To know your future you must know your past.
The above can certainly also be said about monetary systems. When swiping a card at the grocery store, it is hard to imagine our ancestors using seashells or cows as currency. In the same way, many countries are making paper and metal coins a thing of the past. At this rate, in a few year’s time plastic cards and even the centralized financial systems we use today, will look like antiques.
Nonetheless, it makes sense to look at the earlier steps of the monetary evolution to better understand what’s coming next …
Trading with barter
Trading per se started with barter. People traded in plenty and scarcity of commodities. Eggs for grain; at least we know the chicken came before the exchange. Unless you didn’t have chickens. Then the exchange came first.
But eggs are fragile - they don’t travel well. Something else was needed. Something that wouldn’t spoil or be eaten. That was solved about 4000 years ago, when merchants in Assyria, India, and Sumeria gave loans to farmers and traders carrying goods between cities. Among the oldest laws known, in the Code of Hammurabi, are banking and accounting laws. And that something replacing barter? Metals.
Metals - paying the hard way
Eventually, people in many places settled on metals as a means of both storing value and exchange. Metals were durable, relatively hard to find, and they definitely didn’t taste like chicken.
But there were problems - metals are heavy, you need to trust the other side that what they’re telling you is pure enough. Moreover, you needed to have a standardized unit. A clump of metal is not as useful as a shape that should weigh a certain amount. These shapes, known as ingots, appeared across Asia and Asia Minor about 8,000 years ago. Silver bars were used in Central Asia as well. In eastern Asia, ‘knife money’, metallic ‘knife’ shapes were used as money about 3,000 years ago.
All about coins
Ingots were big, and heavy. Something more portable was needed, and by 3,000 years ago, roundy metal bits were used. We call them coins. With the coins, though, came devaluation, mostly by changing the silver content. The Roman denarius, which appeared in 211 BCE, had less and less silver in it over time, until by 300 CE, the silver content was ⅓ of what it had been at the beginning. Debasing money hasn’t stopped since. But then again, it was never a matter of the amount of silver, but the face on the coin, and the trust in that person and the system he represented.
Devalued or not, Roman coins were accepted across a large empire. How deposits were held is an open question, but we’re still finding hoards of Roman coins throughout the old empire. Sometimes, these are not simply bags of mixed coins, but buried in an orderly manner.
Paper - lightweight money
Medieval and renaissance banking brought amazing changes that can be called the birth of the industry in modern terms. In China, paper money makes its debut. Cities on the Italian peninsula developed the grain trade and modernized credits, trading debt, dual-entry accounting, and insurance.
Precious metals backed paper money for hundreds of years. Depending on scarcity, the metal backing the paper notes was usually silver or gold, or both. This came to a head when the Bretton Woods system was established after WWII. Currencies were based on gold, and from that, their exchange rates were derived. Once the Bretton Woods system broke down, the monetary system became solely a matter of trust in the system.
Credit cards made it easier to carry money and make purchases, but they added a lot of manual tasks and paper-based processes. That changed when electronic, or computer-based money became a reality. Suddenly, you could get your salary by direct deposit from your employer and pay for groceries by a debit card that took money straight from the account. There was never a physical component to any transaction.
By the end of the 20th Century, investment banks also had computerized processes. But these were just building blocks - there were no interconnections between systems. Making changes or offering new products took years.
Unfortunately, digitalization also increased the ability to leverage the monetary system, which amplified boom-and-bust cycles. By doing so, the weaknesses of the 20th Century’s banking system have been exposed.
The next step
The digitalization of the banking and finance industry has already created wealth, lowered trade barriers, and reduced costs. However, since the turn of the millennium, technology has left behind the centralized databases that powered the rise of electric money. Fintech, based on decentralised ledger technology, cloud computing, and other new technologies, has made storing wealth and making payments more accessible to more people than ever before.
We now have the ability ourselves to do what used to take central bankers and advisors to kings to accomplish. We can bank the unbanked now, and properly bank the banked.