History of Money: How Was It Invented and Who Gives It Value? [VIDEO]

Sergio Valdes

Dec 25, 2020

I imagine all of you have bought something at some point in your life or asked your parents to buy you something. Candy, toys, video games, it doesn’t matter. The important thing is that it was bought with money.

What I really want to ask is this: have you ever wondered why money can buy things? Isn’t it strange that a piece of paper or metal can get you a chocolate bar or the newest game console? What is the difference between a piece of paper that says $100 pesos and a random piece of paper you might find on the street?

Exchange

To understand how we arrived at this strange system where a stack of paper can buy you a Nintendo Switch or an iPhone, we have to go far back in time, to a world where money didn’t exist and people exchanged goods to survive.

Imagine a tribe a little more advanced than cavemen. The tribe has hunters, gatherers who collect edible plants, and artisans who make tools and clothing. Barter began among these people. Let’s say the hunters wanted vegetables but didn’t know how to grow them, the gatherers wanted warm clothes but didn’t know how to make them, and the artisans wanted meat and hides to make clothing but couldn’t hunt.

After thinking deeply about the mysteries of the universe, someone finally realized that the hunters could give meat to the artisans, the artisans could give clothing to the gatherers, and the gatherers could give vegetables to the hunters. It sounds complicated, right? Now imagine doing that not with three people, but with hundreds, all with different jobs, skills, and needs. It becomes chaos.

You would spend more time negotiating and arguing than actually making useful things. And we have not even started talking about the difficulty of deciding how much meat equals how much clothing, or how many vegetables should be traded for how many coats or baskets.

Gold as money

After dealing with these problems for a long time, people realized they could not keep relying on barter for everything, so they started using scarce materials such as gold, silver, or precious stones. Because gold was rare in ancient times, people assigned it a high value. But gold was not a perfect solution either. There were still problems in determining the exact value of a gold nugget, its size, its weight, and whether it had been mixed with other metals. Imagine a cowboy wanting to buy something with a gold bar, but the bar is too large. He would need to break it apart into the exact amount needed. On top of that, carrying gold bars around all day would be heavy and impractical.

As civilization progressed, people realized this did not work very well either. That led to the creation of coins. Leaders in a region decided to create something that would hold the same value everywhere in their territory. This was only possible because in ancient times the word of the king was law. When a king declared that a coin made from a certain metal was worth five apples, people believed it. Everyone agreed that five apples was a reasonable value.

The coin had a specific weight and a specific design to make counterfeiting more difficult. Have you ever noticed that banknotes have different visual marks or special details visible when held up to the light? That is a more modern example of how “real” money is marked. Coins made trade easier. It became much simpler to pay someone with a set number of coins than with uneven pieces of gold or with goods like clothing and food that the other person might not even want.

Over time, people realized that maybe they did not need gold at all. Just as society had once agreed that gold had value because it was hard to find, people could also agree that something else had value, whether diamonds, silver, bananas, or anything else. The real value comes from us. In the same way, we can agree to assign value to a government-backed or bank-backed piece of paper without needing it to represent a pile of gold. This system works because all of us agree and trust that other people also agree that the note has value.

Currencies around the world

Now the next question is: why are some currencies worth more than others? Why is the U.S. dollar worth more than the Mexican peso? Because people collectively agreed on that. In general, people trust the dollar more than they trust the peso.

The first thing to understand is that money only has value because other people agree that it has value. Around the world, there are many different currencies. In Mexico we use pesos, in the United States dollars, in Spain euros, and so on. Each one carries a different level of trust and perceived value. For example, imagine you traveled to China and wanted to buy something in a store. You arrive at the register and try to pay with pesos. Do you think that would work?

In China, the only currency that works directly is the yuan. If you do not exchange your pesos for yuan, you cannot pay. Maybe you have heard people say the dollar is worth more than the peso. That happens because more people trust the dollar and use it more widely to buy things, which increases demand for it.