Before money existed, people solved the problem of exchange through barter. If you raised chickens and needed grain, you’d find someone who grew grain and wanted eggs. This worked fine in small communities where everyone knew each other and needs were simple. But barter had serious limitations that became obvious as societies grew more complex.
The fundamental problem with barter is what economists call the “double coincidence of wants.” You need to find someone who has what you want and simultaneously wants what you have. Imagine you’re a sandal maker who needs a new roof. You’d have to find a thatcher who not only needs sandals but needs them right now and in the exact quantity that matches the value of roof repair. Even worse, many valuable things couldn’t be divided—you couldn’t pay for a loaf of bread with a fraction of a cow.
As societies developed, certain commodities began serving as intermediate goods in trades. These proto-currencies varied wildly by geography and culture. In ancient China, cowrie shells became a medium of exchange. Pacific islanders used carved stone disks called Rai stones, some weighing hundreds of pounds. In parts of Africa, salt bars were so valuable they literally paid people’s salaries (which is where we get that word). Cattle, grain, tea bricks, cocoa beans—all served as money in different times and places.
What made these commodities work as early money? They shared several key characteristics. They were relatively durable, meaning they wouldn’t spoil or decay quickly. They were difficult enough to produce that they remained scarce but not so rare that ordinary people couldn’t access them. They were divisible or came in standard units that made calculating exchanges easier. And critically, they were widely desired, which gave them consistent value across many transactions.
The revolutionary leap came when societies invented representative money—objects that had value purely because everyone agreed they had value. The Lydians in ancient Anatolia (modern-day Turkey) are credited with creating the first standardized metal coins around 600 BCE. These weren’t the first metal money—bronze and copper had been used for centuries—but Lydian coins were stamped with official marks guaranteeing their weight and purity. This innovation solved the problem of constantly weighing and testing metal during transactions.Coins spread rapidly because they solved so many problems at once. A merchant no longer needed to carry actual goods to market or trust that shells or salt bars were genuine. Governments could stamp coins with their authority, making counterfeiting a crime and ensuring standard value across their territories. Coins were durable, portable, divisible, and held intrinsic value from their metal content even if the issuing authority collapsed.
Paper money emerged much later, first in Tang Dynasty China around the 7th century CE. Initially, paper money was simply a receipt—you could deposit heavy coins with a merchant and receive a paper note you could later redeem. But governments realized they could issue paper notes backed by the promise to exchange them for metal, rather than requiring actual metal deposits for every note. This created fiat money, currency that has value primarily because a government declares it legal tender and people trust that others will accept it.
The evolution from commodity money to representative coins to fiat currency represents an increasing abstraction of value. Modern digital money—numbers in bank accounts that we transfer electronically—is the ultimate abstraction. We trust that these digital entries can be converted into goods and services, even though they have no physical form whatsoever.
Money didn’t emerge from a single invention or a flash of insight. It evolved gradually as humans discovered that having a common medium of exchange made life dramatically easier than barter ever could. What began with cowrie shells and cattle has become the complex financial systems we navigate today, but the core function remains the same: money is humanity’s solution to the problem of coordinating value across millions of individual desires and needs.
