The History of Money
A Story of Humanity
By David McWilliams
Category: Money & Investments | Reading Duration: 20 min | Rating: 4.2/5 (61 ratings)
About the Book
The History of Money (2024) takes us on a tour through time, from the earliest forms of currency to the introduction of bitcoin. It’s a story of booming trade, powerful empires and devastating financial busts. It explains how money has fueled enormous progress and why it remains a fragile system that struggles to benefit all people equally.
Who Should Read This?
- History buffs interested in fresh perspectives on old stories
- Anyone interested in global economics
- Curious folks who like big-picture tales of how the world works
What’s in it for me? Trace the evolution of a powerful yet volatile invention – money.
Money has always been more than coins, notes, or numbers on a screen – it’s a social invention that humans created to solve problems and organise life on a larger scale. Whether its ancient marketplaces or modern digital networks, every major leap in human development has been tied to a shift in how we use money, trade, and coordinate with one another. But at its heart, money is a concept that requires trust and faith in currency. Over the years, this faith has ebbed and flowed.
When people believe in a currency and its underpinnings, great things can happen. On the other hand, when resources dwindle and nations overreach, that faith can vanish and make a currency worth less than the paper it’s printed on. When that happens, entire empires crumble. This is the story of money. It’s a tale that continues to evolve, and one that just might teach us a thing or two about how we could prevent the next big bust. So, let’s roll back the clock and see how it all started.
Chapter 1: From bone carvings to lines of credit
To witness the dawn of money, we need to travel back in time to the Congo Basin of Africa in around 18,000 BCE. This is the date of the Ishango Bone, which contains carved notches that suggest a rudimentary form of bookkeeping. As wild as it may sound, the abstract concepts of value and trade may predate settled societies. But money as we more or less know it today – in the form of currency – really took off in Mesopotamia, around 3500 BCE, in the urban settlements of Sumer.
This is where the shekel, the earliest known form of currency, was born. And since the region was fertile farming land, the currency was tied to grain, with one shekel being equal to a bushel of barley. Of course, with money came debt and interest. One of the first recorded names in history is a Mesopotamian man named Kushim. He’s recorded as having to pay back a barley loan at an astounding 33. 33 percent annual interest.
This pivotal innovation, of a rate of interest, turned money into a commodity with its own price. It linked a civilization’s present economic reality to an imagined future. This is important because it shows us that, even at this early stage, money was abstract. It was based on contracts, weights, and meticulous bookkeeping. In fact, it may be the very first thing humanity bothered to write about. Then, somewhere around 1000 to 600 BCE, money got physical thanks to the Lydians.
The Lydians were a civilization in what is now Türkiye, and with the invention of coins they revolutionized commerce. More than just physical money, these coins shifted the economy away from being a top-down central control affair and turned it into a flexible, bottom-up system that was driven by trade rather than a central authority. This idea of a token representing universal value allowed for social mobility and a more complex world to take shape. The Greeks, always ready to embrace a logical system, went all in on coins with their silver tetradrachm – featuring the goddess Athena and her owl. The Greek currency went on to become the most widely minted coin of the ancient world for over 700 years, fueling the bustling democracy of Athens. The Romans built on these foundations, most notably with the introduction of credit.
The power of credit allowed the empire to turn its conquests into vast financial streams, with people across society becoming shareholders in the empire’s expansion. But inevitably, this led to the world’s first credit crisis under Emperor Tiberius. As the empire expanded beyond its supply of precious metals, hyperinflation ensued, which in turn caused the collapse of Roman money and, one could argue, the Western empire itself.
Chapter 2: Europe carries the zero and escapes the Dark Ages
With the collapse of the Western Roman Empire, much of Europe was plunged into the Dark Ages. The value of Roman coins had been thoroughly debased, and the once flourishing trade routes dwindled. So, the region stretching from Germany to Scandinavia and Britain reverted to a clumsy barter and feudal system. Without the engine of money and the connectivity of trade, intellectual and social progress stalled.
Knowledge was lost, and communities became isolated. It was a step backwards to a world dominated by the twin powers of the lord and the monastery – an economy that was based on extracting tithes and rents from a peasant population that was barely surviving. Fortunately, technological innovation saved the day. The heavy metal plow, which came into existence around 1000 CE, greatly increased agricultural productivity. This breakthrough, which made it possible to plow fields with less time and effort, generated massive food surpluses, while at the same time liberating farmers and paving the way for urbanization. As luck would have it, the new plow coincided with the discovery of massive silver deposits in Germany, which led to the reintroduction of coinage, namely the German pfennig.
