History of Money | Where Money Was Born
What is money? How does it work, anyway? And where does money come from to sell to somebody so they can spend it? Thin air? You might be surprised at the answer.
Let’s go back to the beginning.
The lending system that we are so accustomed to today came from the same place the Romans got Juno Moneta, their mythological inventor of currency, and her temple, which is where money was minted. It came from Babylon.
Ancient Babylon was an agrarian economy ruled over by a pagan priesthood. At that time, wealth meant real assets that could produce real commodities. You traded your neighbor two chickens for the use of his plow; he bartered a sack of cornmeal for one of your wife’s well-crafted tunics. You traded what you needed for what he needed. It worked.
As work became more specialized and people got away from the land and began to form rudimentary cities for the sake of commerce, trading sheep for cows or tools or seed became impractical. If you didn’t have anything that the only guy with coconut trees needed, you got no coconuts. Or you had to trade with someone who could trade with someone who could trade with the coconut man. Plus, it was a big production to transfer the goods, especially where livestock was involved. For people seeking to amass wealth quickly, bartering was too slow, too impractical and sometimes impossible.
So the ancient Babylonians found items that were universally needed, easily divisible and easily portable that would function as a sort of currency: basic foodstuffs and similar commodities, for example. But these goods were still not universal, durable or portable enough. They were looking for something everybody needed—or at least something everybody would agree represented something everybody needed.
They found it: gold. Gold was durable, portable, rare and hard to produce. But, by itself, it had little intrinsic practical value except as jewelry. You couldn’t eat it, make tools out of it, grow crops from it, build your house with it or keep warm with it. The thing was, for it to be universal, everyone had to agree that certain amounts of gold equalled certain amounts of goods that were actually valuable. And they had to have faith that everyone would accept it.
They did. Money was born.
Of course there were and are other types of currency in other parts of the world, some quite strange: bullets, tobacco, whale’s teeth, dog’s teeth, cartridges, metal rings, stone rings, knives, beeswax, cowrie shells, spades, cigarettes, beads, salt. In sophisticated cultures, it’s fiat money, numbers inside books and on computer servers, along with round bits of metal and rectangular bits of paper. It’s all called money.
But no matter what culture it is, every person wants to make his store of currency grow faster so he can exchange it for more things he actually needs and wants.
Back to Babylon.
As Babylonians accumulated money, some figured the quickest way to make their personal store of currency grow was to steal others’. This was a problem. So people took their money for safe-keeping to their pagan priest. He stored it in the temple, the people got security and the priest got even more power than he already had.
Then the priest got an idea. Some successful people in the community had real assets: foods, lands, tools, servants, livestock. They wanted to start new revenue-making business projects but lacked the money to do it. So the priest sold them the use of the money under his control. These businessmen used the money, paid it back after a certain amount of time, and paid a fee for having used it.
Those who borrowed money for projects paid the money to their suppliers, who then brought it back to the temple. Since the gold came back to the temple anyway, rather than passing the gold itself around, the priest began issuing receipts that represented the gold—which represented actual wealth. If his borrowers failed, the priest got some of their wealth. If they succeeded, he got a nice interest payment. The savings and loan was born.
Then the Babylonian priest cooked his first book. He realized that of all the gold he was in charge of, only a fraction of it was ever withdrawn at any one time. And typically this came back, under different ownership, a short time later. So he began lending the same unit of gold multiple times. This was possible because a) he controlled the gold, b) few people came to claim their actual gold at once and c) people dealt mostly with receipts anyway rather than the gold itself. As long as most of the depositors never came to claim their gold simultaneously, as long as they remained confident that their clay receipts vouching for the gold would continue to be recognized and desired and they could trade them for items that were actually valuable, it didn’t matter.
Where did all the money circulating Mesopotamia come from, then? Where does our money come from? Nothing—literally. Thin air.
Babylonians—and societies in general—began by bartering actual wealth for actual wealth. Then, they moved to gold—a representation of wealth—and then gold receipts (“cash”)—representations of gold. As the temptation to print up stacks of cash far beyond their gold reserves grew too great, nation after nation after nation moved progressively away from gold-backed money until their currency became “fiat”—worth something only in the consumer’s mind. In America’s case, it cut itself loose altogether from any gold standard in 1971. And today, the bulk of transactions do not even involve the movement of paper currency. Instead, electronic numbers decrease on one computer screen and increase on another—or are created out of nothingness with the press of a button. It sounds risky because it is.
Obviously, money itself is certainly not a wrong concept. It is an advantageous tool. However, like everything else man has gotten his hands on, it has become thoroughly corrupted. In America today, money is not wealth. And in most cases, it’s not even bits of paper and metal. It’s electronic numbers entered into computers, numbers representing your confidence in the way the economy is set up. An American banker can create money by pressing buttons, but he cannot create actual wealth out of thin air any more than a Mesopotamian farmer could magically make a grain harvest instantly appear.
But don’t take our word for it. Here’s what makes money work according to the Federal Reserve, the privately-owned central bank of the United States: Money is “the confidence people have that they will be able to exchange such money for real goods and services whenever they choose to do so” (Modern Money Mechanics, emphasis mine).
All that the cash-carrying Babylonians, and Assyrians and Greeks and Romans—and Americans—actually had or have is confidence that they could trade a piece of money—which represented gold—for actual wealth.
From the beginning, this Babylonian economic system was based on selfishness and susceptible to corruption. Lenders tried to squeeze borrowers, borrowers tried to get around lending terms, each tried to steal from the other in subtle ways. Just like today, when a man could do something that benefited himself by hurting others, he often did so, as long as he wouldn’t get caught. Greedily living beyond one’s means was a given then as well as now. But this selfishness and accruing dishonesty, along with reckless irresponsibility, meant this precarious system would eventually fall. When a major crisis struck—or, when the system became extremely leveraged and a minor crisis struck—confidence in bits of clay and even bits of gold would evaporate, and this conjured economy would eventually collapse. This happened both here and in Assyria, Greece, Rome, Weimar Germany, the Eastern Bloc, Zimbabwe; A to Z and everything in between.
Fast-forward to today. In modern America, it’s green paper and dull metallic discs that constitute money. And these don’t even represent gold, which itself only represents actual wealth. Money is valuable only because everyone thinks money is valuable. That’s it. Money equals confidence—in money.
Money is and always has been best described in one word.
Today it’s a blind faith in unseen fiat money—bits of paper and numbers on computers given meaning only so long as people believe this rapidly collapsing system, fueled by fear and greed, will continue to sustain itself. It’s a faith in the exact same type of financial system that began in pagan Babylon and has since collapsed over and over again throughout history because of its intrinsic flaws. Yet—for now—our faith that we will be able to get what we need tomorrow using fiat money is rock-solid. Maybe, just maybe, it would be wiser to put our faith in something a little more sure.
For that, check out “Ending Your Financial Worries,” “Storm-Proof Your Financial House” and “Be a Good Steward.” Tomorrow, we’ll look at where man’s corrupt monetary system is heading. Look for part three of this series, “History of Money | The Future of Money.”