The Evolution of Money

Core Concepts

Money is the tool that functions as a store of economic value, a medium of exchange, and a unit of account.
It improves social coordination.

Economic value is a measure of the benefit provided by a service.

A medium of exchange is the asset used to settle a transaction (i.e., the currency in which it is denominated, such as USD), while a means of payment is the method used to execute the transaction (i.e., the instrument or tool, such as a credit card).

Currency is a generally accepted medium of exchange.

Scarcity is the relative low availability of something.

Monetary Attributes

Monetary Evolution Stages

1. Collectible stage:

Humans, guided by natural instincts, have always enjoyed collecting and trading rare items.

Around 50,000 years ago, Homo sapiens collected shells and animal teeth, made jewelry, showed it off, and traded it—unlike Neanderthals. In Siberia’s Denisova Cave, archaeologists found beads made from ostrich eggshells, even though ostriches only lived thousands of kilometers away in much warmer regions.

This shows how far Homo sapiens went to collect rare objects. Their hobby led to early forms of money, helping them store and share wealth—giving them a social advantage over the stronger Neanderthals.

These collectibles were easy to recognize as valuable, often symbolized rights or status, and their scarcity was obvious and lasting.

2. Store of Value stage:

Durable and easy to hide, these jewels stored value safely and were passed down through major life events. They reduced violence by making tribute more rewarding than fighting, and encouraged favor exchange and food sharing—key steps toward civilization.

3. Medium of Exchange stage:

In the Neolithic era (10,000–1,200 BC), money took the form of precious metal collectibles, but their value wasn’t standardized.

Small, valuable, and widely accepted items were used for trade, though checking metal content was expensive and limited to major merchants.

Around 700 BC, the Lydians in modern-day Turkey invented coinage. This allowed trusted issuers to guarantee value, improving fungibility and divisibility.

4. Unit of Account stage:

Monetary metals like gold and silver became highly saleable, helping markets grow and prices stabilize. They eventually became global value standards.

As economist William Stanley Jevons noted, gold first served as ornament, then stored wealth, became a medium of exchange, and finally a measure of value.

Still, in many parts of the world, non-coin forms of money continued to be used.

The Appearance of Paper Money

In 7th-century China, merchants began issuing paper receipts for stored coins. By the 10th century, only licensed entities could do so, and by the 12th, the Song dynasty took control—issuing paper backed by no real coins. Redemption for metal was banned in the 13th century, leading to hyperinflation and collapse by the 15th. Metal money returned to prominence.

In the West, from the 16th century, paper instruments like bills of exchange eased trade. By the 17th century, banknotes backed by metal reserves became common. In the 18th century, coin counterfeiting pushed people toward paper money, which was easier to verify, leading metals into vaults.

Advances like trains and the telegraph helped banks move money faster. Over time, a few banks became main gold custodians. Governments took over note issuance and centralized it.

Paper money improved gold’s divisibility, reducing silver’s role. In 1717, Britain adopted the gold standard, which about 50 countries followed by 1900.

World War I broke the gold link as nations printed unbacked money. The U.S. devalued the dollar in 1933 and took citizens’ gold. After WWII, the U.S. held most global gold. The 1944 Bretton Woods system pegged other currencies to the dollar, itself tied to gold.

By 1971, Nixon ended the dollar’s convertibility to gold. Since then, central banks have issued purely fiat money.

Fiat Money

Fiat money is currency issued by governments through central banks. It includes physical money (coins and bills) and digital reserves held by commercial banks. Together, these form the monetary base.

People only hold physical money directly. Access to digital money happens through banks, which issue demand deposits (like checking accounts)—promises to pay cash on demand.

Banks don’t hold all deposits in reserve. Instead, they keep a fraction and lend the rest, creating more claims than actual cash. These claims make up bank money.

Cash + bank money = what most people perceive as available monetary value. Because of this, prices react more to changes in total bank money than to changes in the base money alone. This led to tracking money aggregates like M2 (broad money).

The money multiplier explains how much bank money can be created from base money, depending on the reserve ratio. Central banks influence this system by adjusting bank reserves and interest rates, encouraging or discouraging lending to control how much bank money is created.

The Digital Age

As money went digital, cash use declined and regulations grew. Anti-Money Laundering (AML) and Know Your Customer (KYC) rules required financial institutions to collect and share personal data—often exposing it.

“Trusted third parties are security holes. People gather your data on the promise that they will never share it, when in fact they cannot, and will not retain control of it for long.” — Nick Szabo.

Financial assets became centralized under state-controlled institutions, turning money into a surveillance tool.

“Don’t put most of your family’s wealth in assets that some stranger can turn on and off like a switch.” — Nick Szabo.

Nevertheless, every time a money becomes more of a Medium of Censorship, it becomes less of a Medium of Exchange.

The Rise of Bitcoin

“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government... all we can do is by some sly roundabout way introduce something that they can’t stop.” — F.A. Hayek, 1984.

In the 1980s, the cypherpunk movement emerged to defend privacy through encryption. Their vision, mixed with libertarian ideals, inspired the goal of depoliticizing money.

“Privacy is necessary for an open society in the electronic age.” — Eric Hughes, 1993
“The computer can be used to liberate and protect people…” — Hal Finney, 1992

Early digital money attempts—like Hashcash, B-Money, Reusable Proof of Work, and Bit Gold—failed due to centralization.

Then, in 2008, the pseudonymous Satoshi Nakamoto released the Bitcoin White Paper, proposing a peer-to-peer electronic cash system—bearer money with no third-party control.

“I had to write all the code before I could convince myself I could solve every problem…” — Satoshi Nakamoto

The Bitcoin Network launched on January 3, 2009. Block 0 embedded a message from The Times:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

Only Hal Finney joined at first:

“Running bitcoin” — @halfin, Jan 11, 2009

Bitcoin’s design was fixed at launch, but others soon joined to improve its security. The first real-world transaction happened on May 22, 2010, when 10,000 BTC were traded for two pizzas.

Satoshi disappeared in 2011, writing:

“I’ve moved on to other things.”

Bitcoin gained attention slowly.

“I wish I had kept my 1,700 BTC @ $0.06 instead of selling at $0.30, now they’re $8!” — @GregSchoen, 2011

In under a decade, Bitcoin became the world’s most secure financial network, run by tens of thousands of nodes around the globe.