They say that the only certainties in life are death and taxes. But there is something else that has been with us since the dawn of time: change. Change is constant. Every new thing arrives on the heels of something old, making our life easier than before, theoretically at least. Likewise, has been the journey of money to date. It has travelled a long way and gone through a constant evolution since its inception. Over time, the development and use of monetary systems have had a radical impact on the development of human society and culture.

The latest chapter in the changing face of money is playing out right now in the form of Bitcoin and other cryptocurrencies.

But, in order to understand how and why we have arrived at the era of cryptocurrencies, let’s go back through the history of money and discuss the major milestones that have shaped its’ development.

The barter system

Bartering is the exchange of goods or services for other goods or services, rather than for paper money or coins. Its’ history goes back many centuries certainly to 6000 BC and perhaps before and it must have had an incredibly profound effect on the way early humans interacted and communicated at that time.

For instance, let’s say you were lucky enough, through your own ingenuity, hard work, tolerance to the risk of being killed by the food source you were hunting or just plain good fortune to have a surplus of some valuable commodity such as food, livestock or weapons. Now you would be in a position to trade or barter your excess goods for some other good (or service) that you didn’t currently possess or couldn’t get hold of. Imagine the benefit of this system to early man, allowing the development of an economy that enabled goods and services to be traded outside of the local tribe or community and ultimately across the globe as merchants and adventurers sailed the trade routes in search of wondrous new goods to bring home and trade.

Of course, there are several problems with the barter system which ultimately led to new ways to place value on goods and services. The first problem, known as the ‘Double Coincidence of Wants’, basically refers to the requirement that, if you have a cow to trade and you need a goat, you will have to find someone who wants a cow and has a spare goat – not always easy or convenient.

The second problem is the lack of divisibility. If you believe your spare cow is worth 10 pairs of shoes, what if the other party only has five pairs. Dividing the cow in half probably isn’t a good idea, not least because you then need to find someone who needs the other half of the cow (and has something you need in exchange) and you would need to execute the trade before the remaining half deteriorates.

Other problems include the fact that the barter system provides no easy or manageable way to store the excess value you have created or acquired and of course the system doesn’t provide a common measure of value, which would inevitably lead to disagreements about the value of your cow.

So a more flexible system of trade was required that enabled value to be stored more easily and securely.

Money as a Commodity

If your particular tribe or community had access to, or could create, a specific bead, shell, jewel or similar artifact you may have had the opportunity to ascribe a value to such artifacts that might be accepted by other groups (that you would want to trade with). This value might be considered valid due to usefulness, scarcity, or aesthetic appeal and the rarer the object the greater the value you can get away with ascribing. These commodities-based monies could then be traded for other things of similar value that you might need. In that sense, early monies were somewhat fungible– but only in the most basic sense. For instance, an artifact accepted as currency by one tribe might be considered worthless by another.

Over time, precious metals became the foremost commodity-based forms of payment. Various metals would have different prescribed levels of importance: copper would have its own value, as would silver and gold. These forms of currency both had an intrinsic value, as well as a market value. Meaning copper, for example, received for payment could be melted down and made into something else (which could presumably be traded later), or held onto and used for future payment for some other good or service.

Around 600 BC, metal coins were introduced whereby precious metals were stamped into a regular size with a specific value. Coins had the advantage of being far more portable, easier to store and they still carried their value with them, as did the precious metals they were derived from.

According to Herodotus, the Lydians, located in modern day Turkey, were the first people to use gold and silver coins . Used as trading devices and units of measure, metal coins ensured that the value of goods was more widely understood and accepted. It became easier to compare the cost of different items; they were easy to carry and could even be recycled. The introduction of metal coins expanded and accelerated trade and economic growth across the Mediterranean world and beyond.

As great a step up from the barter system as metal coins were, they introduced their own set of problems. Firstly, coins could be manipulated by removing some of the metal thus reducing their value. Exchange rates between gold, silver and copper coins fluctuated with supply and demand (sounds somewhat familiar!) and some cultures actually valued silver over gold flipping the valuations and causing major exchange problems. Some stability was returned at the end of the 17th century, national banks began to guarantee to exchange silver money for gold at a fixed rate – the beginnings of the gold standard.

As usual, our drive to continuously make it easier to acquire that which we need and desire moved the money game on still further with the introduction of paper money.

Paper Money

During the Tang Dynasty (618 – 907), merchants in China began to leave their heavy stashes of metal coins with a trustworthy agent, who would record how much money the merchant had on deposit on a piece of paper.  The paper, a sort of promissory note, could then be traded for goods, and the seller could go to the agent and redeem the note for the coins.  This greatly simplified the storage of value and the process of executing trade, with no need to carry around bags of heavy coins. However, these privately-produced promissory notes were still not true paper currency.

Over the next several hundred years, throughout the Song Dynasty (960 – 1279), the principles of paper money were continuously refined and, in the 1100s, the Song government of the time issued the world’s first proper, government-produced paper money.  This money was called jiaozi.

Interestingly, following the fall of the Song dynasty to the Mongols led by Kubla Khan in 1279 and a return to silver as the currency of choice during the Ming Dynasty (1368 – 1644), China did not print paper money again until the 1890s when the Qing Dynasty began producing yuan.

