Money has been with us since time immemorial. When early men started settling down and exchanging goods and services, money is said to have been born. We should first have a Historical Overview on the evolution of Currency Systems – to better understand how from barter we are at bitcoin. Here is The Money Revolution – From Barter to Cryptocurrency.
Trying to learn about money’s origin and its evolution throughout history may seem pointless to many, but it honestly isn’t. Money is what runs our world. It’s the fuel that drives the economy. In its pursuit, we tend to forget ourselves at times. Thus, for something of such importance, it is always important to take a step back to observe and gain an overall understanding. There’s no better way to capture the overall view on money than to understand the money revolutions in the past. But first, we need to know what money is.
What is Money?
Money is what we earn for the goods sold and services rendered by us. Though this definition isn’t wrong, it’s a very narrow approach to understanding money. In actuality, money is a medium of exchange. Money is anything that we use to buy goods and services. What’s important to know is that anything can be money, as long as people are willing to exchange it for obtaining goods and services. If all people start accepting sheepskin as payment for exchanging goods and services, sheepskin is money.
What is Barter?
Barter is the direct exchange of goods and services. Though it doesn’t involve money, it laid the foundation for money. The early men had shed their nomadic life and started exchanging goods while living in groups. But the need for a more standardized currency was felt when barter started failing in more than one way.
The basic prerequisite to being able to exchange goods is that both parties must have a need for each other’s goods. Also, the goods need to be divisible for a fair exchange to take place.
What form did Money take in the beginning?
The ills of barter were remedied by money. It was easily portable and divisible, which made it an accepted standard. It is said that in the early 1200 B.C., villages made use of cowry shells as a medium of exchange. Cowry shells essentially became money as they were durable, small, and had unique textures which made them immune to forgery. But this money was available at large in the environment. People realized that they could just search for this money than exchange goods in order to earn it. This posed a problem, as the supply of money could not be controlled.
Why was Gold adopted as Money?
People then realized that there was another dimension that money had to possess, and that was a rarity. It should be difficult to find the object which was going to represent money, or else everyone would waste their time searching for money lying around instead of actually adding value by creating goods and services. This paved way for gold to be used as money. Gold was hard to mine, it could be melted into smaller coins, and was difficult to counterfeit. Our faith in gold has withstood the test of time. Even today, people trust gold investments in the event of a financial collapse.
When did Paper Money come to be?
Around 700 B.C. the Chinese moved from coins to paper money. But parts of Europe were using metal coins as their sole currency all the way up to the 16th century. However, banks eventually started using paper banknotes for depositors and borrowers to carry around in place of metal coins. This worked much like the currency does today in the modern world except for the fact that it was not governments but banks who were issuing them. The first paper currency issued by the European governments was actually issued by the colonial governments of North America. These governments issued IOUs that traded as currency because they ran out of cash due to the long shipments between Europe and North America.
What is Gold Standard?
The 19th century brought about an innovative concept called Gold Standard. This standard directly links a country’s currency to the value of gold. This means that under the gold standard, gold is money. Thus, theoretically, we could exchange a 1$ note for its equivalent in gold from the central bank. But this posed a problem as the currency was subject to volatility in gold. Also, the government could not print its currency without an appropriate increase in gold reserves. Economists have blamed the gold standard for sustaining and deepening the Great Depression.
What is Fiat Currency?
The 20th century saw the fall of the gold standard, as many countries delinked gold and their currencies. This brought about fiat currency. Most modern paper currencies are fiat currencies. Fiat currencies are not backed by any commodities. These currencies do not have any intrinsic value; their value is largely based on the public’s faith in the currency issuer, which normally is the country’s government or central bank. Fiat currencies are flexible, as the government can fully control the printing of these currencies. But this is a double-edged sword. A prime example is Zimbabwe’s currency.
What is Zimbabwe’s currency crisis?
Zimbabwe’s currency crisis originates from violent land reforms of 2000, which reduced export income and devastated government finances. In response, the government increased the printing of Zimbabwe dollars exponentially to pay government workers and settle national debt, thereby stoking inflation and eventually making the currency valueless. At the height of Zimbabwe’s economic meltdown in 2008, its largest denominated banknotes of $ 100 trillion, scarcely bought a cart of groceries.
Cryptocurrency – Is this the final form of money?
Cryptocurrency has been the latest money revolution. In 2008, a person, or group using the name Satoshi Nakamoto released a white paper on a ‘peer-to-peer electronic cash system with no trusted third party. This laid the foundation for Bitcoin. The revolutionary aspect of cryptocurrency is that no trusted third party is involved.
How does cryptocurrency impact the banks and governments?
Until now, banks and governments have played an important role in the flow of money in the economy. But with cryptocurrency, there are no such central figures. This electronic cash derives its values solely from demand and supply. Thus, there can’t be cases of governments printing excess money and driving its value to the ground, as there aren’t any third parties. But price volatility exists as there are possibilities of speculation because cryptocurrency derives its value from demand and supply.
Cryptocurrencies are bad news to governments as they can’t be regulated. Mainstream adoption of cryptocurrencies (to buy and sell goods and services) could very well wipe out fiat currencies. This is one of the reasons some governments have gone as far as trying to ban cryptocurrencies.
Cryptocurrencies, where are we heading?
Cryptocurrencies today are nothing more than an asset for investment, and not electronic cash with which we would exchange goods and services. But with increased awareness and interest, mainstream adoption of cryptocurrency doesn’t seem an impossible future.
By Navaneeth Shetty
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