In the beginning, there was grass. The earliest civilizations in Mesopotamia relied on barely and wheat. In Africa, they had preferred cowrie shells. The ancient Egyptians used bits of metal. The ancient Greeks embossed theirs with kings and gods. In the Middle Ages, the English used blocks of wood. Halfway around the world, the Chinese were using paper, but only after dabbling with leather. In the age of exploration, European sailors with coins fought Indian tribesmen with beads. Five hundred years later, everybody prefers plastic.
There is the history of money in 100 words. The future of money requires quite a few more.
That is why in the next month, The Atlantic is publishing a Money Report to explain how people have changed money and how money has changed people. Before we go forward, let's take a short step back to remember why we're asking these questions now of all times.
HOW BANKING GOT BIG
"The world as we know it is going down!" shouted a hysterical New York City broker over a Starbucks latte in Der Speigel's harrowing account of the September 2008. This was the nadir the financial panic that gripped the world. The Dow was collapsing by the hundreds each day, and banks with asset sheets worth more than the GDP of developed countries were teetering on bankruptcy.
In 14th century Florence, money lending evolved into banking.
But 400 years ago, banking wasn't so big. In fact, bankers were practically outcasts.
Since Christians could not legally charge interest to other Christians, money lending fell mostly to Jews, like William Shakespeare's Shylock in The Merchant of Venice. Confined to ghettos, they conducted their business on benches, or banques (the root of the word bank). If you can imagine it today, the price of banking in the early 1600s was ostracism.
How did we go from ghettos to Goldman? The great innovation in modern banking occurred in Florence, Niall Ferguson writes in his book The Ascent of Money. Giovanni di Medici, father of the great Cosimi di Medici, saw that while charging interest was a sin, nothing prevented a trader from making money on taking a commission for converting currencies. If converted currencies were advanced for longer periods of time, the commission would grow as well. By diversifying his investments across traders, depositors and different currencies, Giovanni created a truly booming, stable and legally acceptable bank.
"Now for the first time," Ferguson explained, "money lending had evolved into banking."
SMART MONEY, DUMB MONEY
In the next four centuries, banking continued its radical evolution. In the 1600s, Amsterdam opened the world's first stock exchange. In the late 1700s, Dutch traders inspired King William I to create the world's first mutual funds. In the 1900s modern finance exploded, with the first hedge fund (1949), the first mortgage security (1968), the first collateralized debt obligation (1987), and the first credit default swap (1994). Money is getting smarter.
The democratization of money meant the democratization of debt.
Debt, credit and equity are as old as Hammurabi's Code. But with each round of history, they are extended with greater force and cunning to more people. European countries invented bonds to pay for wars. The Dutch invented stock to pay for ships. Credit cards invented points to pay for goods. From the national level, to the corporate level, to the individual level, finance finds new ways to get us spending more.
In the democratization of money meant the democratization of debt. In the past, only governments and large international companies had the chance to spend themselves into oblivion. Today, we're all so lucky! Easier money, in the form of credit cards smartphone apps, encourages us to buy, buy, buy. Maybe that's why household debt weighs more than half of GDP in eight countries. Maybe that's why the average American worker entered the recession with debt equal to 122 percent of her yearly salary. Brilliant ways to extend credit and financing have invigorated the global economy. But somewhere between the home equity loans and the credit default swaps, we tricked ourselves. Smart money in the hands of greedy bankers and wide-eyed breadwinners looks like dumb money, indeed.
IN _____ WE TRUST
The metal coin lasted millennia. But already, "the credit card is in decline," Daniel Roth wrote in Wired. What will replace it? The list of nominees is miles long and still being written. Square, a 3/4-inch cube, turns your iPhone into a credit card reader. Zong merges monthly statements by having online merchants charge purchases to our phone bill. With Twitpay, you can send checks as easily as you send a 140 character message. This is the future of money: "completely digitized, infinitely transferable, and friction-free."
But if money has changed from wheat in a field to numbers on a traders' screen, its definition stayed the same: trust. Trusting money to be worth its promise is the beating heart of the global economy. Debt is a promise: I will pay you back -- break that promise, and you have default. Fiat currency is a promise: Your money will be worth something -- break that promise, and you have revolution. It's no wonder humans have gone from bartering, from the Celtic word barater for "deceive," to credit, from the Latin credo. "I believe."
Turn over the dollar bill in your wallet (if you still carry bills). Printed above the White House is a familiar four-word phrase: In God We Trust. The phrase is probably two words too long. Whether or not you believe in an almighty doesn't matter to the dollar bill, or the government that issues it, or the bank that holds it, or the person who receives it. That "we trust" in our currency of exchange is the alpha and omega of finance and economics. In the world of money, religion is simple. Trust is God.
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