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Evolution of money

  • Writer: MS Blogs
    MS Blogs
  • Jan 6
  • 9 min read

Updated: Jan 15

Money feels like a modern invention, but the idea behind it is far older than coins, banks, or governments. Long before nations existed, humans needed a way to trade with each other, first within small villages, then across growing communities, and eventually across continents. As societies became more complex, simple barter stopped working. A fisherman could not always find a baker who wanted fish, and a farmer could not divide a cow into equal pieces for trade. People needed something more practical, more universal, and more trusted.


Over thousands of years, money evolved from whatever people found useful from salt, grain, cattle, metal, to forms that were easier to store, measure, and move. 


Why Barter Was Not Enough

Early human societies relied on direct exchange, but economists and historians note that barter had structural flaws:

  • Double coincidence of wants - the classic issue of difficulty in finding an opposite party who is willing to exchange the goods you need for the goods you are offering. 

  • No common measure of value - A secondary issue further existed because of a lack of standard metrics to decide on how to value  the goods in relation to each other.

  • Difficulty storing value - one of the primary requirements of a good currency is its ability to retain value over time. The barter system had goods such as livestock or other perishables, which did not persist over time.

  • Indivisibility of many goods - The characteristics of many goods made it impossible to divide them into parts which made trade very inflexible. 


These limitations made barter impractical as trade networks expanded. Specializations like farming, pottery, metalwork meant people produced surpluses but needed a more flexible medium of exchange.


Introduction of Commodity Money

As societies expanded and direct barter became too limiting, communities began turning to objects that held widely accepted value. This shift marks the rise of commodity money, also called proto money, goods that people were willing to trade not because they needed the item itself, but because they trusted that others would accept it in future transactions.


This essentially meant that one of the biggest limitations of barter system - double coincidence of wants, was now removed, as a semi standard form of currency came into existence.


These earliest forms of money were simply items with established usefulness, scarcity, or symbolic importance. Unlike today, their value did not come from government decree, but from social consensus.


Different regions adopted different commodities:

  • Salt served as a medium of exchange in many ancient cultures, including parts of the Roman world. Before refrigeration, its importance in food preservation made it both essential and valuable, allowing it to function as a reliable form of payment. Here is a fun fact, Roman soldiers often received allowances for salt, and the Latin term salarium, linked to these provisions, eventually evolved into the modern word salary.

  • Grain and livestock functioned as money in early Mesopotamia, where centralized granaries recorded deposits and withdrawals of grains made by people on clay tablets. These receipts represented ownership of grains and were used as currency instead of the  grains themselves. The clay tablets were also used to record transactions, make loans, write receipts and track payments. This facilitated the emergence of one of the earliest forms of financial tools.


Clay Tablets of Mesopotamia

Figure 1


  • Cowrie shells became currency across Africa, South Asia, and the Pacific. Their durability and natural uniformity made them ideal for trade long before standardized coins existed.


Cowire shells

Figure 2


Commodity money solved several problems that barter could not. It offered:

  • Social acceptance — commodity money mainly functioned because of the presence of social consensus that these items would be accepted by everyone.

  • Relative durability — depending on the type of commodity that was used, it provided more durability compared to the barter system. This naturally made more durable commodities as a form of exchange compared to perishable goods. 

  • A way to store value — grain, shells, or salt could hold purchasing power over time.


But commodity money had its own limitations. Grain could rot, salt could dissolve, shells varied in rarity by region, and livestock required upkeep. It also did not solve the issue of commodities being available in abundance, which affected its ability to maintain value as a form of currency. As trade networks further extended and transactions became more frequent, societies needed money that was even more durable, divisible, transportable, difficult to counterfeit and standardized.

These pressures gradually pushed communities toward metallic money


Metallic Money and Coinage.

Metals, especially copper, silver, and gold eventually became the preferred medium of exchange because they solved many of the problems commodity money could not. Metals were more durable, they could be melted and divided, and their scarcity gave them consistent value across regions.


However, early metal money still required verification. Traders had to weigh pieces of metal and assess purity during every transaction, which was slow and prone to fraud. As long-distance trade increased, the need for a more reliable and faster system became more evident.


This led to one of the most important innovations in monetary history: coinage. Coinage fulfilled another important requirement which metallic money did not - credibility . This removed the cumbersome  need for constant testing and created a trusted, uniform medium that could circulate widely. Around the 7th century BCE, the ancient kingdom of Lydia in Anatolia began producing stamped electrum coins - pieces of metal with an official mark guaranteeing weight and purity, making it widely recognised as one of the first civilisations to introduce officially issued currency.


Coins of Lydia

Figure 3


Coinage spread quickly through the Mediterranean, Persia, India, and later Rome, transforming economic life. A stamped coin represented not just metal, but the authority behind it. This shift from raw metal to certified coin made everyday transactions simpler and large-scale trade far more efficient, laying the foundation for monetary systems that have endured until now.


Paper money and early banking structures

As global trade expanded, even metal coins became burdensome to transport in large amounts. This led merchants and goldsmiths to store precious metals and issue receipts confirming deposits. Over time, these receipts began circulating as a convenient substitute for the metal itself. The receipt, not the metal, became the medium of exchange.


In China, during the Song Dynasty (11th century), governments formalized this practice and issued the world’s earliest known state-backed paper money. This shift marked the beginning of money that represented value instead of ownership of a commodity.


