Modex Electronic Cash: The History of Money

1995 Jul 1 See all posts
Modex Electronic Cash: The History of Money @ Satoshi Nakamoto
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The History of Money

Over more than 4,000 years money has evolved from primitive tokens to sophisticated, digital systems.

The loose change in your pocket is just one chapter in that story.

Follow the Timeline to look further into the way that money, and banking, have evolved, and then journey into the electronic future.

Then test your knowledge in our on-line quiz.

Before Money

It's hard to think of a world without money. How did people buy, sell or exchange goods like food and clothing. The earliest human societies did not need money. Instead, goods were bartered or swapped.

In other words, if you grew some corn, but wanted a new shear, you could exchange some of your corn for a new shear from the blacksmith.

You would have to haggle over the value of the shear to you, as would the blacksmith.

Bartering is primitive, but it only works if both parties want the goods on offer for exchange. What if the blacksmith didn't want your corn, but your cow? Could you afford to lose the animal? What if you needed the shear now but couldn't part with the corn or the cow until the next summer?

As societies developed and became more complex, a way around these problems was needed.

Shells to Coins

The oldest written records of money are from Ancient Mesopotamia (now in southern Iraq) about 4,500 years ago. About 3,500 years ago tiny Cowrie shells from the Indian Ocean were used in China as a means of exchange. Even the Chinese symbols for buying, bartering and selling incorporate the symbol for the Cowrie shell. The shells were still being used as currency in parts of Africa as late as the 19th Century. Ancient Mesopotamian inscriptions describe payments being made with weighed amounts of silver. Since then, weighed amounts of metal have been used as money in many parts of the world, and this practice led to the invention of coins.

Coins are just pieces of metal marked with a special design that indicates its use as money. Unlike precious metals, however, coins do not need to have any value in themselves. They only represent value.

True coinage developed in Asia Minor during the 7th century BC in what is now Turkey. Weighed lumps of ‘electrum' (a mixture of gold and silver) were used by the Lydians as money, and were stamped with pictures, a practice known as minting, as a guarantee of their purity. These irregular lumps were eventually standardized in shape and weight.

The same idea was developed elsewhere to standardize other forms of metal money: copper lumps in southern USSR and Italy, bronze tools and shells in China, silver rings in Thailand, and gold and silver bars in Japan.

As soon as coins were commonplace, however, people realised their limitations - chiefly their weight and bulk, and a new type of money was needed which made larger transactions easier.

Banks and Banknotes

During the 10th century, the Chinese started to leave their heavy iron coins with merchants and to use hand written receipts instead. The government, who issued the coins, adopted this idea in the early 11th century, when receipts were printed which were given fixed values.

This practice evolved and spread, with gold and silver being deposited in exchange for receipts (often with Goldsmiths), as well as coins.

The goldsmiths profited from the gold and silver deposits by lending them out to third parties and charging interset. Eventually banks emerged which assured the value of their notes and people no longer exchanged them for the original deposit. The notes had become currency.

The first official printed notes were issued in 1661 - by the Swedish Stockholm Bank.

The exchanges of notes for coins and precious metal took place on benches, hence the term "Bank", from "banco" - the Italian for bench.

Forgery, and the frequency of issuers going out of business, led to governments often taking over the issue of notes and coins, storing the gold or silver reserves to back them up in places such as the Tower of London, in England.

Even banknotes had their limits. Although you may have money in the bank, to get to it requires you having banknotes to hand. This is expensive (money has to be printed and circulated), as well as risky (the money could be stolen or forged). Banks sought a way of exchanging their customers money without the medium of notes.

Cheques and Plastic

Cheques, printed by Banks, allowed their customers to write "exchange" notes to their other customers, or customers of other banks. Money could then change hands without involving any notes or coins.

Over the past twenty years, with the advent of computers, the majority of money has come to be stored as bits and bytes in Bank computers, and exchanged digitally - through telephone or satellite links - rather than physically.

Today, the majority of the world's cash does not exist in notes and coins at all.

Plastic cards holding personal data on magnetic strips were developed to give people access to their money stored electronically. Cheque, debit and credit cards now enable nearly every kind of payment, through the users' bank account.

As with every other stage in the evolution of money, however, even these cards have their limitations. For example, the cost of using them means that coins and notes are still the most suitable means of making small payments. Magnetic Stripe card transactions also have to be signed and authorised, slowing down the transaction process when compared to cash.

Money is now evolving to the next stage - the creation of electronic cash, such as Mondex, as an alternative to notes and coins.

Electronic Cash

Despite the popularity of credit and debit cards, the vast majority of all transactions worldwide are still carried out with cash.

Cash remains the only universally acceptable form of payment - even when a retailer doesn't accept a particular credit card, cash will be taken. When it is, the exchange of value is immediate. No clearing or processing is needed, no signatures and no electronic transfers.

Smart cards have been used as cash substitutes for a decade, in phone cards, vending cards and transit cards. However, the value stored on these cards has already been paid, and cannot usually be exchanged for other goods and services.

A true cash alternative, replicating the core features of notes and coins, would have to be universally recognised and acceptable. Like cash, transactions would have to offer immediate transfers of value. Finally, like hard cash, electronic cash has to enable easy person to person payments. Electronic cash also has to be able to work in different currencies. And it would have to be secure from forgery.

Mondex is the only electronic cash system which meets all of these criteria.