It didn’t. The idea that economy evolved from barter to money to finance is a fiction of classical economists, who wanted to make their field of study into a “hard” natural science, akin to physics or mathematics. For that reason they were blindingly ahistorical in their approach, inventing hypothetical scenarios without basis in real life or actual human communities, which they then used as proofs of their own theories. There’s an ugly ideological reason why this circular logic keeps being perpetuated - but we’ll get to that by the end of this answer.
To begin with, the earliest agrarian economies weren’t based on barter or trade, but on a system of debt and credit. This may seem anachronistic to people who lost all notion of how agriculture actually works - but for any archaic farming community, it was the most natural thing in the world to run low with resources at the time of planting, and then reap a hefty surplus following the harvest. Such natural yearly cycle quite plainly translates into a credit system where initial debt at one end brings payments with interest on another. On the other hand, why on earth would these people go around haggling for basic goods they all produced, shared and owned communally?
Therefore, the first economic institutions which developed were religious authorities tasked with managing this system of debt and credit. Temples and palaces of early Mesopotamia, Egypt and Crete essentially functioned like public corporations or national banks: levying a share of everyone’s crops or herds, storing and redistributing goods, and providing credit and investment for various public projects, such as irrigation works, trade expeditions, and building of large-scale monuments (which often had practical astronomical significance). It was only against backdrop of such early state organization that division of labor could occur, with people now specializing in other activities than farming, herding or hunting.
˘ Temple complex in the Sumerian city of Eridu, cca 3200 BC.
Neolithic and Bronze Age economies operated mainly on credit. Because of the time gap between planting and harvesting, few payments were made at the time of purchase. When Babylonians went to the local alehouse, they did not pay by carrying grain around in their pockets. They ran up a tab to be settled at harvest time on the threshing floor. The ale women who ran these “pubs” would then pay most of this grain to the palace for consignments advanced to them during the crop year. These payments were financial in character, not on-the-spot barter-type exchange.
As a means of payment, the early use of monetized grain and silver was mainly to settle such debts. This monetization was not physical; it was administrative and fiscal. The paradigmatic payments involved the palace or temples, which regulated the weights, measures and purity standards necessary for money to be accepted. Their accountants developed money as an administrative tool for forward planning and resource allocation, and for transactions with the rest of the economy …
These large institutions employed staffs of weavers and other craft personnel, who were fed by crops grown either on palace or temple land or that of sharecroppers paying grain-rent or fees to these institutions, and supplied with wool from temple and palace herds managed by entrepreneurs or owned outside of these institutions.
Building public infrastructure required feeding and supplying corvée labor and craftsmen with food, tools and beer, as well as provisioning celebratory festivals. In order to calculate budgets for forward planning and tally surpluses or shortfalls, these flows had to be measured and accounts presented to the palace for managing cropland and herds, brewing and selling beer, baking bread and producing handicrafts for use within these institutions and for local or long-distance trade.
- Michael Hudson, Palatial Credit: Origins of Money and Interest
The first form of money was therefore writing itself, which originated as accounting aid to help with management of such complex economic systems. Sumerian cuneiform, Egyptian hieroglyphs and whatever they’ve came up with on Crete all originated from clay seals impressions, which were used to seal, store and identify various types of goods in these temple-palaces. This is well explained by the origin of Greek word symbol, whose original meaning was “token of recognition”. The etymology comes from sum + bállō, literally “putting together”, which referred to act of checking the seal against its imprint on clay, to figure out if the seal-bearer has a right to access whatever has been sealed away. Clay seals essentially functioned as credit cards of ancient economies, and writing developed as next step of this symbolic system, to add additional information on clay tablets or stuff itself. For this reason, the oldest texts of any ancient culture almost never contain any kind of arcane wisdom, but only the most begrudging accounting records.
ˇ The unbroken clay seal discovered in the tomb of Tutankhamon.
Trade did not develop spontaneously between individuals, but as long-distance, publicly financed expeditions, through which these early states sought goods that weren’t locally available. Sumerian trade routes went west to Anatolia and east into Iran and India, to acquire stone, timber and metal; Egypt imported wood from Levant and spices from Arabia and Ethiopia; and Cretans were making shipping rounds all across Mediterranean. The merchants who conducted these expeditions were contractors employed and empowered by their respective temple-palaces. In Mesopotamia and Levant they came to be known as tamkaru - the term might be translated as “businessman” or “entrepreneur”, though it seems to have acquired the same nasty connotation as modern-day “tycoon”. These tamkars functioned as middle-men in dealings between temple-palaces, their populaces and foreign powers. And as is usually the case with state-sponsored business, they’ve began to enrich themselves at public expense.
