The Origin and Evolution of Money: The Story from Shells to Blockchain

Author: Utrust

Compiled by: ChainCatcher

Over the past few months, Utrust has been providing the history of money for our beloved community, hoping it reads interestingly and provides a comprehensive story of the world we live in.

Now that the series is complete, we have compiled it all into one giant article so you can easily find it and read it carefully at your leisure. It has been meticulously edited and appropriately curated.

We hope you enjoy it as much as we enjoyed writing it.

We have been trading. A common misconception is that the concepts of markets and trade are relatively new ideas that stem from civilization and large crowds. This is certainly not true; economic interactions have existed since the dawn of humanity.

However, much of our understanding of them is not accurate. There are many myths and misinformation about the origins of money and how we made it exist. Sometimes, studying the history of this most important human endeavor seems like a monumental task because

there is so much

information.

Most people are simply not interested in the competing economic debates about what constitutes reciprocal altruism.

This is why we decided to create this series. We will go through the whole shebang, from shells to blockchain, and we will do our best to make it not boring.

No, we didn't really barter. We just gave people things.

Yes, the "barter economy" was never really a thing. There is a widespread myth about the origins of economic practices that suggests that at the very beginning of our history, people primarily traded through barter. There is just no evidence to support this. Clearly, the absence of evidence is not evidence of absence. It is difficult to prove a negative, especially when we are talking about a prehistoric period with no records, no data, and no writing.

However, the historical consensus points to a communal gift system where the spoils of fishing, hunting, gathering, etc., were freely distributed among small communities. This allowed the whole group to thrive and provided protection when individuals could not contribute for some reason.

Because, of course, we kept track. We weren't that good when agriculture developed, which required something a bit more complex. Not everyone grew the same things, so not everyone needed the same things. And, more importantly, they didn't need them at the same time.

A system was needed to keep track, and then… voilà… credit emerged.

This happened 8 to 10,000 years ago, long before any form of actual currency existed. And we may have been doing this for even longer. Credit is older than money. In this regard, debt is too. Artifacts like the Ishango bone, which may be 25,000 years old, suggest that some form of bookkeeping existed as far back as the Paleolithic era.

That came later.

And, without a central controlling entity, it developed in many different forms (I think fans of digital currency will love this part). Before we start telling this story, let’s look at what a few things mean:

Okay, got it? Which one is cryptocurrency? Aha, the beauty is here. We will get to it, I promise.

The oldest examples we can fairly consider as money come from Mesopotamia (around 3000 BC). Barley was the staple grain of ancient Mesopotamia and was highly valuable. Farmers with a lot of barley could be considered wealthy. But they couldn't carry barley around town to barter with every other merchant, could they?

So this is what they came up with: they took their barley to the most trusted institution of the time, the temple, for safekeeping. The scribes there marked the amount of barley they received on clay tablets and then gave the farmers a clay token to represent each shekel of barley (the word is a Semitic verb root meaning "to weigh").

And thus, representative money was born.

However, this was not the only way societies initially acquired money. There are examples of commodity money from Africa to India and Asia, particularly shells, used for trading between communities where mediators (like temples) were impractical. Cattle and salt were also used, but metals were the most popular, especially silver and gold.

Why?

There are many theories, but the prevailing view is that metals are durable, portable, and relatively easy to divide. Egypt used gold, Babylon preferred silver, and bronze was widely used in China.

This is when things start to get a bit complicated. Once you have actual funds, you start needing rules to manage how it is handled. In the next chapter, we will briefly touch on how the Code of Hammurabi laid the groundwork for later fiat currencies.

(We will also introduce you to coins. We know you all love coins.)

I know you all can't wait to learn about fiat currencies, banks, and stonks, but before we get into those, we need to understand why coins made one form of currency more popular than others.

Because you do remember representative money and commodity money, right? We discussed them in the previous chapter. So why did people mostly stop using paper slips backed by assets (yes, we will get back to this) and shells, and switch to marked metal pieces?

Understanding this timing is crucial. We previously explained how debt appeared before money, and complex economies developed in very similar ways before any standardized currency emerged.

Representative money is a form of currency that is easier to regulate, so large ancient economies like Babylon (from 1760 BC) or Mesopotamia (as early as 3300 BC) tended to prefer it and began regulating economic activities very early on.

So what’s the problem?

The kind of proof that temples or local authorities used to guarantee the safe storage of collateral was only valid within the region. If you intended to trade with anyone outside that area, there was no way to do so. People from elsewhere neither trusted your local authorities nor had a way to redeem the actual goods you stored at home.

So if you wanted to trade with people from other places, what you wanted was something they would want regardless of whether they could exchange it for what it represented. This brings us back to commodity money, like shells or precious metals.

