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The Evolution of Money — History of Finance I
25-10-2022
AXO
Axo is pioneering the transition to a fair financial system for everyone — but if we are to understand where we’re going, we must also understand where we came from.Over the next few weeks, we will take you on a journey of finance from the distant past to today. All articles are self-contained, so there is no need to read all of them, but you will likely miss some of the joy of discovery by not doing so.In the first article, we will talk about the origin of trade and the evolution of money. Upon this foundation, we will build the rest of our story. But as always, everything starts with money. Our journey will take us millions of years ago before there were even humans, then moves on to the first large-scale communities of the Neolithic era when humanity was transitioning from hunter-gatherers to farmers, and then at the end we arrive at finance as we know it today.Let’s go!
Is money part of human nature?
Humans are a social species. They are neither the strongest, fastest or most vicious creatures out there. Yet, through working with each other, we managed to take over the world.This did not happen all at once, nor was Homo Sapiens the first hominid out of Africa. But the broad principle of mutual cooperation applied to all of them. If you live in a world that is hostile to you, where you basically just own what you can carry, it makes sense to share resources and abilities with each other.After all, if you kill a mammoth, it’s physically impossible to eat the whole beast. So, given the lack of refrigeration and other food preservation techniques, you shared the food with others in your band.Hunter-gatherers “store” food in the bellies of their comrades when they hunt something bigger than they can eat [1]. At its core, this is what money is — it’s a promise that at some point in the future, the social scales and favors will be balanced between the different parties.Of course, when you’re in an isolated and small band, it’s easy to keep track of who is pulling their weight and who owes what to whom. But once you start introducing strangers into the mix, the matter becomes complicated.There’s evidence of trade going back at least hundreds of thousands of years. Economist Him Ofek suggests that fire was perhaps the first ‘commodity’ traded, as it was universally valued [2]. Without modern tools, fire is difficult to get started but easy to share and maintain.Neanderthals by the fireIt’s worth mentioning that the trade routes were far longer than one would think, covering what would today be international boundaries. For example, 33,000-year-old South African ostrich egg shells have been found 1,000 kilometers away from where they should’ve originated [3]. By any measure, those are the bounds of international trade, as that’s roughly the distance between Madrid and Paris. But this happened before there were roads, cities or even a lingua franca between the original gatherers and their end recipients.Humans seem to intuitively understand how to balance the social scales, and trade services and goods, without even needing a common tongue.In 1963, Glen Jensen, a researcher studying the psychology of animals, observed that rats, when given a choice between food that requires effort to obtain and unconditional food, more often than not, they will prefer the food that requires effort to obtain [4]. Similar results have been observed with a range of other animals, the one exception being cats, who preferred to be waited on hand and foot.Put simply, when it’s within the powers of a social animal to not accrue debt with someone, they will do their best to avoid incurring it. Whether tokenized or not, and irrespective of whether we call it money, this mental ledger exists in all our interactions. It seems to be a basic element in our psychology as primates.The problem is that once you go from a society of hundreds to thousands, and eventually millions, you start encountering issues that evolution did not prepare us for!
Money & Civilization
For most of human history, we lived in bands of between 150–210 people. We interacted with other such tribes for trade, spiritual gatherings, and occasional fights, but our day-to-day revolved around those few hundred people.As such, our brains developed in such a way as to keep very good track of those relations, as for practical purposes that was our world. Yet, when agriculture was developed and suddenly a smaller area could support a larger amount of people, there wasn’t the same motivation as previously to be able to move around.Societies grew in time, and farmer town populations came to outnumber hunter-gatherer tribes. But evolution is slow to make any significant changes, and thus we were stuck with the same mental hardware as cavemen.To this day, we can still only keep track of those 150–210 people, or Dunbar’s number, as anthropologists call it. Initially, societies tried their best to ignore it and still lived in localized communities, even in larger towns. These non-monetary societies worked on the principles of gift economies and debt [5].However, without some notion of a credit score, or someone in your inner circle to vouch for a stranger, obligations have to be settled immediately; or you run the risk of never settling the score as you might never see them again.Without a commonly accepted source of value, you then need to barter with each other and immediately exchange goods and services to balance the scales. This brings its own set of problems.If someone is selling you a clay pot, and all you have are chickens, how many clay pots is one chicken worth? Moreover, what if the person selling the clay pot doesn’t like chicken, they like goat? Then you have to find someone who’ll trade you chickens for goat parts and hope that the potter still wants to make the trade by the end of it.The “double coincidence of wants” can be a computing nightmare if you don’t have complete and accurate information of the whole system — who wants what, in what quantities, when, etc. As such, most possible transactions just don’t end up happening, since people neither have the time or patience to find the transactions necessary to make things operate successfully.This computation of data is trivially easy to do with a modern computer, and so barter has had a bit of resurgence in the crypto world where there are thousands of tokens and different people value various assets. In this new era, we’re reaching a point where even if we don’t share a common unit of value, we can seamlessly trade with each other by having algorithms solve the double coincidence of wants in the background.Our ancestors did the exact opposite — they found some item that they agreed was desirable and used that to measure the worth of everything else. In other words, they tokenized the dynamic we had had for millions of years, of exchanging goods and favors, and made the abstract into a material substance.Thus money, as we would come to understand it, came to be born.
