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The Big Question: What is money?

Updated Monday 10th January 2005

You know when you don't have it, but what exactly is money?

Using a cash machine: But what is money? Copyrighted image Icon Copyright: BBC

Some of us have lots of it, others very little. For some people, it's a cure for all problems, but for others, it's a curse. Money. Most of us couldn't live without it, but do you know what it is? From loose change, to banknotes, cheque books to online banking. The week's Big Question: What is money?

Kate Eagleton Copyrighted image Icon Copyright: Used with permission "Money is whatever two people can agree on as a way of exchanging goods," explains Dr. Katie Eagleton, curator at the Money Gallery in the British Museum, London. "In some parts of the world, salt was used like a currency because it was valuable."

So money is something with value used as a medium of exchange. And that value has to be agreed on by everyone who uses it.

"It's also a store of value and a unit of account," says Andrew Bailey, chief cashier at the Bank of England.

How long have we used money?
The use of cattle as currency is thought to be the oldest form of money - dating back eight thousand years. Three thousand years ago, the Chinese used cowry shells. And from 1,000BC they made cowry shell imitations out of base metals.

From China to Africa to Central America, our ancestors also used symbolic tools, like daggers, and representations of valuable objects for use as money.

A collection of old coins Copyrighted image Icon Copyright: Used with permission The ancient Egyptians didn't have coins as we know them, but they did use fragments of metal as a form of money, believes Dr Eagleton. "They appear to have standard weights, and there are written records of weights of silver and copper being used as payments."

About 650BC, some of the earliest known coins were made in Lydia, a region in what is know Turkey.

It was only in the 13th century that European coins came to be made from gold - once routes were opened up through Morocco from West Africa. "In the late medieval period," says Dr Eagleton, "English coinage was all made of African gold." And with the opening up of the sea routes and increased trade between Indian, African and Chinese merchants, money started to move between countries. "You get things like an Austrian coin becoming standard currency in Africa because it's a standard way to exchange thing."

Why were the first coins made?
Basically, to make life easier. "Before the advent of money, we trade by exchange and barter… like swapping my spare rice for your spare chickens, and then later on, that gets more sophisticated if you're trying to do three or four way trade." So it was much easier to pay for something using a currency that was considered valuable by everyone, than to carry on exchanging goods.

What about paper money?
Banknotes Copyrighted image Icon Copyright: Used with permission "The first banknotes were produced in China", says John Winchcombe, Marketing Manager of De La Rue Currency, which prints banknotes for more than 150 countries. "The first recorded use of a paper banknote was in 1024."

Those early notes were a handwritten promise of payment - in effect an IOU.

The Bank of England introduced paper notes in 1694. "The economy was growing fast and there was a need to have a convenient and easy form of exchanging value and wealth," says John Winchcombe.

Across Europe, the development of paper money was closely linked to the development of the banking system. "The origin of paper money goes back to the beginning of Central Banks in the later part of the 17th Century," says Andrew Bailey. "The point of a Central Bank and the money it issues is that we guarantee it." Andrew's signature appears on all Bank of England notes - guaranteeing the money on behalf of the bank.

"Historically, banknotes were linked directly to gold. There was something called the Gold Standard and, originally, every banknote was backed by its value in gold", says John Winchcombe. This meant that at any point, you could exchange your bank note for that amount of gold which it represented. But within a few decades, cracks appeared in this system as the world's economy developed - banks just could not hold the amounts of gold to support the value of money in circulation. "The UK left the gold standard in 1931, the US abandoned it in 1971."

So, what gives money its value now?
"Money is what money does", says John Winchcombe, "and therefore is all to do with trust. If you believe that a banknote has value, it does have value".

"A banknote never loses its face value," says Andrew Bailey. "A five pound note will always be worth five pounds. What really makes the value of money go up and down is inflation and the economy, and that's what we call real value."

In Argentina, until 2002 one peso was worth one US dollar - it was called the "convertibility system". But a deep recession led to currency devaluation - within less than a month the peso in people's pockets was worth a third of its previous value. Argentina's debts though were still in US dollars.

"It was very traumatic, because the government also froze the bank deposits. People knew there would be a devaluation of the Argentine currency, but they couldn't withdraw most of their money," says Florencia Ripani, an Argentinian journalist living in Buenos Aires at the time. BBC News reported on the turmoil of devaluation.

Many Argentines have no option but to turn to alternative ways of surviving the devaluation - such as bartering.

What about the future of money?
Putting it on plastic - bankcards Copyrighted image Icon Copyright: Used with permission "The main change we've been seeing over the last decade is the increasing electrification of payments", says Avivah Litan , Vice-President and Research Director of financial analysts Gartner . "Instead of using paper currency, or coins, or cheques, we're using more frequently plastic cards or transfers over the internet."

But that's only half a billion people out of a global population of more than six billion people. "You'll never get the total population out of cash, because there will always be a group of people that don't have bank accounts, so they can't get cards," says Avivah.

So, what is money?
"I think money is much more than the economic definition," says economics anthropologist, Keith Hart. "In ancient Roman times, money was part of the cultural repertoire of a society that needed divine protection." The word 'money' comes from the temple of Juno Moneta , in Rome. The mythology of Juno Moneta tells that she was "not only the source of money, she was also the mother of the muses; she was responsible for divine protection of the arts and sciences."

"In some sense, money represents everything we could desire," says Keith Hart. "It is the thing that gives us potential access to what we want. Like language, money is one of the two ways we have to communicate" - a major factor in the psychology of money.

This edition of The Big Question was first broadcast on 8th January 2005

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