With money back in circulation, new urban and trade centers emerged, and the region was back to being an economic powerhouse. The demand for plows helped ignite a flourishing class of manufacturers, artisans and labor guilds, creating the bedrock for a new economic identity. With trade routes picking back up, Sicily became an unlikely hub and cultural melting pot. There, Greek Christian Byzantines, Arab Muslims and Jewish businessmen rubbed shoulders, and traded goods and ideas. This led to the wider adoption of Hindu-Arabic numerals, including the crucial concept of zero. Christians had long rejected the idea of zero, as it represented a so-called philosophical void.
But embracing zero was an essential step that enabled large numbers, fractions, and abstract financial calculations. Merchants around Europe would soon be using algebra to calculate interest rates, and once again the economy would shift from being a top-down system to a more horizontal affair. This new financial literacy fueled the rise of the Italian city-states, most notably Florence. Governed by merchant guilds, Florence minted the pure gold florin in 1252. This coin became the era’s reserve currency, giving Florence “soft power” and immense wealth. From here, a second major innovation emerged: banking.
This included the development of merchant lending, double-entry bookkeeping and the bill of exchange. But it also included fractional reserve banking, which was more or less the practice of creating money out of thin air. This pivotal moment broke the link between the state’s mint and the money supply, shifting power from the king to the merchant and propelling Europe into the Renaissance.
Chapter 3: Paper promises and revolutionary speculation
At the start of the seventeenth century, money started to take on a new form: paper. This idea caught people’s attention when the Dutch Wisselbank began the transition. With Holland being a small country with no natural resources, Dutch Wisselbank’s paper money wasn’t anchored by silver or gold, but by the credibility of the state. This trust and optimism, rooted in Amsterdam’s position as a trade hub, was enough to turn Holland into the wealthiest state in Europe, and the envy of Britain and Russia.
The Bank of England would soon follow suit. Of course, optimism can lead to dangerous bubbles like the infamous tulipmania incident that began in 1636. It was a disastrous frenzy of speculative buying that resulted in flower bulbs being valued more than houses. But Holland’s system proved strong enough to quickly rebound. Around the same time, France was also experiencing some wild ups and downs. This was due in part to economic innovations supplied by an unlikely source: John Law.
Law was a prodigious Scottish math whiz, as well as an inveterate gambler, who fled England to escape murder charges. When he landed in France at the start of the 1700s, he got himself installed as the Controller-General of Finances and set about reducing the nation’s debt. Law essentially launched a test run for fiat money, where currency needn’t be backed by any real asset or commodity at all. Rather, in Law’s vision, it could be tied to shares in a separate company. In this case, it was the Mississippi Company, which held trading rights over French Louisiana in the Americas. This was a debt-for-equity swap built on the speculative promise of the New World and it ended up about as well as tulipmania.
For a minute, the frenzy revitalized the economy, but when the bubble popped, fortunes were wiped out, and France was plunged into a financial chaos that paved the way for the French Revolution. Despite being on the other side of the Atlantic, Alexander Hamilton learned from France’s mistakes that had led to its civil war. As the first US Treasury Secretary, he issued the Coinage Act of 1792, making the US dollar the country’s legal tender and tying it to a universally trusted currency: the Spanish silver dollar. But more than that, he established a central federal authority, absorbed all state debt into a new federal debt, and established a sinking fund – effectively acting as the world’s first modern central banker and lender of last resort. His vision for a capitalist republic, backed by a strong, stable currency, laid the financial architecture for the US to become an economic superpower.
Chapter 4: Evolution, exploitation, and weaponization
In the nineteenth century, when Charles Darwin read Thomas Malthus’s book, An Essay on the Principle of Population, it was the ah-ha moment that allowed him to formulate his own theory of natural selection. This, in turn, proved to be an apt way to describe the modern economy. The marketplace, like nature, is unpredictable and complex. Ideas and companies enter, and those that don’t adapt invariably die.
It’s survival of the fittest. Adapting is what the world’s powers were going to need to do, as their commitment to the gold standard was becoming increasingly unsustainable. This system, tying global money supply to finite resources, like gold, was inherently deflationary. And at the end of the nineteenth century, clinging to unsustainable sources of wealth reached its tipping point. This is perhaps best represented by the commercialization of rubber. When John Boyd Dunlop invented the pneumatic rubber tire around 1887, the Anglo-Belgian India Rubber and Exploration Company descended upon the rubber trees in Africa’s Congo Basin, and set upon the local workforce with ruthless violence and exploitation.
