History of money

Thousands of years ago, people in Western Europe paid for things with small stone axes. And in Africa, the shells of sea snails called cowries were exchanged for goods. In fact, many different objects are exchanged for goods and services over the ages, from strings of beads, to animal skins, to lumps of gold and silver that are eventually flattened into coins. What gives these very different objects value? What makes them work as a medium of exchange, as money?

Some early forms of money have value because they are rare and precious, like gold and silver, or because they are useful, like animal skins. This kind of money is called commodity money. Over time, people find commodity money bulky and inconvenient to carry around. In the 900s, merchants in China begin to hand over their gold to the government. In its place, they are given a paper certificate that says how much the gold they deposited is worth.

The certificate can be used to pay for goods. And anyone with a certificate can take it to the government to have it changed back to gold. The certificate represents the gold. This is representative money. In the 1500s, this form of money reaches Europe.

People gradually grow to trust the paper certificates as much as the gold until, eventually, the gold isn’t even needed... In the 1900s, governments around the world declare that the paper certificates used in their countries are an acceptable form of money by themselves. They no longer need to be backed by gold or any other valuable item. These paper certificates, or bank notes, are fiat money. Fiat money is not naturally valuable, like gold or silver, and it does not represent an asset held somewhere else.

It has value only because the government says it does, and because the people who use it as a medium of exchange agree it has value. Today, all major economies around the world use fiat money. But in some places, it is being overtaken by a new form... When people pay with a card or an app at a store or send money over the internet they are using electronic money. Electronic money exists only in a banking computer system, but it is backed by fiat money; it can be exchanged for bills and coins at a bank.

Electronic money is convenient because it doesn’t require people to carry bills and coins. Nor does it require a seller and a buyer to be in the same place. As technology develops and more and more trade takes place online, electronic money could become the norm and bills and coins may one day disappear altogether.