Over millennia money has taken a plethora of forms, emerging from primitive exchanges of minerals, and culminating in the digital abstraction we use today.
The evolution of currency can largely be divided into three phases. These phases may not have occurred in any particular chronological order, as some civilizations developed faster than others, allowing for concurrent use of different currencies across the world.
Tools, Salt and Sea Shells
The most primitive phase, could be defined as the periods with the use of a variety of scarce objects and minerals as currency (which sometimes had intrinsic value, in addition to functional use). The following are a few examples.
Weapons and tools of stone to survive in the wilderness were among the first inventions of man. Since they had value, they were commonly used as a medium of exchange in ancient times.
This practice is known to have gradually evolved, by 1100 B.C. into a system where replicas of tools were exchanged in place of the tools themselves. Thus the practice of abstracting objects of value in order to use them for exchange was born, setting the foundation for the development of future coin based currency.
The story of salt as a store of value spans centuries in time, and continents in space. Salt was not only a commonplace inclusion in human diet, but additionally, was a vital means of food preservation, by as early as 500 A.D. This gave it intrinsic value.
Further, salt extraction was an arduous process, resulting in its scarcity. Many early civilizations on both sides of the Mediterranean and Aegean seas, effectively exploited salt for these characteristics. In the first few centuries A.D. the Roman empire is known to have used salt in addition to their coin currencies, for economic activity, as an article on the online Time magazine explains:
A soldier’s pay—consisting in part of salt—came to be known as solarium argentum, from which we derive the word salary
Between the 16th and 17th centuries there is evidence for common use of Cowry shells as currency across all of the continents. They mostly existed in concurrence with other currencies within a particular country and were used as a result of revolution or strife. However, their use was short lived as they were disproportionately vulnerable to inflation due to their near abundant natural occurrence.
Precious Metal Phase
The next phase would be the adoption of rare metals as currency, through various denominations of coins. The first use of coin currencies dates back to the gold coins minted in Lydia in 600 B.C. Lydia experienced a ‘golden age’ of growth and expansion following the adoption of coin currency.
At the same time, the Roman empire is known to have used several denominations of coins, based on gold and silver, across the first few centuries A.D. These include the gold Solidus, and the silver Denarius, which also served as the denomination basis for early British money: pounds, shillings and pennies.
Precious metal coins had an appeal across many civilizations because of their deflationary nature arising from scarcity, intrinsic value, and divisibility. The divisibility factor was enhanced by many civilizations through the practice of ‘debasement,’ which involved minting coins with impurities.
Early Gold Money
The final phase which predated fiat currency would be the evolution of bank-notes which often acted as receipts for precious metals stored in banks. As trade across nations and states evolved, and individuals began to amass wealth, the emergence of banks began to change the monetary landscape. Banks would issue a note, signed by their cashier, certifying the ownership of a particular amount of gold, and this note could be exchanged for goods and services, since at any time, it could be traded over the counter for gold.
This was the stepping stone to ‘gold-backed currency,’ which gradually morphed into the floating fiat currency system (no peg) we have today.