From Bartering to Bitcoin: The Road to Digital Currency
What is money? Everybody knows the answer. It’s the thing you earn by working, make by selling, grow by investing, and spend on the essentials and pleasures of life. But if you think for a moment longer, you realize that what you’re talking about is not what money is but what money does. Our modern conception of money may start with coins and banknotes, but we have to expand it to include the wealth in our bank accounts, which leads us to think about checks, credit, and debit cards. And these days, when we see bitcoin accepted as currency, where does that take our understanding of money? Once our local store starts to accept crypto payments, will we feel that money has evolved into something entirely new? Or is this simply an old idea dressed in new digital clothes?
Stripped down to its essential being, money is anything of fixed and verifiable value that can be exchanged for goods and services or surrendered in payment of debts. It’s arguable that as soon as the earliest humans invented the concept of possession, they needed some mechanism for transferring possession from one person to another. That’s money. But how did we get from the primitive exchange of value represented by bartering - a basket of fruit for a leg of lamb, a horse for a cow - to the sophisticated financial systems of today whereby billions of dollars can cross the world at the touch of a button? It’s a long and almost certainly endless journey.
The Age of Barter
Although the practice must have existed for many thousands of years, when humans were hunter-gatherers before the invention of agriculture, the first records of formal barter systems are from Egypt in about 9,000 BC. Bartering most frequently occurred between farmers who worked the land and those who raised livestock. They would convene at markets and exchange their produce because each produced something the other needed, so the transactions were mutually beneficial. It’s possible that some entrepreneurial spirits sought to increase their bartering power - or their wealth - by producing a larger surplus than necessary, but overall, this was a system of subsistence. As humankind became more mobile and the trade routes developed, the goods exchanged became more rarefied, such as precious stones, oils, spices, minerals, and animal skins.
The Advent of Coins
The barter system worked very well for thousands of years, but there was a flaw: the difficulty of assigning a universally agreed value to a product. If one exchange led the parties to believe that what they had received had the definitive value of what they gave in exchange, they were disappointed when they tried to make another exchange in which the other party disputed the value being offered. This led to the idea of representative value embodied in coins.
Initially, the value of coins was related to the weight of a commodity. The Mesopotamian shekel was a unit of weight that eventually became a coin. While opinions differ about the first coin ever produced, the shekel is undoubtedly one of them. Some say it was in the kingdom of Lydia, now part of Turkey, in 600 BC, but others trace it to the Chinese Bronze Age, around about 1,100 BC. Coins were often minted according to weight, and there is still a residue of this in the pound, a unit of currency in several nations.
Whatever the truth, the introduction of coins was a massive development because it allowed merchants to trade and customers to buy using tokens with a fixed value.
International Trade and Universal Currency
Coins remained synonymous with money for centuries, through the Greek and Roman Empires and into the early Middle Ages. They were accepted within geographic limits as representing a specific value, but international trade growth required a more universal currency. In 1250 AD, the Florin was issued in Florence. This was a gold coin that was accepted as legal tender across Europe. What’s more, it held its value for over a hundred years - unthinkable today. Its stability encouraged cross-border trade and introduced a welcome certainty into international finance.
The First Banknotes
Just as they may have been the first to produce coins, so too were the Chinese the inventors of banknotes. Known as Jaozi, these took the form of promissory notes, appearing in the 11th century to replace the heavy coins that were in circulation at the time. Initially customizable according to the purchaser’s needs, they eventually became standardized by the Paper Note Bank, established by the sixteen largest merchant companies in Sichuan.
In the 13th century, European travellers, notably the Venetian merchant Marco Polo, brought the Chinese idea back to Europe. Still, it aroused very little interest, and coins remained the favoured currency of all European nations for another 300 years. The earliest adopter in the 16th century was Sweden.
The Columbus Currency Crisis
There is nothing like a pandemic to cause financial catastrophe. The Black Death swept across Africa, Asia, and Europe in the 14th century, causing havoc amongst formerly stable economies and causing up to 200 million deaths. A dramatic increase in the skills and activities of counterfeiters at about the same time flooded those same economies with worthless forgeries. Together, the natural and human-made phenomena caused severe inflation, which was not brought under control until the middle of the 15th century.
Not long after this, another explorer entered the story, with more dramatic but less benign results than his Venetian predecessor. When Columbus landed on the unknown continent of America, he discovered all kinds of riches. This created a glut of imported precious metals in the European market, destabilizing currencies again.
The First Steps Away from Cash
After centuries of relatively settled reliance on coins and later banknotes, it seemed as if cash - the physical embodiment of money - would culminate the journey. Checks and promissory notes were widely used, but these were mere trading conveniences compared to the dependability of cash.
