A Brief History of Money: Origins of the Most Efficient System of Convertibility and Trust

Sapiens: A Brief History of Humankind by Yuval Noah Harari is an amazing book that deconstructs the history of nearly every aspect of human life – from evolution to religion, from politics to the scientific revolution. Reading the book, however, I was very pleasantly surprised to find a whole chapter dedicated to the history of money and its function in society.

Harari explains that the history of money is based on two universal principles:

a. Universal convertibility: With money as an alchemist, you can turn land into loyalty, justice into health, and violence into knowledge.

b. Universal trust: With money as a go-between, any two people can cooperate on any project.

Let’s break down each of these principles into further detail.

Universal Convertibility

Hunter-gatherers of “caveman” times had no money. Each band hunted, gathered, and manufactured almost everything it needed. While different band members may have specialized in different tasks (e.g., Bob is really good at healing people, and I’m really good at hunting), they shared their goods and services through an economy of favors and obligations. A piece of meat given for free would carry with it the assumption of reciprocity – free medical assistance, for example.

In addition, the band was economically independent. Only a few rare items – seashells, pigments, obsidian, etc. – had to be obtained from strangers in other bands, and this was done with simple barter: ” We’ll give you pretty seashells if you give us high-quality flint.”

Harari explains in Sapiens that this barter economic system didn’t change until the rise of cities and kingdoms, where improvements in transportation (roads, wagons) and densely populated cities providing full-time employment allowed some areas to gain a reputation in producing certain items – like really good wine, olive oil, or ceramics.

But an economy of favors and obligations doesn’t work when large numbers of strangers try to cooperate. As Harari explains, it’s one thing to provide free medical assistance to a relative or neighbor, but what about having to take care of multiple strangers who might never reciprocate the favor?

In these instances you could fall back on barter. But barter is only effective when exchanging a limited range of products. Why? Because economic relations are simply too numerous and too complex.

Here’s Harari:

In a barter economy, every day the shoemaker and the apple grower will have to learn anew the relative prices of dozens of commodities. If one hundred different commodities are traded in the market, then buyers and sellers will have to know 4,950 different exchange rates. And if 1,000 different commodities are traded, buyers and sellers must juggle 499,500 different exchange rates.

Even if you manage to calculate how many apples equal how many shoes, which equal how many jugs of wine, which equal how apples, etc., barter trade requires that each side want what the other person is offering. What if the shoemaker doesn’t like apples? He would have to find someone (or multiple people) to make a multi-person deal.

Clearly, favors and obligations and bartering cannot work in a complex economy.

Money solves this problem.

Money was developed at different times and in different places. It wasn’t a technical revolution. It was a mental revolution. See, money is not coins or dollar bills – money is anything that people are willing to use in order to represent systematically the value of other things for the purpose of exchanging goods and services.

This is why throughout history, shells, cattle, skins, salt, grain, beads, cigarettes, and even packets of Ramen noodles have all been used as forms of currency.

Money allows people to store the value of a good or service, which they can then transform into some other good or service. It allows people to convert what they have into what they need or want.

Universal Trust

As Harari points out, money wasn’t a technical evolution – it was a mental revolution.

Cowry shells and dollar bills only have value in our common imaginations. Their worth is not inherent in the chemical structure of the shells and paper, or their color, or their shape. Their worth is only derived in the minds of the people who use them.

So why does money work? Why would a anyone be willing to give up the most fertile agricultural grounds in exchange for some cowry shells? And why are you willing to flip hamburgers, sell used cars, or sit at a desk for 40+ hours a week for a few pieces of colored paper?

Here’s Harari again:

People are willing to do such things when they trust the figments of their collective imagination. Trust is the raw material from which all types of money are minted. When a wealthy farmer sold his possessions for a sack of cowry shells and traveled with them to another province, he trusted that upon reaching his destination other people would be willing to sell him rice, houses and fields in exchange for the shells. Money is accordingly the most universal and most efficient system of mutual trust ever devised.

Today, this mutual trust is based on very complex and long-term networks of political, social, and economic relations. But initially, when the first versions of money were created, people didn’t have this sort of trust. So it as necessary to define as “money” things that had real intrinsic value.

History’s first known money was simply barley – set amounts of barley grains were used in Sumer as a universal measure for evaluating and exchanging all other goods and services.

Still, barley was difficult to store and transport. The real breakthrough in the history of money occurred when people gained trust in money that didn’t have inherent value, but was easier to store and transport. This breakthrough occurred about a millennium after barley money was created, and it came in the form of the silver shekel in Mesopotamia.

The silver shekel wasn’t a coin – it was 8.33 grams of silver. Silver of course has no inherent value. You cannot eat, drink, or buy clothing with silver, and it’s too soft for making useful tools like ploughs or swords. Eventually set weights of precious metals gave birth to coins, which eventually gave rise to notes and dollar bills.

What’s interesting is just how universal the system of money – whether it be cowry shells, gold coins, or dollar bills – is. For example, why would Chinese, Indians, Muslims, and Spaniards – who belonged to very different cultures that failed to agree about much of anything on much of anything else – nevertheless share the same belief in gold? Why didn’t the Spaniards believe in barley, Indians in cowry shells, and Chinese in rolls of silk?

Harari says that it’s simply economics. Once trade connects two areas, the forces of supply and demand tend to equalize the prices of tradeable goods.

Assume that when regular trade opened between India and the Mediterranean, Indians were uninterested in gold, so it was almost worthless. But in the Mediterranean, gold was a coveted status symbol, hence its value was high. What would happen next?

Merchants travelling between India and the Mediterranean would notice the difference in the value of gold. In order to make a profit, they would buy gold cheaply in India and sell it dearly in the Mediterranean. Consequently, the demand for gold in India would skyrocket, as would its value. At the same time the Mediterranean would experience an influx of gold, whose value would consequently drop. Within a short time the value of gold in India and the Mediterranean would be quite similar.

Just the fact that Mediterranean people believed in gold would cause Indians to start believing in it as well.

Similarly, the fact that another person believes in cowry shells, or dollars, or electronic data, is enough to strengthen our own belief in them, even if that person is otherwise hated, despised or ridiculed by us. Christians and Muslims who could not agree on religious beliefs could nevertheless agree on a monetary belief, because whereas religion asks us to believe in something, money asks us to believe that other people believe in something.

Conclusion

Harari concludes his discussion on the history of money with the following observation:

For thousands of years, philosophers, thinkers and prophets have besmirched money and called it the root of all evil. Be that as it may, money is also the apogee of human tolerance. Money is more open-minded than language, state laws, cultural codes, religious beliefs and social habits. Money is the only trust system created by humans that can bridge almost any cultural gap, and that does not discriminate on the basis of religion, gender, race, age or sexual orientation. Thanks to money, even people who don’t know each other and don’t trust each other can nevertheless cooperate effectively.

What do you think of Harari’s summary of the history of money? Do you agree that money is the apogee of human tolerance? Tell me what you think in the comments section or shoot me an email!