All about money

Money has not always come from cash machines at banks. It has a long history and has developed over thousands of years. As our society has developed, so our need for more sophisticated types of money has developed in parallel, as is described here.

What is money?

The history of money shows us that it is a medium of exchange for trade. It can be a medium of exchange because it has a clear value that is trusted by everyone.

Money is also a way to store value for the future. So, for example, we can save up our money to buy something expensive in the future.

Finally, money is also a unit of account. It can be counted easily and it enables a clear value to be given to goods.

What about banknotes?

Until recent times, money was based solely on coins. This was because a coin contained a precise weight of a metal, such as gold or silver, that had a known value. This type of money is known as 'specie money' and its value is guaranteed by the precious metal it contains.

As trade increased, more and more money was needed as a medium of exchange. Therefore, banks and governments began issuing banknotes.
Banknotes do not contain the value they represent.
Instead, the issuer of a banknote guarantees its value. This is known as 'fiat money'.

The history of money

Barter



TIME TRAVELLER
You've ended up in the Stone Age! Travel through the perilous ages and collect the right currencies to warp back to the present.

Many thousands of years ago, our European ancestors lived as hunters and farmers.


Stone axe from
the Stone Age
Metals had not been discovered, so they hunted and farmed with stone tools – this time was known as the Stone Age. Stone Age men and women did not have the banknotes and coins that we use today. Instead, they would exchange goods with each other: for example, a hunter could exchange animal skins with a farmer for grain, or a fisherman could exchange decorative seashells for a polished stone axe with a hunter. This exchange is known as barter. An important feature of barter is that it involves the exchange of goods that have value.


A medium for exchange

When our ancestors learned how to make metals then exchanges became easier.


Silver nugget

This is because metals, such as gold silver, tin and iron, were valuable to everyone. So, a farmer could barter his cattle for a certain weight of silver, then later, the farmer could use some of this silver to pay his taxes. In this way, valuable metals and other objects became a 'measure of value', a 'medium of exchange' and a way to 'store value' until it is needed.


The first coins

Around 2600 years ago, the first coins were made in Asia Minor.

Ancient Greek coin

The ancient Greeks quickly adopted this new idea and started producing silver and bronze coins, for example the silver drachma. These early coins contained a specified weight of metal with a certain value. And to guarantee this weight, the coins were stamped with a seal by the king or city or country that issued them.

Coins were convenient because they could be counted rather than weighed. Because these new coins were a trusted and efficient 'medium of exchange' they helped greatly increase trade in the ancient world.

The first European currencies

To guarantee the value of coins, kings and governments strictly controlled their production.


Denarius depicting
Juno Moneta

In ancient Rome, coin production was done in the temple of Juno Moneta – which is where the word 'money' comes from.

Later, as the Roman Empire expanded, other mints were opened and the same roman coins were accepted for exchange all across Europe, from the British Isles to Turkey – the first pan-European currency.



Later, as the Roman Empire broke up and the nations of Europe began to appear, each country kept control of its own coinage.



Roman temple
It was from these European nations that we inherited the many coins and currencies that existed before the euro. These were often named after units of measure, such as the Italian lira and the Finnish markka, because the coins originally contained a fixed amount of gold and silver.

A problem with many currencies is that, depending on the success of individual economies, the exchange rate between the currencies can vary a lot – this makes trade between countries a risky business, so it is discouraged.

Single currencies in history

Before the euro, monetary unions with single currencies were tried in Europe.

The Latin Monetary Union united France, Belgium, Switzerland, Greece and Bulgaria in 1867 with gold and silver coins, and a Scandinavian Monetary Union was established in 1875. One reason why these unions failed was because the price of gold varied with respect to silver – destabilising the currencies.


Old German 100-Reichsmark
banknote
One successful monetary union was that of the German Federation. A customs union was completed by 1834 and currency exchange rates fixed.

Then came a single currency, the Reichsmark, the forerunner of the Deutschmark. German monetary union succeeded partly because clear rules were in place on how to produce the coins.


20th century currencies in Europe

Before the euro was introduced most European countries had their own coins and banknotes – their own currency.


For travel and trade, it was necessary to change money as you changed country. In Germany you paid in Deutschmarks, if you left Germany and travelled to France you had to exchange your Deutschmarks for French Francs, and so on.

The names of Europe's old currencies often revealed something about their origins: