The History of Money
I’m Andy Temte and welcome to the Saturday Morning Muse! Start to your weekend with musings that are designed to improve financial literacy around the world. Today is May 17, 2025.
Last week, we talked about the concept of barter, which is a direct, immediate exchange of goods between two parties. We found that barter fails as a method of trade between parties because conditions need to be just right for trade to occur—(a) the physical goods must be present every time a trade happens, (b) many goods can’t be subdivided into smaller parts, (c) there needs to be a double coincidence of wants where I have what you want and vice versa, and (d) physical goods are seldom a store of value—especially perishable goods like bananas and avocados.
To solve these problems with the barter system and to make trade more efficient, we need to create what’s called a medium of exchange that trading partners agree to use in lieu of trading with physical goods. That medium of exchange is typically referred to as money.
Throughout history, money has taken many forms. Today, if I asked you what money is, you’d likely reach into your pocket or purse and pull out some of the physical currency that’s used in your home country. In the US, we use the US dollar. In Europe, the euro is the agreed currency. In Mexico you have the peso, and Canada uses the Canadian dollar.
But if we dial the clock back 5,000 years to 3,000 BCE, one of the first uses of money is a measurement system called the Mesopotamian shekel. As a reminder, Mesopotamia was located in what we now know as Iraq.
The Mesopotamian shekel was a unit of weight that was about as heavy as 160 grains of barley—a common grain grown in the area at the time. It’s important to note that the shekel wasn’t the money that was traded, it was used for weighing silver.
Why silver? As trade based on the barter system accelerated, the challenges that accompany barter needed to be solved. Silver and other precious/semiprecious metals became the go-to option because these substances could be easily melted down, transported, subdivided, and they did not perish or deteriorate over time. Most importantly, traders began to agree on the value of these metals to support transactions.
Using the hypothetical macroeconomy and trading environment we’ve been talking about the past two weeks between FruitLand and ProteinLand, a non-barter trade conversation might have gone something like this:
“Hello trader from ProteinLand, I don’t have anything that you want in return for those awesome beaver pelts you have, but I do have some silver that I’ll give you for your pelts. I hear the going rate is 2 shekels of silver per beaver pelt. Hey! Who’s got a shekel to use to weigh out 2 shekels weight in silver?”
Our traders would then enlist the help of a village elder who was trusted to have a shekel that hadn’t been tampered with and weighed the correct amount. The trade likely occurred in front of this third-party who would verify the quality of the pelts and the quality/purity of the silver. The third-party shekel holder—the facilitator or import-export agent as we would call them today—would have charged a small commission for providing this validation service. As you might imagine, fraud was a huge problem, so having a trusted mediator for trades would have been important to maintain trust and accountability.
The result of this transaction is that the trader from FruitLand had a few fancy new beaver pelts to take back to FruitLand and the ProteinLand trader had a new cache of silver that they used as a store of value to trade with someone else for the goods or services they really needed. The bottom line is that using silver in trade solved the problems with the barter system—both sides having physical good to trade, a coincidence of wants, the indivisibility of goods, and the lack of a store of value.
While items like sea shells were used as money in some early economies, we can think of silver, gold, and other metals as the first examples of what we call money today.
Introducing Coins
The big problems that remained in this trade-for-silver commercial environment was the reliability and quality of silver used, and the fact that a random lump of silver wasn’t a standard measure of value. A unit of account was needed to help standardize bookkeeping and eventually allow for credit agreements (where one party makes a promise to pay on a future date). Enter the stamped coin.
Between 600 and 700 BCE—aka the 7th century BCE—the Kingdom of Lydia—modern day Turkey—began stamping seals onto standardized weights of silver as a signal to increase confidence in the weight and purity of silver that was used in trade. The Lydian Lion stater was one of the first coins minted by a government entity for use in trade.
The Functions and Properties of Money
So what is money? Money is anything that acts as (a) a medium of exchange, (b) a measure of value, (c) a standard that can be used for credit or deferred payment, and (d) a store of value. Early coinage ticked each of these boxes.
Money also has the following properties. Money must be:
Durable—it has to hold up to repeated use over long periods of time
Fungible—a penny is a penny is a penny is a penny—units of money are interchangeable
Divisible—money must be able to be split into smaller units to allow for many different transaction types and sizes
Portable—it can’t be unwieldy and cumbersome to use and transport
Acceptable—whatever is called money must be accepted by the vast majority of consumers
Scarce—there has to be some limit to the money supply—we’ll talk a lot more about the supply and demand for money when we talk about inflation
The Modern Lesson
So before we part ways this week, how can we apply today’s lesson to the modern world?
I’m sure you’ve heard of Bitcoin and various cryptocurrencies. In future lessons we’ll talk about what these things are, but the question we’ll ask today is this: is Bitcoin money? The answer to this question depends on your perspective. For something to be classified as money, it needs to be acceptable to the vast majority of consumers and institutions in an economy. Said differently, we all have to agree on whatever we’re going to classify as money as a medium of exchange, measure of value, standard for deferred payment, and a store of value.
If everyone you transact with uses Bitcoin, you might call Bitcoin money. To folks like me, Bitcoin is not money because it’s very cumbersome for me to use and it’s not accepted by many of the people or businesses I transact with. During the course of these financial literacy lessons, I’m going to begin accumulating Bitcoin, so we can go on that journey together. So in Bitcoin money? The jury is still out on that question in my opinion.
So let’s leave it here for this week. Until our next financial literacy lesson…
Grace. Dignity. Compassion.
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References:
https://en.wikipedia.org/wiki/Money
