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The History of Money: From Cows to Bitcoin
Money is, by definition, something of value. From before written history when human beings bartered with one another for the exchange of goods and services to the current exchange of virtual currency in the form of bytes and bits, we humans have swapped something we have for something we want.
Livestock and agricultural products such as grain have been used to facilitate trade since 9000 B.C. Humans all over the globe have recognized the value of trading a beast of burden or a food/wool animal for the other necessities of life. Barter, however, didn’t work very well when the producer of the goods you wanted did not need what you had to trade. By 1200 B.C. humans were trading cowrie shells instead of camels. The first use of cowries, the shells of a mollusk that was widely available in the shallow waters of the Pacific and Indian oceans, occurred in China. Historically, cowries are the most widely and longest-used currency in history. The first metal money appeared around 1000 B.C. as bronze and copper imitations of cowries. They showed up in China at the end of the Stone Age, along with metal tools, like knives, that were also used as currency. Outside of China, the first metal coins were crafted around 500 B.C. from lumps of silver, stamped with the likenesses of emperors and gods to designate their authenticity. The first of the silver coins appeared in Lydia, part of present-day Turkey, and were refined by the Greeks, Romans, Persians and Macedonians. While the Chinese coins were made of base metals, these later coins were crafted from precious metals such as silver, bronze and gold, which had individual intrinsic value.
The first “banknotes” were one-foot-square pieces of white deerskin with colorful borders. Used first in China, this leather currency was easier to transport than the heavier coin currency. They were the precursors of paper currency, which also first appeared in China around A.D. 800 Between the ninth and fifteenth centuries, Chinese currency grew in production to the point that its value depreciated, causing rampant inflation. Beginning in 1455, the use of paper money in China disappeared for several hundred years. It took three centuries before the use of paper money would be considered common in China and Europe.
Meanwhile on the North American continent, Native Americans were using “wampum” well before 1535. Wampum, which means “white,” was a string of white beads made from clam shells. This medium of exchange was prevalent among most Native American tribes.
Gold was made the official standard of value in England in 1816. Taking note of the early Chinese mistakes by overproduction of paper money, the English established guidelines to allow for a non-inflationary production of standard banknotes which represented a specific amount of gold. While paper banknotes had been used in Europe for centuries before 1816, they had not been tied to gold. The Gold Standard Act was officially enacted in the United States in 1900, leading to the establishment of a central bank, eventually the Federal Reserve.
When the Great Depression was felt worldwide, it marked the end of the “gold standard.” In the United States, the gold standard was revised and the price of gold, devalued. This was the first step in ending the relationship between gold and currency altogether, marking the beginning of a complex international monetary regulation.
The evolution of money continues. “Bitcoin” appeared on the scene in 2009, developed by an unknown person whose alias is Satoshi Nakamoto. Bitcoin is a decentralized digital currency that uses peer-to-peer technology. Transactions are made with no middle men, no banks, and no regulation. With Bitcoin, a person can buy merchandise anonymously. International payments are easy and inexpensive because Bitcoins are not tied to any country or subject to monetary regulation. Small businesses may like them because there are no credit card fees to pay. Bitcoins are traded on marketplaces called “Bitcoin exchanges,” allowing individuals to buy or sell Bitcoins using different currencies. People can send Bitcoins to one another using mobile applications or computers, much like sending cash digitally.
As with actual precious metals, Bitcoins are in limited supply. They are “mined” using a computer rather than a pick and a sluice box. Miners set their machines to run a series of complex calculations that tally up and certify all the transactions of other Bitcoin holders around the world. If the miner’s computers complete these calculations and solve a complex mathematical puzzle before anyone else, the miner earns about 25 Bitcoins as payment. With the price of each Bitcoin at over $1,000, that’s $25,000+ for about ten minutes’ work. Engineers are vying to design and build chips that will perform the calculations at higher speeds.