Precious metals were especially favored. They were easy to weigh, relatively easy to divide, you could mark them to set amounts, and they were almost infinitely durable.

But there was a reason they didn't initially catch on. They couldn't be eaten. You couldn't grow anything with them. Unless you were wealthy enough to use them as jewelry or for further business, they were really of no use to you. Worse still, different people valued them differently, and there was no authority to ensure their price… you had no guarantees.

This is why you find very ancient metal currencies (like those from the Shang Dynasty), but no real monetary systems. As early as 1000 BC, you could find metal currencies in China, India, and elsewhere.

There are many infant prototype coins. There is reliable archaeological evidence that modern China, India, and other countries along the Aegean developed their own versions of round metal disks as currency.

So what made Lydian coins different?

History can be unfair. Lydia was an Iron Age kingdom located in Asia Minor (modern Turkey).

You would think that inventing standardized currency would make you famous. People get famous for being good at TikTok, yet…

Very few remember the Lydians.

They created the first stamped silver and gold coins, and not only that: they were among the first to open retail shops at permanent locations. Now, we could bore you with details about Lydian achievements in numismatics (they might have minted coins as early as 700 BC!), but this is why their idea of coins was so revolutionary:

By stamping recognizable shapes on metal (they started with animal images but quickly began using human features), you could determine the value of each minted coin without weighing or measuring it. This would effectively create a monetary system.

Within a century of the Lydian invention, standardized coins were being used across the Greek mainland, by the Etruscans, and in the Persian Empire (which would assimilate Lydia, wow).

From that moment on, all these nations would expand significantly and begin extensive trade, and the Lydian invention would become immortal. To this day, we still use stamped round metal circles as currency.

Have you ever wondered why we used soft metals like silver and gold to make money instead of hard metals like steel? You would think we would need more durable and resilient materials, right? Just like we do now.

That's because assay, the development of assay, is another key moment in making money.

Assaying is a simple process through which you can analyze the chemical composition of something to understand the presence of specific elements. Sounds complicated, right? Well, sometimes it is. For certain assessments, you need a modern laboratory.

But don’t figure out if you are in front of soft metals. It is well known that soft metals (like gold and silver) leave marks on a sufficiently abrasive touchstone. Once people figured this out, they realized how easy it was to verify the quality of metal ingots, jewelry, and of course, coins.

So which came first, the gold standard or fiat currency?

Are you talking about the gold standard?

Really?

Aha, wrong.

Well, now that we have put you in your place, welcome to Chapter Three of Utrust's history of money.

But first, let’s do this: what is fiat currency?

Fiat is actually a Latin word. It is a verb that means to command or to order. It means "let it be so" or "let it be done." This should be our first clue in understanding what fiat currency means. It is currency that functions as money because someone decided it would do so.

Who is that someone? The government.

The power of the government ensures that all trade within its jurisdiction must accept fiat currency.

Because the main characteristic of fiat currency is that it has no intrinsic value or use value.

If you remember, we previously talked about three types of money: representative money, commodity money, and standardized coins. That’s all from the first chapter.

Fiat is different from all of these because it is not tied to anything of value, nor is it a valuable object in itself.

So what about those banknotes in China?

Before this situation occurred, you could talk about paper money or similar paper-based currencies (by the way, coins have been the rule for centuries), but you could not talk about fiat currency. Because the government did not guarantee its value, paper money before the 11th century was more likely to be representative money linked to copper coins. Clearly, metal coins were heavy. This meant that some people, those who had enough of them, did not want to carry them on business trips. They would store them with a trusted party and receive a voucher in return. This voucher could be redeemed.

This lasted for about 400 years. Paper-based vouchers circulated in China alongside copper coins. You could talk about paper money, but not fiat currency.

Then the government realized this was a great way to supplement its treasury.

The government began issuing its own paper vouchers in exchange for people's coins, ensuring that anyone using them could redeem the vouchers for coins at any time.

But wait.

Doesn’t this make those notes represent currency, rather than fiat currency?

This is debatable.

In theory, the vouchers could be exchanged for coins (or even other materials like silk), but in practice, this was not allowed. By the time the Yuan Dynasty appeared (1271-1368), these transactions were completely prohibited, and paper money became the norm. The value of paper money was guaranteed by the authority of the government, not by any actual valuable material reserves.

To be fair, the amount of paper money in circulation quickly exceeded the reserves of coins.

Were promissory notes used during the Middle Ages and beyond? Certainly.

But these were more akin to what we now think of as bank checks, rather than true paper money. By the mid-13th century, the Chinese were using millions of different denominations of banknotes. It would be about 400 years later before the British began doing the same in the late 17th century, and Europe would see something similar.