Early European banking evolved similarly: goldsmiths became custodians, and their receipts, which represented ownership of gold, became widely accepted as a form of payment. These custodians held some of these deposits as reserves and started lending out the rest, laying the groundwork for fractional reserve banking, where banks hold a fraction of their deposits in reserve and lend out the rest, which allows them to create credit and expand the money supply).


The Gold Standard: Money Tied to Metal Again

By the 19th century, industrial economies needed a stable and uniform monetary system for global trade. Many countries adopted the gold standard, which meant each unit of currency could be converted into a fixed amount of gold and issuing of new currency meant central banks had to acquire more gold. But this system was different from the initial paper money system, because this did not represent ownership of a metal in the traditional sense, but had its value linked to it. This system offered:

  • Predictable exchange rates

  • Lower inflation over long periods

  • International confidence in currencies


But it also restricted economic flexibility: governments could not expand the money supply without acquiring more gold. It was also fundamentally flawed because, linking the value of currency to gold meant that the maximum value of currency of all countries was practically limited by how much gold was in circulation


By World War I, the pressures of financing large-scale conflict forced many countries to suspend gold convertibility. Attempts to return to the gold standard in the 1920s proved unstable, and the system eventually collapsed during the Great Depression.


Bretton Woods Agreement and the emergence of fiat currency

In 1944, near the end of World War II, 44 Allied nations met at the Bretton Woods Conference to rebuild the international monetary system. They designed a hybrid model:

  • The U.S. dollar was convertible to gold at a fixed rate.

  • Other countries pegged their currencies to the U.S. dollar.


This arrangement created a dollar-anchored gold system. Under Bretton Woods, the U.S. dollar was convertible into gold at a fixed rate, while other countries pegged their currencies to the dollar at fixed exchange rates, effectively making the dollar the center of the global monetary system.


As global trade expanded, the world needed more dollars to function. To supply them, the United States ran persistent fiscal and trade deficits driven by post-war reconstruction, domestic spending, and later the Vietnam War.


Over time, the volume of dollars circulating outside the U.S. far exceeded the gold reserves backing them. This meant foreign governments held growing claims on U.S. gold without a corresponding increase in gold itself. By the late 1960s, the system became unsustainable, as maintaining gold convertibility at the promised rate was no longer feasible.


Gold and dollar holdings: the gold deficit

Figure 4


In 1971, the United States suspended dollar-to-gold convertibility, formally ending Bretton Woods. This marked the beginning of the fiat money, currency with value derived from government authority rather than a physical commodity.


Under fiat systems:

  • Central banks can choose whether to be a free float or pegged to another currency.

  • Central banks can adjust money supply to manage inflation and economic cycles.

  • In free float currencies, Exchange rates float based on market forces.

  • Currency stability relies on trust in institutions, not gold reserves.


Fiat money allowed economies to respond more flexibly to recessions, financial crises, and structural changes, though it also introduced new challenges such as inflation management and the need for credible central bank policy.


Digitalization

By the late 20th century, money was no longer primarily physical. Most transactions shifted to digital records where the “money” that moves is simply data on institutional ledgers. This has given money the highest level of portability.


This transformation did not change the nature of money itself but reshaped how it moves:

  • Payment networks like debit and credit cards (Visa, Mastercard).

  • Real-time settlement systems like IMPS, RTGS

  • Platforms like UPI


Digitalization has made transactions faster, more reliable, and globally interconnected.


New alternatives

The 2008 financial crisis spurred a new alternative: Bitcoin, a decentralized digital currency that uses blockchain technology that operates without a central authority. Its design, fixed supply and transparent ledger was a direct critique of fiat money and centralized banking.


This created new categories:

  • Cryptocurrencies (Bitcoin, Ethereum)

  • Stablecoins (digital tokens pegged to fiat currencies)

  • CBDCs (central bank digital currencies), such as the digital rupee


While these new technologies have offered their own advantages like transparency, security and decentralized handling, they do come with their own set of risks and limitations like high energy consumption, scalability, complexity, volatility, and a lack of intrinsic value.


Conclusion

From barter and salt to coins, paper, fiat, and digital networks, money has constantly evolved to suit the needs of society. What began as objects with inherent value gradually became symbols backed by institutions, and today, money is largely digital, existing as data rather than something we can hold.

Each transition solved a weakness of the previous era: metals added durability, coinage added verification, paper improved portability, fiat offered flexibility, and digital systems brought speed and scale.


If history has taught us one thing, it is that nothing is constant, just like how money has constantly evolved over the past, it will continue to evolve in the future, each time accommodating a new requirement and bringing in new challenges of its own.


Now, with programmable currencies, decentralized networks, and state-backed digital money emerging all at once, we may be standing at the edge of another major shift. What comes next is still taking shape.


This leaves us with a few questions:

  • If money has become increasingly abstract over time, what might the next stage look like?

  • Will governments remain the primary issuers of money, or will private and decentralized systems compete more directly?

  • With increasingly complex technologies being integrated into money, is money losing its fundamental feature of ease of use or is it just accommodating the rising complexities of the current economy itself?


Over the course of history, the core purpose of currency has remained unchanged: to help societies store, measure, and exchange value efficiently.


References:


Disclaimer-This article is for educational and informational purposes only and should not be considered as investment advice or a recommendation to buy or sell any securities or adopt any investment strategy.  

 
 
 

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M Stories Asset Management LLP 

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