Who invented money? | A deep dive into the history behind it

Money. It's what you use to buy your clothes, pay the rent, and put food on the table. You (or your parents) work to earn the money needed to purchase things you need or want — but who invented paper money, and what is the history of money? The answer may surprise you. 😯

What are the roots of currency?

At an early age, most kids are pretty familiar with the basics of money. They see their parents use it to buy things at the store and hear their friends talking about the money they earn doing chores. However, money hasn't been around forever. Only in the last few hundred years did the money we use today — the U.S. dollar, British pound sterling, and other currencies — come into existence.

From barter systems to commodity money

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The earliest humans recognized the importance of trade. Since money hadn't been invented, they relied on barter systems to obtain needed goods. For instance, a farmer might trade a bushel of wheat for yarn🧶or cloth. Or, a merchant might sell candles in exchange for food utensils, like a plate or bowl. 

Barter systems relied entirely on perceived value, not a standard price structure. If the buyer didn't place much value on what you had to offer, they might require more of it before agreeing to a trade. However, if the seller could find another buyer who believed the goods were high worth, they could negotiate a more favorable exchange.

As you might imagine, bartering had its problems. If the seller couldn't locate a buyer for their goods, obtaining things they needed, such as clothing or food, would be challenging. Similarly, if the perceived value of their goods dropped, their purchasing power would fall, too.

Over time, those problems contributed to the development of commodity money. Items used by everyone in society were deemed commodities, such as salt, cattle, seeds, or tea. People exchanged the commodities they had on hand with merchants to buy things they wanted. However, commodity money had its own issues. Many commodities couldn't be held for long since they were perishable. Hauling heavy commodities from one merchant to the next was a challenge, especially in the days before automobiles existed. 🚗

The birth and evolution of coinage

The first known use of metal objects for trading goods dates back to 5000 B.C. However, it wasn't until 700 B.C. that the first printed coins came into existence. Historians generally agree that the Lydians were the first to make coins. However, in recent years, Chinese archaeologists have uncovered evidence of a coin production mint located in China's Henan Province thought to date to 640 B.C.

In 600 B.C., Lydia began minting coins widely used for trading. Created from electrum — a naturally occurring substance containing silver and gold — each coin was imprinted with a picture that defined its denomination. The coin currency system remained predominant for several hundred years. Other empires adopted their version of legal tender coins, and some relied on them until the 16th century or later. 

Paper money and the advent of banking systems

In the 12th century, the Chinese transitioned from coins to paper currencies. Like coins, the Chinese paper currencies came in various denominations. Over the forthcoming centuries, European governments slowly adopted paper money for international trade, but its first issuance occurred within the North American colonies. The colonies started using paper money due to a lack of available coins. Shipments between Europe and North America were notoriously slow, and colonies ran out of coins to pay for their goods. 🚢 To combat the issue, they issued paper money as promissory notes, which could later be traded for coins.

The foundations of banking systems began during the transition from coinage to paper money and bank notes. People realized they needed a safe place to store their valuable coins outside the home. They turned to religious institutions, such as temples and churches, to hold their money for them. Priests housed their parishioners' wealth in the basements of their churches, which were protected by armed guards and workers. The owner of the money could visit the temple to obtain their funds when needed. Some churches also offered loans to people who needed cash.

Institutional banks outside the churches first developed in the Roman Empire. Formal banks in dedicated buildings became widespread, and people moved their money from the churches to the banks. Many banks remained connected to churches, overseen by papal bankers or other religious figures. However, some merchant bankers offered their services on a smaller scale.

By the 1800s, the banking system we know today began to take hold. 🏦 Adam Smith, a well-regarded economist, introduced his invisible hand theory, which advocated for a self-regulating economy with minimal government involvement in banking. The first U.S. Treasury Secretary, Alexander Hamilton, established a national bank that printed a standardized form of currency. The national bank helped strengthen the economy and lay the groundwork for a reputable banking system.

Contributions from different cultures

Societies from around the world all contributed to the creation of money. Bartering was the go-to system for centuries before the Lydians introduced coinage and the Chinese developed paper money. The Roman Empire introduced banks, and Europeans and colonials in North America cemented the banking and money supply system used by modern economies.

From gold standards to digital currencies

Over the past 150 years, money has continued to evolve. From the late 1800s through 1971, the U.S. primarily followed a gold standard, which tied paper currency to a specific value in gold. 🪙 However, the U.S. dropped the gold standard in an effort to mitigate banking crises and reduce economic volatility. 

Digital currencies like Bitcoin and Ethereum have entered the money scene in recent years. Virtual currencies are available only electronically. To obtain them, individuals must mine, trade, or purchase them using other currencies. The value of digital currencies can significantly fluctuate, making them attractive to investors hoping to earn a return on their holdings.

Learn more about money with Greenlight

The evolution of money is fascinating. 💰 Over the centuries, our ancestors found ways to exchange goods, from the earliest barter systems to gold coins, copper coins, silver coins, and paper currency. Today, our society is transitioning from paper money to digital banking systems, including credit cards, debit cards, and mobile payments. As technology continues to accelerate, more changes are likely to come!

To learn more about money — and not just its intriguing history, but how to manage, spend, and invest it — visit Greenlight's Learning Center. With over 100 blogs,  explore all the topics you care about, such as budgeting tips, the importance of fun money, and savings hacks to optimize family finances.