Why did they do this?

Ah, colonialism.

Between the 15th and 16th centuries, the Spaniards (and the Portuguese, let’s not kid ourselves) were rapidly mining precious metals. It is estimated that the influx of silver doubled between 1470 and 1520 and increased even more in the 1520s. The increase in the money supply led to soaring prices. There were simply too many people with too much money, but not enough things to buy.

This caused people and governments to reassess the value of money. People began to realize that if the value of gold and silver could fluctuate so greatly, then perhaps it wasn't that important after all.

Modern paper money acknowledges that the value of currency is determined by its use, which means some form of social and legal consensus.

However, the British were very cautious about completely decoupling paper money from gold, as at the time, paper money was still seen as a form of value guarantee. This means we still couldn't really talk about fiat currency.

What the Western world was preparing for was something very different: the gold standard.

Let’s talk about how the gold standard collapsed! Fun!

We pick up where we left off in the last chapter, about paper money. Paper money was a necessary first step toward the gold bullion standard. Because, yes, there were several.

The gold standard, if we take it literally, has existed as long as there have been gold coins. They have always been the standard in circulation.

This is why it is important to make this distinction. The idea that banks, i.e., national banks, would ensure that all paper money in circulation could be exchanged for gold is a relatively recent development. And politically, it is more significant.

This meant that states (through their national banks) had to accumulate enough gold to cover all the currency in circulation. The landmark legislation that established this standard was in Britain, passed by Parliament in 1844. It was called the Bank Charter Act, which effectively made the Bank of England the only bank able to issue paper money, which would replace the gold pound as fiat currency. Before this, any bank could issue paper money. Businesses could choose to accept it or not. The fiat currency was gold coins.

Not anymore.

There was a silver standard. There was a bimetallic standard that included both gold coins and silver coins as fiat currency (by the way, this was the case in the U.S. before the Civil War).

However, most countries in the world had a gold exchange standard. This meant that their currency value was not backed by their own gold reserves, but rather (usually) by the dollar or pound.

Having a gold standard and strictly controlling how much money the government could print would have some positive effects. On one hand, it controlled inflation by preventing the government from solving problems by throwing money at them. It also provided a degree of certainty for international trade, as it prevented price fluctuations.

However, it did have a huge downside.

That is deflation.

Essentially, what you are doing with the gold standard is limiting the amount of available funds.

When the economy is booming (see the roaring twenties), this is not a big deal. Money is circulating, most people don’t care about gold, and the government can easily buy it. This means the amount of currency in circulation is steadily increasing, the government is increasing its reserves, and everyone is happy.

The problem is when a crisis occurs. Like, say… a war?

Imagine what happens when the government unexpectedly spends a large amount of money (like a war, a great war. A world war. Like 1915-18). If it cannot deplete its reserves, the government will never be able to pay for the war, which means abandoning the standard. That is the only choice.

This is what Britain and many other European countries did.

So what happens if you try to return to the gold standard and fixed gold prices? Like Churchill did during the Great Depression in 1925?

Well, as the 1920s progressed, these European countries' economic growth slowed because governments struggled to inject funds into the economy. This meant they had difficulty repaying debts. With low reserves, governments would have to mine more gold to have more currency in circulation.

That was not possible.

Thus, most countries began struggling to repay debts. Banks started to fail. The U.S. economy began to see the results. Fearful people began hoarding gold, which made it difficult for the government to maintain its reserves.

This led to very slow growth because money was no longer circulating. This meant wages stagnated. This meant that if companies wanted to continue selling, they needed to lower prices. Lower prices meant less profit. Reduced profits meant people lost jobs. Higher unemployment meant slower growth.

I think you know where we are going with this.

There are many reasons the Great Depression became a behemoth, but the British and American governments' return to the gold standard was undoubtedly one of them. When the gold standard was abolished in the 1930s, it never came back.

Money without any backing. Its value is entirely determined by the market and government guarantees. No gold (or grain).

Isn't that nice?

Can you imagine what computers could do?

This is the final chapter of our history of money series, and we will discuss drumroll please

blockchain.

But not just that. First, we need to understand how money entered the internet.

Once the gold standard fell, we could finally talk about true fiat currency. These are unbound currencies. They are money with no intrinsic value and no use value. It has value for two reasons:

Once this point is reached, the transition from paper money to plastic money to electronic money happens very quickly. In terms of currency and its characteristics as a medium of exchange, there is really not much difference when you pay with paper money, debit cards, or apps on your phone, whether it is dollars or euros.

It’s all the same dollars or euros.

The only thing that changes is the material.

