A Brief History of Money
It’s easy to think of money as just coins and banknotes. In the modern day, this is how we transact. Although, money has changed shape according to needs and resources. Money is anything with value that can be used in the exchange of goods or services. The art of exchange first began with the barter system. Hunters and gatherers identified a personal need and sought out a trade that would provide mutual benefit to another individual. For example, a caveman would offer excess animal fur for animal meat. It was clear that, in their situations, one needed fur while the other needed food. This system of exchange was driven by the desire to survive, a theme that has persisted throughout the history of money. Although, the methods and means to survive have drastically changed. Let’s examine the rocky trail of money and how it’s changed over time.
Changing Shape
10,000 years ago, the ice age ended and humans began to spread across the globe. The domestication of wheat, grains and animals led to the emergence of farming, causing population density to increase and centralize. The early formation of these dense communities resulted in a change of operations. Instead of a universal skill set composed of hunting and gathering, individuals began to refine specialized skills. The good or service of someone highly experienced in a craft could be exchanged for something they were lacking. Specialization provided a focus for the barter system, but there still remained a major reliability problem. Mutual demand for every good or service would not remain the same day-to-day. Therefore, the unreliability of demand introduced a form of volatility that continued to impact the efficiency of exchange.
The desire for a standardized and controlled transaction system persisted. As time progressed and evolution occurred, money (and the storage of it) continued to take different shapes. Cowry shells were used in trades around Africa and Asia. Early civilizations, like Mesopotamia, introduced a banking system to store valuables like cloth that could be used for trading. As can be seen, various civilizations around the globe each were testing more efficient means of exchange. As commerce grew, certain necessary elements of money were identified. It was required to be physical, resilient and agreed upon. To ensure widespread acceptance, the production and issuance of standardized coins by a central entity (banks) was introduced.
Centralization
Centralized entities issued physical coins in order to improve the reputation and trustworthiness of money. Commonly made of scarce metals, centrally-issued coins ensured there was a controlled supply whose value was vouched for by the government. The rulers of Greece created unique, stamped coins, ensuring their citizens they would maintain their value as long as the civilization existed. Management of money by an official and credible entity influenced widespread acceptance of these currencies. This fulfilled the last requirement of a reliable form of money. Coins fit the mold for sound money, but there were several disadvantages. Molded from precious metals, circulation and availability were limited by the scarce supply of that resource. Although it prevented devaluing through mass production, this limited availability to all citizens. Additionally, metal coins continued to be difficult to store and transport. Mobility was an important component to facilitating exchange, so their physical structure posed a problem to commerce.
First created by the Chinese in 100 B.C., paper became a promising replacement for coins. People were able to leave valuable physical items in the bank and receive a signed note of verification for the existence and worth of the item. These could be exchanged amongst individuals without using the actual physical assets. Eventually, Marco Polo brought the concept of paper currency back to Europe and its value was backed by gold held by goldsmiths. Due to the essentially unlimited supply of paper notes, European banks began to issue more notes than the amount of gold on hand. They believed not all citizens would try withdrawing gold at once, ensuring they’d be able to fulfill citizen requests. Although yet to be seen, this was a step towards money supply expansion that would have detrimental effects.
Gold-Backed No More
For most of American history, every dollar printed in the United States was backed by $0.40 worth of gold. This was known as the “Gold Standard.” Similar to Europe, the purpose of it was to ensure value was evident so that it could translate into credibility and reliability. Additionally, the system was based upon the fact that citizens would not redeem their money for gold in such an amount that required it to all be on hand. This system posed a problem when the Great Depression struck.
Unable to immediately print more money to support the United States economy, President Franklin D. Roosevelt made private ownership of gold illegal. Gold was reclaimed from private citizens by threatening legal consequences of up to 10 years in prison. In return, they were given paper money. This effort did not stop the Great Depression, lasting another 6 years. President Richard Nixon removed the Gold Standard in 1971 and in 1977, the private ownership of gold was made legal again. The tradeoff of a substantial money supply was the opportunity for overprinting and devaluing.
Recent Developments
As it stands today, the value of paper currency is solely a promise from the government. There is no limited resource that ensures its value. Complete trust is given to the government to properly create and disperse the currency so as to retain its value over time. This trust was soon to be broken. In 2008, the United States was experiencing a recession due to widespread defaults on disproportionately unfair mortgage loans made to unqualified individuals. When they defaulted, banks struggled to stay afloat others tried to withdraw money. To prevent the economy from collapsing causing negative global effects, the United States government issued $145 billion in stimulus packages to bail out banks. The predatory actions of banks not only caused the 2008 Recession, but also contributed to additional devaluing of the United States Dollar through money supply expansion.
In the midst of the economic downturn in 2008, an unknown person or group named Satoshi Nakamoto published a paper to a cryptographer email list. In it, they detailed a distaste for the current monetary system and proposed a non-sovereign, digital alternative. Satoshi described Bitcoin as a decentralized, trustless and peer-to-peer system that did not require a trusted intermediary (like a bank) to control and monitor operation. A global web of computers process and record transactions, ensuring proper operation of the Bitcoin network. Its distribution made it inherently more secure since there was no single point of failure or consolidation of power. Satoshi had created a new, long-term store of value than both fiat currency and gold.
Bitcoin is a monetary and fiscal policy experiment that has the potentially to revolutionize how we process, exchange and store value. It might succeed, it might fail. As we’ve learned, money is no stranger to change. As new needs are prioritized, an attempt at creating something better is born. Let’s keep pushing towards a financial ecosystem that works for the many, and not just the few. Don’t forget, a visit to the moon was once just a dream as well.
This was the first topic in a nine part online course that I created as part of my graduate thesis. Its role was to examine how non-experts learn about complex financial topics, specifically relating to digital currency. If you enjoyed this, reach out on Twitter and share with those around you that are crypto curious!
