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We use money everyday to purchase our food, pay for the roof over our head, and purchase various good and services. But have you ever wondered how the concept of money began or where it first originated? Or even why it works? These are actually very profound questions and the answers have as much to do with history, economics and technology as with human psychology. The story of money represents the many bonds between different people, cultures and individual human beings.

Why was money first developed? The usual answer is that money was developed for barter, which is the exchange of one kind of good for another. For example, an early farmer might have traded rice for sheep from a herder, or an ancient family might have exchanged their help in building a shelter for footwear or cloth. This practice of barter probably started over 10,000 years ago, although since there is very little physical evidence remaining, an exact date for when this practice began is not known.

It is commonly believed that livestock, like cattle, and food items were probably some of the typical early units of value against which other goods were traded. If livestock or food were commonly bartered products, they would have been hard to move, or keep for long periods of time. Another difficulty was that livestock could easily become sick and die or could possibly even escape or be stolen. A more permanent solution was therefore needed, one which would allow people to exchange some type of small, consistent, and portable physical object for many kinds of goods needed now or at a later time.

One of the first manifestations of what is more familiar to us as “money” were actually cowrie sea shells (pictured above). These shells were used three thousand or more years ago in China and the Pacific area, and until recently they were also used in some area of Africa. This use of the cowrie shells nicely fit the requirements of today’s money — shells are easy to count and they are portable. On the other hand, they can also be found on beaches and even if cowrie shells used as money were cut or inscribed in a certain way, their supply would not have been that easy to control.

This led to more elaborate forms of money whose production could be controlled. There is evidence for metallic versions of cowrie shells in ancient China. In ancient Mesopotamia, the word shekel was used to designate a fixed amount of barley and became the term used for an equivalent amount of precious metals. This was around 2000 BCE and began an evolution towards precious metals like silver or gold bars as the physical manifestation of money. Empires and the authority they represented were used to imbue money with their authority. Coins date to at least the 7th century BCE, in the ancient kingdom of Lydia (present day Turkey) which is interesting because the Anatolian peninnsula is also thought to be where the first cities originated. This would have been around 10,000 BCE when different tribes came together to trade goods in a central marketplace. The link between trading and money is obvious, as is the link to an authority that could control the production of coinage (the number and types of coins produced). The coin above dates to the first century BCE and shows the Roman Emperor Nero, famous for having strummed his harp while his capital burned around him. The appeal of coins often lay in the gold or silver metals that they contained which gave them intrinsic value over and above the authority they carried in a ruler’s head. Even today, silver and gold coins are used and often produced for special occasions, and their value is determined both by collector interest and the amount of precious metal they contain.

A very different, but equally important step in the development of money was the emergence of paper money. This is thought to have begun in China in the 9th century ACE. The key more than with coins was the authority of the ruling entity that produced the currency. The value of paper money is not intrinsic but guaranteed by law and common usage. The problem with paper money is that a government, in times of need, can print as much as it wants, which is what ended up happening in China after a few centuries. It so devalued the concept of paper money that it was not used again for centuries by the Chinese! Because there is no precious metal to limit the production of paper money, its devaluation through inflation and over-production has been a problem in countries all over the world until recently. In the end, the underlying strengths of an economy and discipline of a government are what give paper currency its value. The examples above show early American notes.

Paper currency points to the psychological basis of money, the fact that people choose to believe in and accept its value given the conditions around them. In times of trouble or dislocation, people often prefer more intrinsically valuable currency like gold coins. Indeed, even today gold remains something that increases in value when economic troubles loom.

Money, its use and form is based in a complex interaction of authority, the type of money itself, the economy, confidence in government, and the psychology of those who use it and believe in its value or not. Money is one of the most important human products and, in some situations, the most fragile.