However, for perhaps the first time since the invention of the minting progress, technology opened a new chapter. In 1861, Western Union - founded ten years earlier as the New York and Mississippi Valley Printing Telegraph Company - laid a transcontinental telephone line across America. They hadn’t banked on Sioux warriors cutting sections out of the wire to make jewelry, and it was another ten years before they tried to re-establish the connection between the east and west coasts. The first transfer of funds took place via telegram in 1871, and the modern concept of e-money was born.
The Dawn of the Credit Card Age
The credit card as we know it today developed from the charge card. This was another Western Union innovation introduced in 1914. Department stores quickly adopted the idea of a card account which would be used by customers solely in their stores to buy goods on the account and settle up later. The first charge card for use in multiple unrelated outlets was the Diners Club card, which is often said to have been inspired by the experience of its founder Frank McNamara, who found himself unable to pay a restaurant bill because he had left his wallet at home. The idea of a universal charge card seemed the perfect solution. Quite how this would help if you kept your Diners Club card in your wallet is not clear, but in any case, the idea caught on.
These early cards required the outstanding amount to be paid on receipt of the following statement, so it was not a genuine form of borrowing. That came later as the credit card industry matured.
Money From a Hole in the Wall
Automatic Teller Machines (ATMs) were invented in the UK in 1967 and launched by Barclays Bank, which used a minor TV celebrity as the face of this revolutionary service. These early ATMs pre-dated plastic payment cards, so the early machines used checks impregnated with a radioactive substance, and the daily withdrawal limit was £10. ATMs led indirectly to the creation of debit cards.
This was another innovation in which Britain led the field. The technology used by the Bank of Scotland seems unbelievably quaint and primitive now. Launched in 1983, the service was called Homelink and required customers to use a television set and a telephone to pay bills and make transfers. However, users had to send the intended recipient’s details to the bank by post. Tim Berners-Lee was still at college, but the seeds of internet banking were sown.
By the end of the decade, telephone banking had advanced dramatically, and in 1989, the UK’s Midland Bank launched First Direct, the first truly telephone-only banking service, which remains one of the UK’s most popular banks to this day.
The creation of the worldwide web in the 1990s was always going to significantly influence our relationship with and use of money. Stock market trading had for years been conducted both on trading floors and by telephone. Deregulation in the 1980s meant that new technology would be free to transform it beyond recognition. However, the take-up of internet retail banking was slow, mainly because of public distrust. For example, it took more than ten years for Bank of America to build a customer base of 2 million internet bankers.
The established method of card payment, using a card reader and a signature, took another step forward with the introduction of contactless payment. In 1997, Mobil Oil Corp introduced Speedpass, an electronic payment system allowing customers to pay for gas at the pump instead of at the cash register. It quickly caught on in most parts of the world and heralded the roll-out of contactless to all forms of commerce.
This led to the introduction of chip and pin, which was not primarily about convenience but for greater security against theft. In 2005, retailers became liable for fraudulent transactions, which caused significant controversy because fewer than half of bank cards in use at the time had chip and pin technology.
The Birth of Bitcoin and Programmable Money
The brainchild of Satoshi Nakamoto, the first Bitcoins were issued in 2009, during the global financial crisis that began in 2007. Interestingly, in the early days, Bitcoin had something in common with the era of barter because it was a currency with no objectively fixed value. People joined Bitcoin forums to negotiate the value of individual transactions. One famous story tells of how in 2010, two Papa John’s pizzas were indirectly bought with 10,000 Bitcoins. At the time, they were deemed for the purposes of the order to be worth $40. Today they would be worth about $300 million.
Since then, Bitcoin and other cryptocurrencies have come of age as the blockchain technology that enables them to function matures. Cryptocurrencies and programmable money are digital, decentralized, secure, and flexible. The financial industry is committed to gaining wide public acceptance for this new incarnation of money because it gives the consumer much greater control and makes transactions of every size significantly more secure.
The banking sector and the wider business community seem more interested in the wider uses of blockchain technology, which is entirely understandable. Its possible applications are extensive and include insurance, real estate, supply chain management, medical information, non-fungible tokens, data storage, and the secure Internet of Things.
However, wherever blockchain takes us socially and economically in the future, it is currently revolutionizing how we perceive money, redefine monetary value, and transact in the future. Bitcoin is, of course, the highest-profile of cryptocurrencies, but it is one of about 18,000 in existence by 2022. Only a handful of them has a market cap of over 1 billion dollars, the level at which they could reach the tipping point and pass into general usage. With bitcoin accepted as currency in an ever-widening context, more businesses will inevitably accept crypto payments as a legitimate, secure basis for transactions. Not only that, but they will recognize that its growing popularity is another major step in the never-ending journey of money from barter to who knows where.