Throughout human history, economic factors and consumer needs have led to changes in how people use money. From cowrie shells in early civilizations to the global rise of Bitcoin, innovations in currency have been an important part of history.
Bartering and Banknotes: A Brief History of Money
Early humans began bartering for goods and services with livestock as early as 6000 B.C.
Cowrie shells, one of the earliest forms of currency, were used near the Indian Ocean beginning in 1200 B.C. Around 200 years later, people in China began trading small copper and bronze replicas of cowrie shells and other items such as tools.
The first coins in recorded history arose in what is now Turkey in 600 B.C. Coins made from gold, silver and bronze became popular across Europe and Asia. The coins’ value was directly linked to the value of the rare metals used to make them.
In 1290, Marco Polo saw paper money in use in China and brought the concept back to Europe. However, paper money didn’t become popular until the 17th century, when Sweden became the first country to print banknotes. One big advantage of paper money was that it didn’t rely on the production of precious metals such as gold.
Native Americans first used wampum, beads made from clamshells, in trade with English settlers in 1630. Previously, wampum was worn as jewelry or decoration to signify status within a tribe. Around the same time, settlers began to use fur pelts as a form of currency in North America.
The gold standard, which defined the value of currency in terms of gold, began in England in 1816. European banks had produced banknotes for hundreds of years, but around this time, the value of the notes was linked to the value of gold for the first time. Gold became the standard in the United States in 1900.
In the 1930s, the Great Depression marked the beginning of the end of the gold standard. In 1933, President Franklin Roosevelt required Americans to exchange their gold for paper money to try to stop individuals from hoarding gold. At the end of the Depression in 1939, the U.S. held the most gold of any country in the world. Other countries began to peg the value of their currency to the dollar rather than to the gold standard. In 1971, President Richard Nixon officially ended the gold standard in the U.S.
The Diners Club Card, the first modern credit card, was born in 1950. The idea for the card came to businessman Frank McNamara when he forgot his wallet while dining at a restaurant. He wished for a form of payment that represented credit with a bank, rather than relying on physical money. He soon returned to the same restaurant and paid with the first Diners Club Card.
21st Century Innovation and the Rise of Bitcoin
As with the Diners Club Card, consumers’ needs are often the driving force behind innovations in money. These innovations continue into the 21st century. Recent developments include convenient payment applications such as PayPal and Venmo. Contactless transactions, which allow customers to hold their credit card or phone near a payment terminal to pay, are also taking off.
It was the desire for a private, convenient, speedy form of international transaction that led to the invention of Bitcoin in 2009. A mysterious inventor, Satoshi Nakamoto, introduced bitcoins to the public that year and mining started; bitcoin mining is the process through which coins are discovered and recorded.
The following year, bitcoins were used as currency for the first time, as someone traded 10,000 of them for two pizzas.
Like all money, bitcoins are valuable simply because they can be traded for goods and services.
According to bitcoin.org, users’ trust in Bitcoin “comes from the fact that it requires no trust at all.” In other words, the currency is trustworthy because of its transparency and the fact that it isn’t controlled by a particular organization or person.
The intense demand for bitcoins led to the currency’s unprecedented growth. The price of a single bitcoin reached a high of nearly twenty thousand dollars in December 2017.
Bitcoin’s supply is unique compared to other currencies. The rate at which new coins are mined is designed to slow over time. There is also a hard cap on the total number of bitcoins that can be mined. Currently, just over 3 million unmined bitcoins remain, out of 21 million total.
Competition with other cryptocurrencies, such as Ethereum, also affects Bitcoin’s value. New cryptocurrencies enter the market often, which helps keep prices down. Currently, Bitcoin’s popularity gives it an advantage over competitors.
In 2018 many cryptocurrencies, including bitcoins, lost up to 80% of their value due to large selloffs and other events.
The actions of bitcoin “whales,” who hold large amounts of the cryptocurrency, can cause fluctuations in price. A whale transferring or selling bitcoins can lead to sharp drops in value.
One such selloff took place in June 2019. A bitcoin whale moved 25,000 bitcoins onto the Coinbase exchange and then removed them a short time later. As a result, the price of bitcoin dropped 8% over 24 hours, a loss of almost $1,000 per coin.
A drop of $2,000 per coin in July 2019 was attributed to remarks by US Federal Reserve chairman Jerome Powell. He stated that he would not approve Facebook’s proposed cryptocurrency, Libra, until concerns about fraud, privacy, and other issues are addressed.
Bitcoin’s Future
Bitcoin’s anonymity and lack of an overseeing party are two of its selling points. They’re also reasons that scams and fraud are hard to prevent in the world of cryptocurrency.
Mt. Gox, once the largest cryptocurrency exchange in the world, declared bankruptcy in 2014 after losing $460 million of bitcoin to hackers.
As of September 2019, some financial experts are urging Congress to enact much stricter regulations around cryptocurrencies. The goal of these regulations is to combat cryptocurrency’s use in illegal activities, including human trafficking.
In a written statement to the U.S. Senate, David Murray, vice president at Financial Integrity Network, said that the lack of a compliance system for cryptocurrency “allows criminals space to operate.” He wrote that the anonymity of cryptocurrency makes it less likely for law enforcement to notice payments that are involved in human trafficking.
Murray proposed sweeping changes to how the US government monitors and regulates cryptocurrencies.
The proposed regulations would strictly reduce the use of Bitcoin and would likely cause significant drops in its value.
Peter Van Valkenburgh said that the regulations would be “an effective ban” on Bitcoin and other cryptocurrencies in the U.S. Van Valkenburgh is a director at Coin Center, an advocacy group that works on policy issues facing cryptocurrencies.
While Bitcoin’s exact future is uncertain, the history of innovation in currency shows that new forms of payment will continue to play an important role in society
