During the Stone Age, when one cave man needed a primitive tool or weapon that another cave man had, he would pay for it using the world’s oldest form of currency and one which is still in circulation today – violence.
Failing that, the barter system was invented. Food, tools and other practical resources were traded in whatever the two parties considered to be of equal value. Useful goods, such as cattle, clothing, grains, and even weapons and wine were considered the earliest forms of currency because, to whoever was bartering for them, their value was immediately apparent.
In the earliest instances of trade with money, the things with the greatest utility and reliability in terms of re-use and re-trading of these things (their marketability), determined the nature of the object or thing chosen to exchange. So as in agricultural societies, things needed for efficient and comfortable employment of energies for the production of cereals and the like were the easiest to transfer to monetary significance for direct exchange. As more of the basic conditions of the human existence were met to the satisfaction of human needs, so the division of labor increased to create new activities for the use of time to solve more advanced concerns. As people's needs became more refined, the indirect exchange became more likely as the physical separation of skilled laborers - who controlled the supply of goods - from their prospective clients - who had the demand for goods - which required the use of a medium common to all communities, to facilitate a wider market.
According to Aristotle, “When the inhabitants of one country become more dependent on those of another, and they imported what they needed, and exported what they had too much of, the necessity of money came into use.”
Aristotle
According to Nancy Demand in her book The Mediterranean Context of Early Greek History, it wasn’t until around 15,000 BCE that Anatolian obsidian was considered a valuable form of currency, which was mined from areas surrounding the Mediterranean and distributed through organized trade. Then, around 3,000 BCE, copper and silver became the dominant forms of currency in most of the civilized world. Countries controlling the copper and silver mines would press coins made from either mineral. Not to be outdone, other countries soon followed.
Gold first gained popularity in Asia and was quickly circulated throughout Europe. Initially, gold was preferred to other metal currencies, like silver and copper, because it was much harder to come by. It is also denser, yet soft, making it easy to assay, or test its authenticity.
For centuries, gold was the preferred form of currency around the world. With gold coins as the standard currency in most countries, the world’s economy was in great shape. For travelers throughout Europe in the middle ages, it didn’t matter which country your gold coins came from since they were all made of the same material and were carefully made so that each coin had the same weight.
There was only one drawback to gold coins. For many wealthy merchants throughout Europe, their business thrived on travelling from one city to the next. Knowing this, gangs of bandits and criminals routinely ambushed, robbed, and murdered merchants and travelers for their wealth of gold coins. A trader was left with two options – spend a fortune to hire soldiers to defend their goods while travelling, or stay in the same city and watch their business shrink.
Because of this, bank notes and bills of exchange were invented as the first form of credit, allowing merchants to travel while leaving their fortune of gold with a reputable banker, then redeem the bank note for their gold at a later date. These bills could also be used as a form of payment by the seller to make additional purchases from his own suppliers. It wasn’t long before the popularity of the paper note became both a medium of exchange and a medium for storage of value. Like the loans made by the Egyptian grain banks, this trade credit became a significant source for the creation of new money.
Gold and silver
With every country now utilizing their own bank notes, confusion and chaos began to set in due to an unbalance in world economy and exchange rates. Following World War II, forty-four of the world’s nations met at the United Nations Monetary and Financial Conference in 1944 and agreed on the Bretton Woods System, stating that all of the world’s currencies would be backed by the US dollar, since the United States had the strongest economy at the time and the US dollar was still backed by the gold standard.
Then, in 1971, in an attempt to curve the nation’s growing rate of inflation, President Richard Nixon announced that the US dollar would no longer be backed by gold. In its place – nothing.