simply as possible. I strongly encourage readers to poke holes in these ideas because that’s how we all learn and grow.
Full disclosure: I’m no finance / history expert. Many of these arguments are paraphrased from the amazing books The Bitcoin Standard by Saifedean Ammous and Broken Money by Lyn Alden. If you want a more comprehensive look into the history of money from acclaimed authors (and not just some rando online), I highly recommend giving them a read :)
Overview
In the early days of humanity, people lived in small, close-knit groups; tribes. Within these groups, goods were often exchanged based on trust and social reciprocity. For example, one tribe-member might trade a stone for fish or offer to help with a task in the future. However, when it came to trading between stranger tribes, where it was difficult to trust the other, transactions had to be settled immediately on the spot (what is also known as spot trading).
For a transaction to occur, both parties needed to have a mutual desire for what the other had—this is known as the "coincidence of wants." For example, if Party A had meat and wanted nuts, and Party B had nuts and wanted meat, the trade could proceed smoothly. But if one party didn’t possess what the other wanted, the trade would stall, leaving both parties without the desired goods.
To solve this problem, societies eventually began using a universally desired item as a medium of exchange—money in its earliest form. Seashells were one of the first proto-monies. They were relatively rare, aesthetically pleasing, and could be fashioned into necklaces worn by tribe members. Most importantly, seashells were widely accepted as a form of payment among different tribes. In some cases, they even represented a record of one's social contributions—how much value they provided to others.
But what happens when a technologically advanced tribe enters the ecosystem, capable of manufacturing seashells in huge sums? They can flood the market, buying up everything at a fraction of its true value, effectively plundering the less technologically advanced tribes of all their wealth. This scenario illustrates a critical aspect of the physical properties of money and how it evolves: when a society's money becomes too easily produced, its value can be undermined, leading to significant economic and social consequences, and as a result a stronger money emerges.
This brings us to the concept of the monetary premium—the extra value that a particular good holds, not because of its intrinsic utility, but because of its usefulness as money. In other words, the monetary premium is the additional market value a good gains when it is widely accepted as a medium of exchange.
For a good to acquire a high monetary premium and serve effectively as money, it must possess certain key properties:
Durability: The good must withstand the test of time and not degrade quickly. This ensures that it can store value over long periods.
Divisibility: Good money can be easily divided into smaller units to facilitate transactions of varying sizes. Gold, for instance, can be melted and reformed into smaller quantities without losing value.
Portability: The good should be easy to transport, allowing people to carry and use it in various transactions. This was one of the reasons why seashells initially worked well as proto-money.
Fungibility: Each unit of the good should be interchangeable with any other unit of the same size and quality. This makes transactions simpler and ensures that no unit is more valuable than another.
Recognizability: People must be able to easily identify and verify the good as authentic money. This reduces the risk of counterfeiting and fraud.
Scarcity: The good must be sufficiently rare to maintain its value. When seashells became easy to produce, their scarcity diminished, leading to a loss of their monetary premium.
Different forms of money have been competing throughout human history, and we've gone through many iterations using items like cattle, corn, copper, seashells, silver, and more, each serving as money in various societies.
Fast forward many years, and gold became the widely accepted form of money. Gold had many great properties: it was durable, divisible, and universally valued. However, it wasn’t easily portable. Moving gold over long distances, like from Barcelona to Japan, was slow, expensive, and risky, requiring heavy security against thieves, the elements, etc. To overcome these challenges, people developed credit and debit systems. Instead of physically moving gold with every transaction, parties kept ongoing ledgers, recording who owed whom. At the end of a period, they would settle the balance, or they could keep the ledger running indefinitely. This system significantly reduced the need for constant settlements in gold.
While this approach worked well for two parties who were close to each other, it wasn’t practical for the growing global trade involving many participants. Managing individual ledgers between multiple parties became increasingly complex. For instance, if 100 different parties each had a ledger with one another, the number of ledgers needed would be enormous.
To reduce the amount of settlements / reduce the number of ledgers, central banking came to be and it was a much needed innovation to keep up with global trade. The idea was to store all the gold in one central location and maintain a single, unified ledger. This had two major benefits:
A) It eliminated the need to move gold around the world.
B) It allowed for as close to instant settlement of transactions.
However, this system also concentrated power, for those who controlled the gold and the ledger held a significant amount of influence over the entire system.
I hope this provided a basic intuition around money and what causes it to evolve. In the next few articles, we’ll dive deeper into the rise of central banking—how it transformed global trade, the mechanisms that made it both necessary and controversial, and how Bitcoin and other cryptocurrencies aim to challenge the status quo in the modern financial system.