52 ideas that changed the world - 50. Money

In this series, The Week looks at the ideas and innovations that permanently changed the way we see the world. This week, the spotlight is on money:

Money in 60 seconds

Money is a verifiable and accepted medium of exchange used in transactions for goods and services, or as a measure or store of value. The two main forms of money used today are cash and bank deposits. Cash takes the form of notes and coins, while bank deposits are held electronically.

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In the UK, 96% of money is now held electronically, with just 4% held in cash, according to the Bank of England.

Early forms of money were usually “commodity money” - a currency that had a link to an item of tangible market value such as gold. But, since the 1930s, most money has been “fiat money”, which is not convertible to gold or any other item.

How did it develop?

Before the invention of money, goods were procured through bartering. People would simply swap something they had - for example, food - in exchange for something else that they needed. But around 3,000 to 4,000 years ago, communities began exploring more efficient systems of exchange.

Around 1,000BC, China began to manufacture bronze and copper coins, which often contained holes so that they could be strung together like a chain.

Outside of China, the first coins made of precious metals were created in around 500BC. Round, silver coins stamped with the forms of gods or rulers to mark their authenticity appeared in Lydia (present-day Turkey), and under the Greek, Persian and Macedonian empires, and later under the Romans, says the US Public Broadcasting Service (PBS).

Because these coins were made of precious metals, they had inherent value - that is, they were the first form of “commodity money”.

Paper money developed centuries later, in different places at different times. China’s Song Dynasty was one of the first to introduce paper money, in the 11th century. This new system originated from merchant deposit notes used by merchants during the Tang Dynasty in order to reduce the amount of physical coinage needed to make large transactions, explains Hans Christian Ekne in an article on The Capital platform.

This form of money was used for centuries in China before use of banknotes took hold in Europe, in the 17th century. However, by then, China had learned a painful lesson in the potential dangers of relying on paper money.

“The production of paper notes had grown until their value plummeted, prompting inflation to soar. As a result, China eliminated paper money entirely in 1455 and wouldn’t adopt it again for several hundred years,” says Time magazine.

Skipping forward to recent times, plastic money cards were first introduced to the UK in 1966, after the first credit cards were issued by Bank of America in 1958. The first cards has the account number embossed on the front of the plastic card, and when the account holder made a payment, this number was swiped onto a slip of paper which they then signed, as the Cashfloat blog explains.

The first experiments with electronic cash payments took place in the 1990s, and Chip and PIN cards - which allow customers to use a unique code number rather than a signature to authorise purchases - were introduced to the UK in 2004.

Contactless payments followed in 2007, and quickly became a commonly used and accepted form of payment. Contactless has seen a further boom during the ongoing coronavirus pandemic, because of the risks associated with handling cash, reports The Independent.

As well as these standard methods of payment, forms of so-called digital currency have been developed over the past decade or so. Cryptocurrencies such as bitcoin have become increasingly popular - and unlike fiat currency, “Bitcoin is created, distributed, traded, and stored with the use of a decentralised ledger system known as a blockchain”, says Investopedia.

Indeed, the future of physical money appears uncertain, with some experts suggesting countries such as the UK could be completely cashless society in as little as two years, reports the Daily Express.

But not everyone is convinced.

Although the popularity of digital payments is likely to increase, there’s no getting away from the “enduring popularity of cash” says The Scotsman. “While cash may have replaced cows, seashells and cheese, it’s perhaps not quite ready to give way to digital currencies just yet.”

How did it change the world?

Money is one of the most significant inventions - for good and bad - in human history.

“It facilitates exchange as a measure of value; it brings diverse societies together by enabling gift-giving and reciprocity; it perpetuates social hierarchies; and finally, it is a medium of state power,” says Chapurukha Kusimba, a professor of anthropology at Washington D.C’s American University, in an article on The Conversation.

By making transactions between people and organisations far more efficient, money allowed for the globalisation of our world today. No society could completely sustain itself on its existing resources, and money gave a way for different groups to trade resources.

Trade, alliances and wars all came out a desire to command resources through the medium of money. It also enabled the movement of people, making migration to certain areas more attractive and possible for the first time.

“The instruments of trade and finance are inventions, in the same way that creations of art and discoveries of science are inventions - products of the human imagination,” The New Yorker concludes. “Paper money, backed by the authority of the state, was an astonishing innovation, one that reshaped the world.”