Losing touch with reality
Money is a representation of the social capital owed to someone. It’s a means by which a community implicitly says that someone has contributed something meaningful to society.As our TradFi Tales series will attest, we’ve become very disconnected from this notion over the millennia where this system developed. It’s possible now to make vast fortunes without having ever contributed anything productive to society.In much the same way, our money has progressively lost any notion that it had to be tied to anything valuable. In societies that developed physical money, currency typically took the role of something durable, divisible, and hard to come by. This typically meant that it came in the form of rare materials, commodities like grains, or even alcohol.Like any broad statement on human nature or history, there are plenty of counterexamples. One particularly notable one is the Rai stones in the Yap islands of Micronesia, which are theorized to have existed in some form for thousands of years (and are arguably still occasionally used) [6].Picture a giant stone wheel weighing several tons, so heavy you can’t move it without the whole village helping out. In fact, it’s so difficult to move them around that when you used them to exchange for something, the rock didn’t move place, but people made a mental note that the giant wheel now belongs to someone else.Yap Rai stoneEvery one of these Rai stones came with an attached oral history, which you could almost think of as a prehistoric ledger of all transactions that have happened with it, as well as all the owners.The giant stones still had value even when nobody could see them or had laid eyes on them for generations. There’s a record of one of these rocks getting lost at sea when the Yapese tried to move them between the islands. But rather than writing it off and forgetting about it, the Yapese figured that the stone still existed and was just underwater and out of sight. So what difference did it make whether or not people had access to it when the stones were never actually used for any purpose?The fact that it was underwater and nobody saw it for generations didn’t deter the Yapese people from using it as currency. As an outsider, this whole situation might seem strange, as we come from a culture that took a more circuitous way to completely abstract money.To summarize several millennia’ worth of monetary history in a handful of paragraphs:From gift economies sprinkled with occasional barter, we moved to commodity money. We soon realized transporting bushels of wheat was too impractical and the quality might vary considerably, so we opted for standardized measurements of value.Coins became widespread in most cultures, as the material they were made from was durable, moldable, and dense. However, at some point down the line, the authorities minting these coins realized that coins could have a certain face value but a cheaper material comprising it.The profit made by a government through the difference between the face value of coins and their production costs came to be known as seigniorage. Devaluing the currency while pretending one hadn’t done so effectively works as a stealth tax levied on one’s citizens.The problem is that you can get away with lying about the value of your currency for some time, but eventually, people catch on. This is partially what is happening nowadays, but we’ll get to the current era in a few articles.For now, we’ll simply say that even with the optimizations and standardizations offered through the invention of coins, it could still get very impractical. Imagine you’re a business owner and you have to store a sackful of coins after every business day.After some time, you make yourself a target if you don’t hire security. Yet, this is expensive to do. So, it became commonplace to crowdsource security by hiring a single entity to take custody and protect the funds in a community, which gave rise to the first banks [7].

Perhaps worth mentioning that this is why the trope of the superhero stopping a bank robbery at some point made sense. It’s a trope that was borrowed from the Western Cowboy genre where a bandit could ride into town, and realistically bankrupt the population by defeating the bank’s security. So it was essential that the hero stop the bank robbery, or everyone would suffer tremendously.In the modern era though, this trope is a bit silly. Spiderman isn’t helping the community in the slightest, their deposits are insured by the government which can print more money, and there’s no way that Doctor Octopus could physically carry off enough money to even be a rounding error in the balance sheet presented to the international investors.