The idea of paper money was introduced in Europe in 1290 by travelers including Marco Polo who discussed it at length in his book, ‘The Travels of Marco Polo’. His visits to the court of Kubla Khan gave him an understanding of how paper money was being used in China at the time.

The first European banknotes were issued by private commercial banks as legal tender in the 1660s and this practice continued in Europe until the 19th century and later in America. These banknotes were a form of representative money which could be converted into gold or silver by application at the bank. Since banks issued notes far in excess of the gold and silver they kept on deposit, sudden loss of public confidence in a bank could precipitate mass redemption of banknotes and result in bankruptcy. Even fractional reserve banking isn’t new!

This practice of course led to a proliferation of different banknotes. At one time there were more than 5,000 different types of banknotes issued by various commercial banks in America. Only the notes issued by the largest, most creditworthy banks were widely accepted.

The use of banknotes issued by private commercial banks as legal tender has gradually been replaced by the issuance of bank notes authorized and controlled by national governments. In the United States, the Federal Reserve Bank was granted sole rights to issue banknotes after its establishment in 1913. Until recently, these government-authorized currencies around the world were theoretically convertible into gold or silver. Today there are no national currencies backed by gold, they are all ‘fiat’ or declared by a government to be legal tender – and accepted as such.

Why did the US abandon the gold standard?

The gold standard is a monetary system that directly links a currency’s value to that of gold. A country on the gold standard cannot increase the amount of money in circulation without also increasing its gold reserves. Because the global gold supply grows only slowly, being on the gold standard would theoretically hold government overspending and inflation in check.

Faced with mounting unemployment and spiraling deflation in the early 1930s, the U.S. government found it could do little to stimulate the economy. To deter people from cashing in deposits and depleting the gold supply, the U.S. and other governments had to keep interest rates high, but that made it too expensive for people and businesses to borrow. So in 1933, President Franklin D. Roosevelt cut the dollar’s ties with gold, allowing the government to pump money into the economy and lower interest rates.

The U.S. continued to allow foreign governments to exchange dollars for gold until 1971, when President Richard Nixon abruptly ended the practice to stop dollar-rich foreigners from sapping U.S. gold reserves.

Digital money – pre-Bitcoin

By the early 1900s, the first credit cards arrived when large hotels and department stores issued paper cards to their high-end customers. Diners Club’s claim to fame was that it was the first company to launch a general merchandise credit card in 1949, for which it charged a hefty 7-percent transaction fee.

The birth of the internet in 1990 made the concept of digital money a reality.

With the emergence of the World Wide Web, online payments became popular. European banks in 1999 began offering mobile banking services with smartphones. Then Paypal allowed its members to make digital money transfers and payments as an alternative to traditional paper methods like checks and money orders.

It’s worth noting that the idea of digital cash systems is not new by any means. The first digital money DigiCash was actually launched in 1992. This was followed by others including CyberCash (1994), E-gold (1996) and Liberty Reserve (2006).

Ultimately however, all attempts at creating digital currencies prior to Bitcoin faced a major problem – they all required a middleman who had to earn the trust of users and ensure that no monies were double spent. Ultimately these intermediaries were no different to the banking institutions required by today’s fiat currencies.

On January 3rd 2009 following the release the previous year of the white paper: Bitcoin: a peer-to-peer electronic cash system, a person or persons with the pseudonym Satoshi Nakamoto launched Bitcoin, which amongst other problems resolved the double spend problem that had crippled all previous incarnations of digital money.


Bitcoin is a computer protocol, governed by a consensus-algorithm, mathematics and game theory. At its core, Bitcoin is a global peer-to-peer network allowing for the exchange of money that is censorship resistant and deflationary by design. Bitcoin allows for the exchange of value without needing a trusted third party, government, or central bank.

The defining characteristics of Bitcoin are that it is:

  • Decentralized
  • Immutable
  • Open-Source
  • Incorruptible
  • Non-Manipulative
  • Borderless
  • Permissionless
  • Trustless
  • Fungible
  • Neutral

If we look at the brief history of money, its’ many advances have sought to solve the problems of previous incarnations, some have been successful and others less so.

Now with Bitcoin, we finally have a system of money where the transactions are recorded in an unfalsifiable ledger that relies not on the authority of banks or governments, but on the strength of a vast public computer network that anyone is free to join. The Bitcoin network has proven to be highly secure and has never been compromised. The supply of Bitcoins is ultimately fixed so that no bank or government can devalue it by printing more. As a holder of Bitcoin, you have complete control over access to your coins, no one can prevent you from accessing them, no one can take them away and the only person that can lose them, or the data related to them, is you.

All of which means that not only is Bitcoin here to stay, but look out for the day that it replaces the dollar in your pocket!

If you want to know more about Bitcoin and blockchain (underlying technology of Bitcoin) or you’d like to learn how to buy Bitcoins and other cryptocurrencies, contact us today. Welford Management offers a range of blockchain workshops, online and face to face to help you better understand the world of cryptocurrencies and how to invest in them.