Moolah, Paper, And Cows

A drawing to visualize different kinds of transactions.

“Please buy my clay jar, traveler.”

“You take Paypal?”

“Uhh... no. Do you have barley?”

Talking with a Mesopotamian today would be impossible because first of all, we don’t know their language and second, they are all long gone. However, that’s besides the point. The important question is what caused this massive shift in economics, from trading physical goods to literally just tapping a phone?

The Barter System (6000 BCE)

A drawing showing how bartering works between two parties.

Let’s start at the very beginning in the world’s first civilized kingdom: Mesopotamia. A surplus of agriculture meant that now people were not just eating the food they made on their farms; they were trading it. Commodities such as food, tools, or labor became objects of direct trade in what we now call a barter economy. For example, a farmer might give grain in return for cattle from the rancher, or a potter might exchange ceramics for tools. The value of goods also wasn’t fixed, but instead depended on both parties having a mutual agreement of how much the goods were worth.

Still, there were limitations. This system was difficult to scale past small communities. For a trade to happen, both parties had to have a desire to obtain what the other had, in a moment known as “the double coincidence of wants.” On top of that, these communities would not be able to acquire goods that could not be found nearby, since they were mostly trading with those in their vicinity. As large kingdoms and trading routes rose, societies needed a better method to recognize a constant value of a good. The solution was soon found in precious metals. Regardless, the fundamentals of the barter system continued to survive for thousands of years.

Flying Money (700 CE)

An artistic representation of flying money.

The method of trading precious metals such as gold and copper worked brilliantly, except for one small issue: metal is heavy. Over long distances, this weight meant that the camels could only carry a limited amount to the final destination. In China, this issue led to the creation of flying money during the Tang Dynasty. Instead of carrying the coins across hundreds of miles, merchants could give their government their precious metals in return for an official certificate. Then, the merchant, carrying that light certificate, could go to his destination and give it to the government there. After the certificate was verified, the government would give the merchant the amount of metal he deposited at his starting location. In this way, the risk of theft was significantly reduced, as hiding a certificate was a lot easier than hiding multiple kilos of gold coins.

This innovation allowed trade to expand over longer distances while maintaining security and efficiency. The system marked the moment of separation of value from substance and the introduction of credit.

Fiat Currency (1862)

The United States is at war, not with another country, but with itself. The Civil War led to massive war spending, and there just was not enough gold to fund the spending. To solve this, the United States government passed the Legal Tender Act of 1862, a financial law that created the nation’s first uniform paper currency, commonly known as Greenbacks. Unlike previous notes that promised an exchange of precious metals, Greenbacks got their value in a different way. Its value was determined by the government and was dependent on the trust that the American people had on the government. With this paper currency that was no longer tied to gold, the government could now buy a lot more to help with the war effort. However, this expansion of the money supply also led to inflation. Political pressure led the post-war government to tie the value of currency to the gold supply to fixate the value and stop inflation. For almost a hundred years, American currency would remain tied in some way or form to gold. Then came the Nixon Shock.

In 1971, President Richard Nixon announced that the United States would no longer be converting dollars into gold. This marked the beginning of the fully fiat currency era that we live in today.

Internet Era (2000s)

Just like that, the internet is here. Computers are all the rage, and their impact on economics was revolutionary. The Automated Clearing House, or ACH, is a digital network used in the United States that moves money securely between banks. ACH digitizes transfers, storage, and transactions while still relying on government backed currency. Though transactions take one to two days, the system is trusted, efficient, and widely used, making it a key part of modern finance. While ACH digitized traditional banking, it took fintech to make it more convenient.

Modern fintech apps like Apple Pay, Venmo, and PayPal allow users to send, receive, and store money using just their phones. Unlike traditional paper money, the balance exists entirely as digital numbers, though its value is still backed by government currency.

Cryptocurrency (2008)

An image of a gold coin with the Bitcoin symbol.

After the 2008 housing economic crisis, the American people were wary of working with government banking systems again. This moment is when Satoshi Nakamoto—this is their pseudonym, not their real name—created Bitcoin, the first cryptocurrency. It wasn’t controlled by the government or any bank, but was instead managed completely by computers. This system, known as blockchain, records every single transaction that happens, which removes the need for middlemen to confirm transactions. Similar to gold backing though, the amount available of Bitcoin is limited, giving it the value that it has today ($66,378.95, as of when this article was written). Bitcoin is the next stage in economics, where value doesn’t depend on the government anymore, but instead on code and collective trust.

Well?

Since the first civilization to the present day, money has changed, and it is likely that it will continue to change in the near future. We started in 6000 BCE, where tangible goods were traded with an agreed value. Thousands of years later, in 700 CE, we arrived at Flying Money in China, where paper certificates could be traded in for precious metals. Then, in 1862, the wartime United States created greenbacks, a government-backed currency no longer tied to precious metals. Soon after, we switched back to tying money to gold, but then eventually returned to unbacked currency in 1971 with the Nixon Shock. Finally, in the modern day, fintech and crypto are dominating. Fintech utilizes fast technology and government-backed money to improve convenience for users. In 2008, cryptocurrency entered the market as well, revolutionizing currency and decentralizing it from any central authority. Across 6,000 years, as money becomes more and more abstract, one thing remains constant: money’s value relies on trust, whether in people, governments, or technology.