It might seem silly that digital-currency fanatics are using immaterial strings of numbers—the “addresses” that identify individual Bitcoins and determine who owns them—to buy and sell very real things like cars and houses. But just imagine paying for everyday goods with cowry shells, iron disks, or giant round stones. Throughout history, these objects and many more have functioned perfectly well as currency. That’s because money is nowhere near as limited as how we usually define it.
The story of money begins with the idea of value. The earliest material exchanges that occurred in human society were part of a barter economy: people traded useful goods for other useful goods that they might not have access to. According to Matt Ridley’s book The Rational Optimist, this allowed early humans to specialize on individual and group levels and thrive. Thirty-thousand years ago, they beat out the neanderthals, who lacked such a trade system, one factor in their extinction.
However, scholars like David Graeber have shown that barter likely never made up the entirety of an economy. Along with bartering systems and ceremonial gift-giving, what is called commodity money may have evolved as a way to create a more universal medium of value exchange. Commodity money is a form of currency that’s valued both for its function as money and its ability to be used, an intrinsic value.
If bus riders in Finland can pay for their tickets in gingerbread, why not virtual currency?
One-hundred-thousand years ago in Swaziland, red ochre was mined from the Earth to use as pigment and paint as well as one of the earliest examples of commodity money, a medium of exchange between tribes. In Mesoamerica, cacao beans went beyond an ingredient for spicy hot chocolate and became a commodity currency. In 1526, the Spanish historian Oviedo wrote of the bean in Nicaragua, “everything is bought with cacao, however expensive or cheap, such as gold, slaves, clothing, things to eat and everything else ... there are public women who yield themselves to whomever they like for 10 cacao beans.”
Cigarettes often functioned as a commodity currency in prisons until the Federal Bureau of Prisons banned smoking in 2004. One prisoner remembers chicken going for one pack of cigarettes in the 1990s, with booze going as high as two or three cartons. Now, inmates use stamps—worth $6 a book on the inside.
In contrast, representative money is currency that represents, rather than is, a given amount of a valuable commodity. In 1792, the U.S. Congress passed the Mint and Coinage Act that established a fixed exchange rate between dollars and gold, creating the country’s early gold standard. Theoretically, each paper bill represented an equivalent amount of gold that the holder could request from the government (of course, the Treasury didn’t hold enough gold to convert all of the currency at once).
When the government went off the gold standard in 1933, dollars were no longer convertible to gold (a policy also enshrined by the Nixon Shock of 1971), and the currency became fiat money. Latin for “it shall be,” fiat currency isn’t backed by anything but a government’s official stamp of approval, and its value isn’t directly related to its material value.
The first fiat currency was used in 10th-century China during the Song Dynasty. The government issued paper money—also the first of its kind—called jiaozi, bills printed with images of trading merchants. The succeeding Yuan Dynasty was the first to use paper as the single dominant currency. Chao bills were issued by the dynasty founder Kublai Khan. “All these pieces of paper are, issued with as much solemnity and authority as if they were of pure gold or silver,” Marco Polo recounted in the 13th-century The Travels of Marco Polo. “Wheresoever a person may go ... he shall find these pieces of paper current, and shall be able to transact all sales and purchases of goods by means of them.”
The primary goal of money is to connect disparate individuals and groups, giving them a universal medium of exchange in the form of an object or symbol that all parties value. Does it matter much what material form the actual money takes, or if it has any material form at all? If bus riders in Finland can pay for their tickets in gingerbread, why not virtual currency? “People say Bitcoin has no intrinsic value,” Tony Gallippi, the CEO of BitPay, said during a panel at the 2013 Money2020 conference. “But what gives any form of money value is its utility as money.”
The problem facing any kind of currency, whether red ochre, cacao beans, or paper, is usage. “If no one else is using it, no one wants to use it,” Chris Larsen, the founder of the digital currency company Ripple, said in a recent interview. That could be an issue for the U.S. Dollar as much as Bitcoin.
Throughout modern history, currency has largely evolved away from commodity and representative money and moved toward becoming a material-less, frictionless way of tallying up our credits and debts. Virtual currencies that embrace these qualities that make money more useful may just be the next step in our monetary evolution. After all, no one wants to carry around a pocketful of cacao beans anymore.