During the Sumerian period in Mesopotamia and the Old Kingdom in Egypt, the economy of temple-palaces seems to have been truly publicly oriented, with priest-kings and pharaohs appointing officials to directly manage all aspects of the system. However, from the beginning of 2nd milenium BC, powerful special interests began to appear, which over generations effectively privatized large segments of palatial economies. Tamkars and their ilk effectively became the first bankers, who began manipulating debt system for personal gain, enslaving people in usurious loans, and taking over their land and property.
ˇ Principal trade routes of ancient Near East by 2nd milenium BC, with Egypt in center.
Johannes Renger describes how, under the system of palace control that existed at the end of the third millennium in Ur III, land and workshops were administered directly by palace officials, but a more highly articulated situation developed in the Old Babylonian period. The palace “privatized” agricultural and other economic activities by franchising the management of its fields and date orchards, herds of sheep, brick-making workshops and other handicrafts to “entrepreneurs” as Palastgeschifte, “royal enterprises.” Their administrators were entitled to keep whatever they could produce or collect above and beyond the amount stipulated by contract with the palace, but if the dues they collected fell short, their arrears were recorded as a debt and they were obliged to pay the difference out of their own resources. …
However, what began as productive advances mutated into unproductive loans - classical usury - as well-to-do individuals lent food and other necessities to distressed cultivators in emergencies or to cover the arrears they ran up to the palace. … The accrual of such debts did not reflect a parallel growth in the ability to pay. When they resulted from a crop shortfall or military disruption that prevented payment of the stipulated rents and fees, cultivators were obliged either to pay out of revenue they earned elsewhere, or forfeit or sell their assets including family members, the crop harvest and ultimately their land rights. This turned debt relationships into a disintegrative phenomenon that disrupted the traditional ethic of self-support and mutual aid. Rural debts led to increasingly widespread debt bondage and the loss of subsistence landholdings in the Old Babylonian period.
Outside of Mesopotamia a millennium later the biblical prophets would denounce absentee owners for using usury as a lever to pry land away from smallholders. Debt crises wracked Sparta, Corinth and Athens in the 7th century BC, and by the end of antiquity Livy, Plutarch and Diodorus described usury as the main culprit in their epoch's collapse.
- Michael Hudson, Reconstructing the Origins of Interest-Bearing Debt
This wasn’t a straightforward process, because the divine kings were powerful authorities to deal with, and fought back against this encroaching financial oligarchy. To reestablish back their control over palatial economies, these ancient rulers regularly proclaimed jubilees - religious celebrations through which they canceled private debts, freed people enslaved in debt bondage, restored land and property back to their original owners, and in a word, restarted the economic cycle. In Mesopotamian tradition, these festivals were called amargi or nig-šiša in Sumerian, and misharum in Babylonian (all three words meaning something along the lines of “justice, equity, firmness”) and were tied to 30-year astronomical cycle of Saturn’s revolution around the Sun. In Egypt, they were called heb-sed, royal festivals in which pharaoh renewed his rule, usually in the 30th year of his reign.
ˇ Pharaoh raising Djed, the sacred pillar of Egyptian religion, during the heb-sed jubilee, and thus symbolically reestablishing the order of universe.
The underlying idea reflected a Bronze Age cosmology in which sun-gods of justice endorsed rulers as their earthly administrators. As noted above, Babylon's sungod was Shamash, from whom Hammurapi is depicted receiving his laws. Elam and other regions had similar deities, as did the neo-Babylonians a millennium later. Shamash had two children, kittu and misharu, "right" and "justice." (Speiser 1967:313- 23 discusses their mutual relations.) As the sun-god, Shamash was patron of the New Year festival, the Bronze Age solar holiday par excellence and the occasion on which new rulers ascended the throne, inaugurating their rule by proclaiming equity and order. …
As was the case throughout the Bronze Age Near East, social structuring reflected the rhythms of the celestial heavens, from the sun out to the outermost visible planet, Saturn. The latter (Nabu in Babylonian) was known as the "planet of justice." The fact that its period of revolution around the sun is just under 30 years related it to the solar calendar which divided the year into standardized 30-day months. This correlation of periodicities - "a month of years" - seems to explain the timing of the Babylonian and Egyptian Jubilee years. …
Cuneiformists have noted the parallel between the royal economic and social acts performed at the Babylonian New Year festival and the Creation Myth, which was publically read aloud twice. The Mesopotamian idea of creation did not involve a fresh creation of matter and life, but an ordering of chaos into formal shapes. "Like Marduk in the Creation Epic," observes Jean Bottero (1961:159), the new ruler "finds himself confronted with a kind of chaos, and he must make a cosmos," that is, reestablish traditional "normal" order, free of the imbalances that built up during the preceding period. In this way society, through its ruler (who acted the role of the sun-god in the staged battle against the lunar chaos-dragon Tiamat) won the cosmic struggle against disorder, creating the world anew - the social as well as the physical cosmos.
