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The History of Money

Robertson (p.1) describes money as a big factor that brought about changes in the many

sectors of man’s life over time. From the religion to family setups, science and technology,

money has contributed to changes that affected the key sectors of man’s life. Interestingly, man

is the only being that uses money and money is a great factor that connects one man to another

man. Men meet to do business, to exchange money or eat together because of money, and this is

an indication of the importance and power of money in the world today. This paper focuses on

the history of money, the forms it has taken over the history and other aspects of money.

During the pre-historic times, when there was no money, the concept of money had

already started developing in different aspects. Such aspects included compensation for a crime

committed, as a sacrifice to the gods worshiped, as a tribute to well-respected leaders and even as

a dowry for a wife. Before the arrival of the coin, clay tablets were used to document such

important events (Robertson).

However, Scottish Philosopher, Adam Smith has a very different view of the history of

money (p. 6). The philosopher looks at the history from a trade or business perspective.

According to the philosopher, a man naturally has an urge to exchange, thus, the tendency to

track, negotiate, and exchange. The tendency also goes in line with job specialization. From time

immemorial, man recognized that not all men could be the same thing or could own everything

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at the same time. Adam Smith explains that there were those who traded with livestock, others as

blacksmiths while others were the best farmers with the best agricultural produce (Robertson). In

order to make, trade more efficient, different forms of money were used to officiate the

exchange. Since the exchange was in the form of commodities, a major challenge faced by

traders was finding who has what was needed and most importantly at an equal value. The

challenge caused trade, especially for long distance travelers to be a difficult and cumbersome

process. The situation led to the development of what Greenfield & Hugh refer to as the

‘universal equivalent’. A universal equivalent was something that everyone recognized as a

worthy equivalent for whatever goods that were being exchanged. Different universal

equivalents were used over time, including salt, silver and livestock. Note that the universal

equivalent had to be something that was non-perishable and non-divisible (Greenfield & Hugh).

In the beginning when there was no money, barter trade used to be conducted and traders

would just exchange commodities (Greenfield & Hugh p. 12). Barter trade was followed by the

use of commodity money whereby there was the use of a universal equivalent. During the

commodity money period, different touchstones were used to ascertain and determine the value

of the product and whether it was of equal measure of the amount of universal equivalent being

given. Later came the goldsmiths, who stored gold for traders and in exchange gave them a piece

of paper written the amount owed, hence the statement ‘IOU’. After the goldsmiths came the use

of convertible money. The token was metal of less value than the goods exchanged, but what was

of higher value was what was written on the metal (p. 12). Convertible token money was given at

a fixed rate of exchange. Inconvertible token money was later used and exchanged for goods that

were of a similar value. Later came fiat money in the United States of America that constituted a

US Dollar, no longer convertible into gold (p. 12).

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Ledoit and Sebastien (p. 6) explain that fiat money is money that had no intrinsic value,

however, the real value of the money was in its liquidity. Fiat money was a general mode of

exchange, and it had an added advantage since the traders never refused to take fiat money

compared to commodity money for security reasons (p. 187). When comparing fiat money with

commodity money, the transaction costs and interest rates for commodity money are higher and

have limited use. Hence, making fiat money a more popular mode of exchange in the US at the

time (Ledoit & Sebastien, p. 188). After fiat money, use of cheques was introduced. A cheque

was commonly expressed as a piece of paper on which a certain amount of fiat money was

written. The cheque acted as payment evidence of the payment of the amount written on the

paper (Greenfield & Hugh). E-money and credit cards are the latest and the most modern forms

of money in the world today.

Deirdre McCloskey also brings out another aspect of money when explaining Gresham’s

law that stated ‘Bad money drives out good.’ According to the author’s research, Gresham is not

the owner of the saying however it emerged many years before Gresham, from Sir. Thomas

Copernicus, hence sometimes the law is called Copernicus Law. The law can be explained using

the example of a two and one dollar coins. If one dollar coin contains a higher number of silver

coins than the second coin, the second coin is lighter. The coin with the higher number of silver

coins is considered the bad money and people will not use it (p. 2). The bad money will be in

circulation for as long as it is enough to buy, sell and make payments. With time, the good

money, therefore, becomes redundant and not in use anymore. McCloskey (p. 2) adds that in the

US economy, if there were overrated rubbles to be used compared to the American dollar, the

use of rubbles would be much higher compared to the use of a dollar.

