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The use of currency aids in the exchange of goods and services by distinguishing the transactions of buying and selling from barter, setting a standard of value, and allowing the accumulation of wealth. But before an object may be used as money—whether it is a coin, bank note, shell, grain, or (in modern systems) an electronic transfer—the community must accept it as such.

Money may be defined as a set of objects whose prime use is to facilitate economic exchange. The identity of these objects and the range of functions they may perform are determined by the community in which the exchanges occur. In modern Western capitalist societies, coins and banknotes serve as money; they are issued under the authority of governments and accepted for commercial transactions by the population. Prior to modern times, traditional societies in Africa, Asia, and the Pacific and Indian oceans employed various and differing money forms; the most famous were cowry shells, whose scientific name (cuprea moneta) stems from the popularity of their use as money. We usually refer to earlier money forms that are not coins or banknotes as “primitive money.”

The anthropologist Karl Polanyi argued that money is “a system of symbols, similar to language, writing or weights and measures” (1968, 175). The members of a community, as buyers and sellers, must give the role of money to particular objects (and continue to accept them as money). But there are no objects that are of themselves “money.” A disc of metal or a piece of paper becomes money because a community accepts its value as money. This is easy to see in a modern currency system—in which coins and pieces of paper only represent the sums of money they are worth (and are termed fiduciary, or relying on trust). In the nineteenth century and earlier, coins were issued in gold and silver, and the metal was worth only a little less than the face value of the coin. But the use of gold and silver as money ultimately depends on the agreement that these metals have a value.

The Uses of Money

It is possible to recognize four main uses for money. First, and perhaps most important, money acts as a medium of exchange. It is possible to exchange (sell) an object for an agreed value in money (such as a weight in silver or a number of silver coins) and then to exchange (buy) in a different place and at a different time very different objects or services with that money. Money thus separates the transactions of buying and selling (which are combined in exchange by barter).

Second, money acts as a standard of value. It enables the value of different objects and services to be expressed according to a set scale or measure. The value of a cow or the services of a cobbler, for example, can be compared according to their value expressed in money (such as dollars and cents). The existence of money then allows value to be expressed in terms of a unit of account. Linked to this is the third use: money can facilitate the storage of wealth. Wealth can be stored in banks, for example, through the deposit of a quantifiable number of money objects, such as coins. Finally, money provides a means of payment. It allows precise amounts to be paid to a wide range of people for a wide range of goods and services.

Money and Coinage

The European tradition of money is firmly tied to the history of coinage. The English word money is ultimately derived from the Latin moneta, which could mean coinage as well as the mint in which coins were produced. But money does not equal coinage. While the main functions of money have remained the same, the forms of money and their roles have evolved and changed. We should resist the assumption that money has always been understand and used as we understand and use it today. The use of precious metals, as well as the use of animals and produce, as money can be traced back to the third millennium BCE. Hoards of pieces of silver, some in earthenware vessels, have been found in Sumerian and Akkadian settlements from Mesopotamia. Cuneiform writing on clay tablets from Nippur in Sumer at this time provide the earliest known records of transactions using weighed silver. Other tablets from Nippur record loans and payments valued in terms of grain or cattle. In the second millennium BCE, the Mycenaean Greeks employed cattle as a form of money; in Homer’s poem The Iliad we find armor, for example, and even skilled craftsmen captured in war, valued in terms of oxen.

The creation of coinage was an important step in the development of money. Coins may be defined as pieces of metal that are marked with a design to show the authority under which they were issued, and which indicate that they have legal force as money. They typically conform to standards of weight and fineness, but the key aspect is that they be marked out by the issuer (who is very often the government), as money whose value is guaranteed. The kings of Lydia in Anatolia (modern-day peninsular Turkey) were the first to create such coins, probably at the end of the seventh century BCE. These issues were of electrum, a naturally occurring alloy of gold and silver, which the Lydians cast into discs and impressed with stamps on both sides. In around 550 BCE, the Lydians under King Croesus were also responsible for creating the first gold and silver coinages.

In China, a monetary system employing metals, animals, produce, and shells had been in use from the twelfth century BCE. In the late sixth century BCE the Zhou emperors began placing their names on small-scale cast-bronze farming hoes that were to serve as money. The use of disc-shaped coins did not commence till the third century BCE. The use of paper currency, however, began in China during the twelfth century BCE, but was not adopted in the West till the seventeenth century, where it arose as a solution to the shortage of coinage.

The introduction of bronze coinage in Greece at the very end of the fifth century BCE also marked an important development in the Western world. This enabled coins to be used for everyday transactions of a much lower value than silver or gold permitted. Under the Romans huge issues of small bronze coins enabled the economy of many cities and regions to be extensively monetized for the first time in world history. The invention of coinage was not lost with the fall of the Roman Empire.

Modern Money

Today electronic banking is a key feature of money use. Credit cards are as familiar as coins and banknotes. The study of money in the modern world is primarily focused on the nature and operation of monetary systems and the factors which govern the buying power of money. Monetary systems include the public holdings of money (by individuals and businesses), commercial banks, and central banks operated by governments to facilitate official transactions and economic policy. Modern monetary theories seeking to explain changes in the value of money have been dominated by the quantity theory of money, which posits that there is a firm link between the level of prices and the quantity of money in circulation. Although ancient and medieval societies paid little attention to the nature and role of money, today it has become a consuming passion.

Bibliography:

(1962). The politics. T. A. Sinclair (Trans.). London: Penguin Books.
Bretton, H. L. (1980). The power of money. Albany: State University of New York Press.
Cribb, J. (Ed.). (1986). Money: From cowrie shells to credit cards. London: British Museum Publications.
Galbraith, J. K. (1975). Money: Whence it came, where it went. Boston: Houghton, Mifflin Company.
Hart, K. (1986). Heads or tails. Two sides of the coin. Man, 21(4), 625–652.
Polanyi, K. (1968). Primitive, archaic and modern economies: Essays of Karl Polanyi. G. Dalton (Ed.). New York: Doubleday.
Vilar, P. (1969). A history of gold and money, 1450–1920. London and New York: New Left Books.
Williams, J. (Ed.). (1997). Money: A history. London: British Museum Publications.

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