Back in prehistory, there was no concept of currency. A cow was a cow and a sheep was a sheep. People bartered goods for other goods. The problem was that when you traded ten sheep for five cows, you had to find somewhere to keep the cows. Cows are large; they don’t fit in your pocket. Something had to change.
Urban societies started to emerge in Mesopotamia about 5300 BC. Wealth was based on agricultural products – primarily grain. Grain was stored in temple granaries, and when people made deposits, they needed receipts – the receipt came in the form of a piece of metal.
By 3000 BC, this evolved into the shekel, a measure of barley. Shekels could be converted into metals such as copper, silver and gold.
Then, around 1700 BC, the Code of Hammurabi established formal laws in Mesopotamia. This included rules around the use of money in Mesopotamian society.
The problem with most early money was that there wasn’t any standard measure. A piece of gold could be small or large, so there was no way to place a consistent value on traded goods.
Coins solved this problem. They had a standard weight, and were stamped with symbols by the state to prove their authenticity. The first standardized metal coins appeared in Greece in the seventh century BC.
The value of a coin continued to be determined by its weight into the early 17th century; a Dutch Guilder had one weight and a French franc had another.
However, as trade grew, coins became more and more impractical. Banks started to issue money in large denominations, using cheap materials such as paper. Physical money no longer had an intrinsic value; instead it could be redeemed at banks for gold or other precious metals.
After the Napoleonic wars of 1803-1825, a number of nations fixed the value for their currencies against gold, and promise to redeem the notes directly. Currencies could now be exchanged based on their fixed values.