These kinds of companies were publicly traded, funneling vast amounts of European money into colonial ventures, but they were also committing terrible atrocities. The Belgian Congo savagery just happened to be the one that got exposed, made headlines, and finally put colonialism on trial. In many ways, World War I was the last gasp of the colonialist powers, fighting over the world’s limited resources. Germany overestimated its power. It funded its war effort with public investments, and German citizens were sure that they’d prevail until the very moment it was declared that Germany had lost. They were blindsided when the new Weimar Republic was suddenly saddled with impossible reparation debts and hyperinflation.
This shock led to a social and political chaos that was exploited by Adolf Hitler and nationalists who blamed this outcome on the Raffke, or money grabbers. This included foreign and Jewish businessmen, even though plenty of Germans were part of the speculation market that was making money off the troubled currency. Hitler and the Nazi party rose to power with an understanding of how to undermine a society by weaponizing money.
Chapter 5: The delicate balance of the fiat system
The final shift in the history of money happened after World War II, when much of the world finally dropped the gold standard and moved to fiat money. Rather than finite resources, money was now backed by the credibility and promise of the issuing state and its tax revenue. For the US, the move was finalized in the early 1970s, when President Richard Nixon needed to fund the Vietnam War. The global economy was now unshackled, and in response it experienced its boldest expansion ever.
Fiat money caused the average annual global growth rate to double. Of course, this approach isn’t without its vulnerabilities. For example, there’s the dual nature of the modern financial system. There’s currency, which is the physical cash and central bank reserves; and then there’s finance, which is the credit created by commercial banks. Today, finance – primarily through loans – constitutes about 90 percent of the money supply. So, when a commercial bank issues a mortgage, it’s essentially creating new money out of nothing.
This leads to a delicate balance, where commercial banks, who are driven by profit and incentives, create money in response to market demand; while the central bank can only attempt to influence the price of that money through interest rates. In the US, the Federal Reserve’s ultimate lack of control is most exposed by the vast, unregulated Eurodollar market, where trillions of dollars are created offshore, outside the state’s control. This system of credit creation is inherently prone to boom-bust cycles, driven by the volatility of human psychology. We saw it play out during the 2008 housing market crash. During a boom, low interest rates and leverage inflate asset prices, creating a frenzy of activity. When the inevitable crash arrives, leverage amplifies the destruction, wiping out fortunes and causing what’s called a balance sheet recession.
In 2008, the central bank’s response was known as quantitative easing, which has the disproportionate effect of helping wealthy people and their investments while hurting others. The result has been more inequality, more distrust in financial institutions, and more people being drawn toward the angry, divisive rhetoric of populist leaders. This new mistrust has brought us cryptocurrency. Cryptos like Bitcoin are a form of private money. But it’s also a fixed supply, primarily benefitting people who are already rich, and is subject to extreme price volatility. All of this renders it unusable as a functional currency.
Unlike other innovations, it doesn’t present a real solution to a real problem. A more organic innovation is M-Pesa. This mobile phone-based system, which debuted in Africa, allows people to use and exchange airtime credit as a valid currency. M-Pesa solved a real problem of banking access for millions of marginalized people, embodying the true spirit of money’s evolution. Above all else, money is a social technology. It’s functional public money, not cryptocurrency’s private money, that has proven to be the most potent tool for human progress and collective organization over the past five millennia.
Final summary
In this Blink to The History of Money by David McWilliams, you’ve learned that money has been – and remains – a powerful tool at the center of human progress. Currency has evolved from ancient Mesopotamia, where it was tied to bushels of barley, to fiat money that doesn’t rely on finite resources, like gold. Every step of money’s evolution has shown that it’s constantly adapting, leading to new developments like cryptocurrency and mobile-based money like M-Pesa. However, useful developments must be based on public money, as this is the force that facilitates trade and innovation, and supports the ideas that will take us into the future.
Okay, that’s it for this Blink. We hope you enjoyed it. If you can, please take the time to leave us a rating – we always appreciate your feedback. See you in the next Blink.
About the Author
David McWilliams is an Irish economist, writer, and broadcaster from Dublin, known for making big economic ideas easy to grasp. He’s the author of several bestsellers, as well as the host of a popular economics podcast, called The David McWilliams Podcast. He’s also the co-founder of the Dalkey Book Festival and the Kilkenomics economics-and-comedy festival, blending serious analysis with a healthy dose of humor.