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Greenfield and Hough (p.2) also explain three key functions of money. They state that the

major use of money is in measuring of value. One can accumulate wealth-using money. In

today’s world, through stock exchange one can trade money during specific times when the

value of the money has increased and in return acquire more money. Similarly, different

countries across the world have different currencies. The different currencies have different

values, hence varying amounts of wealth. For example, a one-shilling coin in Kenya does not

carry the same value as one Canadian dollar or one Indian rupee (p. 14).

Another key function of money is that over time it has evolved to become the most

important means of exchange in business. As a means of purchase and selling goods, an

individual can buy a product that has the same value with the money the seller receives in

exchange. For a buyer and seller, the value of the sold goods is always equivalent to the value of

the money given in exchange (Greenfield and Hough, p. 14). Apart from being a means of

purchase, money can be used to pay debts for goods purchased in advance. Another key function

of money is the use as a unit of account. Wealth can be compared, and the value equated to a

certain amount of money. When one is asked to explain how much wealth the person has, the

best answer is to quote an average amount of money that is worth the land and other properties

owned (Greenfield and Hough, p. 15).

Money in the American economy is equated using the dollar currency. The name dollar is

older than the dollar sign and was invented earlier during the early 17th century (Davies).

According to history, the dollar is the Anglicized version of thaler. The name thaler was used

during the 15th century to refer to coins extracted from the earth to be used as a means of

exchange. Later, when the name dollar was adopted it was used in different forms of other

currencies including Spanish pesos and Portuguese money. During that time, a number of North

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American countries were being colonized by Britain. However, due to a shortage of the pound

(British currency), the dollar was being used. After America had acquired its independence, the

country adopted the dollar currency into its economy as a means of exchange (Davies).

The dollar sign symbolizes the importance of monetary history in the American economic

history. Different authors, explain different theories of the sign, however, Ayn Rand’s theory

stands out. As simple as the sign looks, Ayn explains that the dollar sign is an abbreviation of the

name United States (US). The letter S has been retained and the letter U put on top of it without

the lower part (Davies). The sign is also considered a symbol of patriotism because it symbolizes

a free country, with a free economy and a free mind (Davies).

During the modern times, the buck is considered slang for a dollar. However, Hiskey

explains that the buck was used as a means of exchange long before the first dollar was minted.

The name, duck refer to a deer’s skin. Traders used to exchange a bottle of whiskey for five

bucks. After Europeans began moving to industrial areas and government structures were put in

place, the Coinage Act passed in 1792. From the Act, the term buck was officially made a

medium of exchange (Davies). Buck has stuck until towards the end of the nineteenth century,

when the dollar was introduced and gained more popularity.

From a long history dating back several centuries, money has evolved through various

forms and is established as one of the most precious commodities for the existence of a man. The

commodity still plays the same role it played during the prehistoric era. However, one important

question arises from the research; 'is money still evolving and changing faces?' With

technological advancements in the modern world, money seems to advance at the same pace and

hence a century from now, other forms of money will have come up. This is evident with the

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introduction of plastic money, which indicates that forms of money are changing with the

advancement of technology all over the world.

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Works Cited

Davies R. ‘Origin of the word dollar’ 4

September 2008

Greenfields R. & Rock-off H. (1995) ‘Greham’s law in nineteenth century America’. Journal of

money, credit, and banking pp. 1986-1988 Print.

Hiskey, D. ‘Why a dollar is called a buck’ (2012). Today I Found, Web.

Ledoit O. & Lotz S. ‘The coexistence of commodity money and fiat money’ August 2011,

Working Paper No. 24 Print.

McCloskey D. ‘Greham’s law: History’ (2012)

Robertson, J. ‘The history of money from its origin to our time’ (2007) Print.

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