Eventually, the people in charge of the secured and protected vaults realized something interesting, people had gotten so used to storing their wealth with them that they treated the paper receipts of their coins to be just like money.It was far more practical to do a business deal and hand someone a piece of paper instead of a sackful of coins. So in a roundabout way, Western Society came to the same sort of abstraction as the Yapese — the piles of coins would stay where they were stored, the difference was that ownership would change with a piece of paper, as opposed to a narrative ballad.Meanwhile, the proto-bankers came to the conclusion that since the vast majority of people didn’t need the physical currency, they could just lend the reserves out, charge interest, and if they kept enough on hand to meet any withdrawal requests, all would be fine and they would earn a profit.From then on, all bank-like institutions became pseudo insolvent. If every depositor came with the intention of withdrawing their funds, the banks would not be able to make good on their obligations.As compensation for the risk, banking institutions started paying depositors instead of the other way around. However, as eventually they just lent out promissory notes, rather than physical precious metals and coins, seigniorage came into the picture.Imagine there is an economy where there are only two participants (John & Sally) and 1,000 gold coins between them. Sally has somehow managed to monopolize all 1,000 gold coins, yet John can borrow a promissory note issued by Sally, and she can charge interest based on this loan. If a third person comes along and accepts the promissory note as a coin substitute, then eventually all fetters with reality are broken.Put simply, debt creates money. On paper, at least, the economy is worth 1,000 gold coins plus the new interest rate, which can then be used to issue even more debt ad infinitum. This is how our modern economy works, where debt issuance and obligations create new financial tools. It’s a castle built so high up in the air that it’s difficult to see the ground on which things might have originally been built.This is why, in the modern era, we call our money “fiat money” — from the Latin “let it be done” — as a sovereign uses worthless paper, but through their authority and sheer influence, they will imbue value into the financial instrument. It takes the same amount of effort to produce a $1 note as a $100,000 note (which, while few in number, do exist). It’s merely by the will of a central authority that one is worth 100,000 times less than the other.Of course, given the divorce between palpable effort/utility/connection to the value within the economy and currency, this creates intense volatility. Following some catastrophic failures of the industry over the last century, regulators started trying to impose some limits on how money is created.Nowadays, there are things like a “deposit multiplier”, which is a pre-agreed number of times a single unit of currency in a bank can be lent out by the financial institution. In other words, if regulation permits a bank to have a deposit multiplier of 5x, then that means that for every dollar someone has deposited with them, the bank can lend it out five times to different people and institutions.This type of regulation is the government’s attempt to still maintain some semblance of connection between what is happening in high finance and the real world. This break between reality and finance is precisely why crypto is such a groundbreaking innovation — you can’t just write cheques without funds, you have to have something behind the facade.Rather than opaque transactions happening behind closed doors, blockchain technology is instantly auditable and seen by all. By its nature, it incentivizes transparency and honesty, as any dishonorable logs would be permanently stamped for all to verify.Crypto, whilst not even two decades old, has the potential to completely revolutionize how we think about money and force financial institutions to acknowledge the real world again.
Conclusion
Money, as a means of tallying who owes what to whom, has been one of the cornerstones of our evolutionary psychology since long before humans even existed. If there is intellect, and mutual aid is necessary for survival, then some notion of money seems to be inherent in our biology.As human societies evolved past their natural thresholds of around 150–210 people, and the day-to-day financial operations became too complex to keep track of, we had to develop new means of enabling transactions.Many societies found different ways of coping with our inherent psychological limitations, but they all in some way began abstracting and tokenizing “money”, the social favors owed to others. Eventually, we managed to develop such complex and wonderful systems that we began to lose sight of what was real.This journey from the inception of finance to the invention and evolution of cryptocurrency is one that can’t be fully told in a single article. Hence, over the next few weeks, we will be exploring different facets of the evolution of trade, beyond just creating money.Finally, we’ll end with the development of Axo and why this represents such a seismic shift in how we will conduct business. Join us in this story and learn what created the modern world.The history of money and trade is the history of civilization, and therefore it is the history of you!
Bibliography
1 “Revenge of the Nerds.” How the Mind Works, by Steven Pinker, Penguin Books, 2015, p. 196.2 Ofek, Haim. Second-Nature Economic Origins of Human Evolution. Cambridge University Press, 2001.3 Stewart, Brian A., et al. “Ostrich eggshell bead strontium isotopes reveal persistent macroscale social networking across late Quaternary southern Africa.” Proceedings of the National Academy of Sciences 117.12 (2020): 6453–6462.4 Jensen, Glen D. “Preference for bar pressing over” freeloading” as a function of number of rewarded presses.” Journal of Experimental Psychology 65.5 (1963): 451.5 David Graeber: Debt: The First 5000 Years, Melville 2011. Cf. review6 Gillilland, Cora Lee C. (1975). The Stone Money of Yap. A Numismatic Survey. (Smithsonian Studies in History and Technology 23). Washington, DC: Smithsonian Institution Press. p. 75.7 Rostovtzeff, Michael Ivanovitch (1926). The Social & Economic History of the Roman Empire . Biblo & Tannen Publishers. p. 542. ISBN 0819621641.