Checks actually appeared before paper money (we have studied those), but since the decline of the gold standard, governments and banks have been very eager to introduce new, more practical ways to use currency for us. Here’s a quick timeline:

1938 --- The early predecessor of credit cards, Charga-Card, is introduced.

1958 --- Bank of America launches the first successful modern credit card, BankAmericard.

1967 --- The first ATM is established on a street in Enfield, London.

1997 --- Sumitomo Bank launches the first online banking service.

2000 --- Electronic bill payment becomes commonplace.

As we can see, money is evolving alongside technology. Once a new way of processing data and information can be used, funds begin to flow. With no gold standard, the government also has no need to truly ensure that all this electronic currency will convert to physical currency… who cares?

This effectively allows governments to inject funds into the economy whenever they think it is beneficial (of course, they are not always right).

In fact, a very small portion of the money currently in circulation can be attributed to physical payments. As of 2010, of the $88.534 trillion in broad money supply in the U.S., only $9.157 trillion (about 10%) actually existed. In any form, whether coins or paper bills.

So what happens when technology surpasses money?

The moment we have all been waiting for!

The increasing digitization of currency always leads to chaos. Since the 1980s, people have been trying to create some form of digital currency or another. As far as we know, the first real attempt was David Chaum's scientific paper. He called it blind signatures for untraceable payments.

This happened around the same time as the development of the first electronic point-of-sale systems, so you can see this has been going on for a long time. Much earlier than Satoshi Nakamoto.

Satoshi Nakamoto is the most famous name in the Bitcoin space, although no one really knows who they are.

We all know the story, but here’s a quick recap: in August 2008, the domain bitcoin.org was registered.

In October of the same year, these sentences were published for the first time:

"A pure peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution."

This is one of the most famous white papers ever, Bitcoin: A Peer-to-Peer Electronic Cash System, authored by Satoshi Nakamoto. What made Bitcoin revolutionary was not just the technology (which we will detail later), but the ideology.

Let’s recap. What did Bitcoin do that was so different from its predecessors? Why did it succeed where others failed?

Let’s look at DigiCash.

DigiCash was a company founded by American David Chaum, whose flagship product (of the same name) already had many features of today’s digital currency. People also liked it for many of the same reasons. It allowed for security (in the form of cryptography). It allowed for privacy (payments could not be traced by issuing banks, governments, or third parties). It avoided the high fees of small payments, which is one of the main drawbacks of credit cards.

Many considered it a truly great product, technically perfect as well.

So what happened?

This was the dawn of e-commerce in the 1990s. People still hadn’t figured out how to make it work.

DigiCash could not decentralize its processes. As its user base grew, and several banks actually adopted the technology (Deutsche Bank was one of them!), the company could not survive the internal tensions and scale accordingly. It eventually went bankrupt, and credit cards won the e-commerce war.

So what about HashCash?

HashCash was indeed unrelated to money (although people saw its potential early on). It was a proof-of-work system designed to prevent people from sending spam. Spam was a bigger problem than we realize now. Any service you use today likely has very effective filters. In 2002, that was not the case.

So Adam Back (some believe he is Satoshi Nakamoto) designed a proof-of-work system that would force email senders to perform "moderately difficult but not tricky functions" before sending anything. This was not a big deal for someone sending ordinary emails, but it would be a huge demand for spammers who relied on sending thousands of emails at once.

The system Back proposed would allow for simple and computationally efficient verification from the recipient's side, making the world a better place.

In fact, the idea never really took root, and other methods of filtering spam ultimately prevailed. However, people immediately began speculating about other uses for this specific type of hash-based proof of work.

Blockchain is the system that emerged connecting all these previously unsuccessful efforts. It inherits the security measures and privacy concerns of DigiCash, utilizes the hash-based proof of work principles of HashCash to guarantee the authenticity of each block, while also mimicking many characteristics of fiat currency: portability, scarcity, durability, fungibility, divisibility, and recognizability.

This would change the world.

By bypassing traditional banking systems and governments, Bitcoin and other blockchain-based digital currencies have taken money out of the hands of political decision-makers and made its value entirely dependent on adoption and use.

With the emergence of other blockchain-based technologies following Bitcoin, the potential of these currencies has exploded. Stablecoins, smart contracts, NFTs. The use cases for this technology are just beginning to become apparent.

Of course, there are concerns. The volatility of energy consumption and its environmental impact needs to provide proof of work, which is the main one. Not everyone is immediately ready to embrace a system without regulators and authorities to prevent misconduct.

But adoption is happening.

At Utrust, we are excited to say we have provided some stepping stones in this process. We are creating a payment system that allows merchants to easily, securely, and seamlessly accept payments in these currencies. Because we understand that these currencies are indeed the future of a more transparent and secure world economy.

That’s the reason behind us.

Now, we build.