Designed to be a libertarian’s dream of regulation-free currency exchange, U.S. and international banking regulators are working on ways to make the digital currency safe for consumers while not stifling innovation. No doubt the first users of leather currency in China who were opting for an easier way to transport the means of exchange also met with resistance from traditionalists.
Speaking of China, the People’s Bank of China, the country’s central bank, banned financial institutions and payment services from Bitcoin-related businesses. The stated reason was to avoid harm to the public and to the legal monetary status of the renminbi (the yuan) that might occur as a result of excessive speculation in Bitcoin and other virtual currency. Third-party service providers were also told to stop offering clearing services to Bitcoin exchanges. In contrast, Brazil has adopted a legal framework for the regulation of Bitcoin and other virtual currencies.
Human beings will find a way to turn any innovation into a criminal enterprise. Websites like Silk Road, which allowed people to buy drugs online and on the black market, took Bitcoins. The FBI shut down Silk Road on Oct. 2, 2013, seizing $3.5 million in Bitcoins during the sting. Since then, other sites have been seized as illegal market places for Bitcoins.
But we don’t ban money because it can be laundered or used for illegal purposes. We devise means for protecting society from abuses. The states are actively involved in exploring these issues, not only the big guys like California and New York, but our own Tennessee. In May 2014, Commissioner Greg Gonzales participated in a hearing in Chicago hosted by the Emerging Payments Task Force of the Conference of State Bank Supervisors. The task force includes nine state financial regulators and is examining the changing payments landscape to understand the opportunities and risks of current and emerging technologies, products, and services that impact monetary, regulatory and consumer decisions. States represented on the Task Force include Massachusetts, California, Florida, Georgia, New York, Texas, Utah, Washington and Tennessee. Commissioner Gonzales said, “[The Chicago] hearing was the first of many discussions the Task Force will have with various stakeholders within the emerging payments industry.”
During the hearing, state regulators heard statements from BitPay, a Bitcoin payment processor; CoinX, a virtual currency exchange for buyers and sellers of Bitcoin; and Xapo, a Bitcoin wallet provider. PayPal and Green Dot also spoke on a separate panel on retail payments innovations in retail.
“This hearing has been a valuable contribution to the Task Force’s efforts to study changes in payments systems to determine the potential impact on consumers, state law, and banks and non-bank entities chartered or licensed by state regulators,” said Gonzales. “State regulators welcome innovations in the payments system that can lead to greater choice, security, and lower costs for consumers, but not at the expense of marketplace stability and consumer protection.” The commissioner hopes that the Task Force’s work will help inform Tennessee’s regulatory efforts as they relate to virtual currency.
My siblings and I were on the cutting edge of currency innovation when, as children, we devised ways to swap such mundane things as painted rocks of varying sizes (the bigger the rock, the more valuable) for things we wanted from the other kids in the neighborhood. Small pebbles, about the size of dimes, were traded for candy, and we were compensated by our hooligan neighborhood friends with larger, smooth or painted, stones for the use of our basketball goal. It was a great game, not much different from the Japanese “Wat-ticket” designed by Eiichi Morena that allows small businesses to issue IOUs or Wat-tickets to their suppliers. The suppliers circulate the Wat-tickets within an undefined community, until they are eventually redeemed by the issuing business.
If there is a need for a medium of exchange, we humans will find it — I still think there might be a future for the smooth rocks I collected — just in case the Great Computer Apocalypse really does occur.
- Comments provided by Commissioner Greg Gonzales when asked for comments on this column.
- “Complementary Currencies in Japan Today: History, Originality, Relevance,” Lietaer (2004) ijccr. Vol. 7.
KATHRYN REED EDGE is a member in the Nashville office of Butler Snow LLP with offices in Tennessee, Mississippi, Alabama, Pennsylvania, Georgia, Louisiana, New York and London, England. She is a member of the firm’s Government and Regulatory Practice group and concentrates her practice in representing regulated financial services companies. She is a past president of the Tennessee Bar Association and a former member of the editorial board for the Tennessee Bar Journal.