As the world increasingly embraces a digital monetary system it is fun and worthwhile to look back at how money systems have developed. Before we ever had a currency in place we had a barter system. This was incredibly inefficient as it relied on a ‘double coincidence of wants’ where someone who wants to buy sheep wool and only has wood must rely on the person that has sheep wool actually wanting wood. It was these difficulties that eventually led to basic currencies being formed. Many believe the first currency ever created was the cowry shell.
For a currency to work it must perform three clear functions. It must be a medium of exchange, meaning it must be a common good that people can use as a ‘middle man’ between purchasing and selling goods. In the example mentioned earlier, a sheep farmer could sell his wool for cowry shells and then use them to buy wood. It must also be a store of value. Perishable items are not a good form of money because if you sell a sheep for 200 bananas and then the bananas rot, you have lost your money. Well performing money must be able to hold its value. Cowry shells were seen as durable. Finally, money must be a unit of account. This means that it must be able to be used to express a value for things and to be able to be added to or taken away from with ease. A cow is not a good form of money because all cows are different in weight and yield. It would be difficult to value things in terms of cows because if you bought a house for 20 cows, you would likely give your worst cattle for the trade.
One of the first items used as currency was the cowry shell. Evidence shows the cowry shell was used as a form of currency in the Americas, Asia, Africa and Australia making it incredibly widespread for an early form of currency. It met all of the previous conditions mentioned and its value was based on how rare cowry shells were in the area. Close to the Maldives where cowry shells were very common you needed many shells to buy any item. Thousands of miles away, a single cowry shell was seen as valuable. As people began to realize that the number of cowrie shells in circulation could not be controlled better forms of currency were sought after. Precious metals soon stepped in.