The guiding spirit was one of rebirth of calendrical nature combined with social justice--the regeneration of nature and society. Moral and physical blight was purged as men and beasts, houses, barns and temples were cleansed. During the course of the festival the rich and poor acted "ideally" towards each other in an auspiciously utopian atmosphere. Charpin (1987:39) points out that the Sumerian cuneiform sign for amargi signified the cyclical trajectory of the sun as well as the return of persons or property to their original status. The inference is that just as the sun returned each New Year to its celestial point of origin, so the Mesopotamian "rulers of justice" proclaimed what Mircea Eliade has called “the Eternal return.”
- Michael Hudson, The lost tradition of Biblical debt cancellations
The shift in monetization that happened during 2nd millennium BC, from publicly accounted system of palatial credit, to a system of privately owned precious metals, was probably due to wealthy individuals trying to preserve their wealth through these cycles of debt cancellation. Inside the palatial credit system, it was silver (and not gold, as the modern libertarian fetishists would have it) that was used as an off-account means of payment, particularly in trade and mercantile enterprise. Thus, a prospective tamkar hoarding silver could quickly regain his wealth and power, once his network of personal debtors got wiped out by a royal jubilee. In this way, private interests were effectively building their own currencies, outside management of palaces and oversight of kings.
The takeover of Babylon by warlike Kassite dynasty, in mid-2nd millennium BC, seems to mark the end of debt jubilees in Mesopotamia. The Amarna revolution in Egypt, a century or so afterwards, was the last attempt of pharaohs to reestablish their control over increasingly independent temple oligarchies: it failed, and Egypt ended being ruled by a warlike Ramseside dynasty as well. The destruction of palaces on Crete, and their takeover by Mycean Greeks at about the same time, was probably due to similar developments there. The effective privatization of Bronze Age economies by the later half of 2nd milenium BC lead to emergence of new social class of outcasts, called Habiru. These were dispossessed, homeless, lawless and rebellious marauders, whose ever-increasing bands roamed the Middle East as robbers, mercenaries or vagabonds, disrupting trade, selling themselves to local strongmen, and sacking city-states on the fringes of larger empires.
All this contributed to the eventual collapse of Bronze Age civilization by 1200 BC, and the following dark age (of the real kind, not the wishy-washy one that came after collapse of Roman rule in west). The credit economies of ancient temple-palaces went down the drain, the authority of divine kings crumbled with them, and what was left was bunch of local potentates hoarding precious metals in their strongholds. Since writing was also lost to large regions of ancient world, metal lumps began to be stamped with local symbols and totems to signify their ownership. Thus the first coins emerged, around 700 BC or so, originally as personal badges and ritual tokens. But as civilization slowly recovered, and old merchant routes were reestablished, metal coinage began to be used in long-distance trade, and eventually became the main means of exchange.
Now, an astute reader has probably already figured out why, by and large, modern economists are completely oblivious to all this history of their field. This paradigmatic division that emerged in ancient Near East, between public authority of temple-palaces, and private interest of their tamkars, practically defined the economic development of our entire civilization. So when classical economy emerged as separate field of study in 18th and 19th century, it directly favored the interests of the new class of tamkars, that was coming into being with Industrial Revolution. Therefore, it defined money from their ideological standpoint, as a hard commodity with inherent value, which is exchanged for other goods, ideally outside the oversight of any kind of public authority.
This worldview - where money is privately owned property and therefore private persons can lend it with interest and/or charge fees for its use - lead us to the entire modern system of usury, commercial banking and finance capitalism, which seems to be quickly ushering us into a new dark age. The alternative idea, that money is in fact a system of social credit, managed by a government authority for public good, now seems as something straight out of a Star Trek fan-fiction. Yet as history clearly attests, complex civilizations achieving extraordinary things could and did exist without any kind of “hard” currency.
Depicting commodity money as primordial and natural, this view sees the direction of history as culminating in today’s commercial banking. It puts credit at the end of the Barter-Money-Credit sequence, not at the beginning. … The prehistory of money had become an arena in which free-market economists fought with advocates of government regulation over whether the private or public sector should be dominant, and whether governments should oversee credit and create their own money or leave it in private hands. Financial interests applaud the implication that it is natural to leave credit and pro-creditor rules of debt collection to bankers, bondholders and the wealthy, minimizing government “interference.”
Neither prehistorians nor anthropologists provide supporting evidence for this Barter Theory. “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money,” anthropologist Caroline Humphrey (1985:48) has emphasized, stating that “all available ethnography suggests that there never has been such a thing” (cited in Graeber 2014:29; for further critiques see Wray 2004 and Ingham 2004). As for the cuneiform record, it shows that the major initial monetary activity of most Mesopotamians was to pay taxes, fees or to buy products that palaces and temples made or imported, on credit provided or regulated by these large institutions.
- Michael Hudson, Palatial Credit: Origins of Money and Interest