Written by Emaad

On April 17, 2020

The history of money

What is money?

Money is a technology that has been as essential to the development of civilization as the wheel itself. Money is any good that is widely accepted as a medium of exchange during the transaction of goods and services. It facilitates commerce by serving as a ledger which keeps track of how much we owe one another. Without money, commerce would be hindered, as we would be limited to transacting directly in exchange for other goods and services (otherwise known as a barter system).

Barter systems create limitations on the rate of exchange because physical commodities are often not easy to sell, and it can be difficult to find a vendor with an item you are looking for who is also willing to trade it for the item you have.  If a merchant accepts goats as a medium of exchange, for example, they would need to first find takers for the goats before they could exchange for other goods and services.

The goats have value, but their subjective value for other participants across the marketplace may not be apparent. Therefore the merchants must first sell the goats to acquire something that will be more widely accepted in their supply chain. Creating a modern economy required the inclusion of a monetary system, and it’s easy to see why money became a pillar of society.

Let’s take a look at how money has evolved throughout the ages.

What is the history of money?

Valuable sources of clothing, food and tools, cattle and other livestock were first utilized as money during the time period between 6000-9000 B.C. Their high degree of utility ensured that there would always be a liquid market for cattle that were accepted in exchange for goods and services. 

Cowrie shells were introduced around 1200 B.C. in China. They were derived from commonly available shallow water mollusks that are native to the Indian and Pacific Oceans. The usage of cowrie shells has been documented in Africa as recently as the mid-20th century.  

The first metal coins were introduced between 1000 and 500 B.C. Originally bronze and copper, the primitive coins from China were the precursor to round metal coins. As coin technology spread around the world to Greek civilization, for example, coins were improved with stamps of leaders or gods for authenticity purposes, and even forged from gold and silver which increased their inherent value. 

Paper money was also created in China, around the year 806. This original system of paper money survived for approximately 6 centuries until 1455, after which it disappeared from the Chinese populace for several hundred years. During its reign, the money supply increased so rapidly that paper note value declined and inflation soared. Paper banknotes were not popularized again until the late-17th century in Europe. 

The Gold Standard was implemented in England during the year 1816. Prior to its inception, banknotes were issued but were not backed by gold. In 1900, the United States passed the Gold Standard Act which established a central bank and allowed for dollars to be redeemed for gold at a fixed price. However, in August 15, 1971, the Gold Standard was abolished.

This meant that the Federal Reserve monetary policy was no longer limited by the quantity of gold in their reserves. Theoretically, they could begin printing as much paper currency as they pleased.

What are the characteristics of money?

There are 7 characteristics that are brought into question when comparing the different types of money. 

Durability of money is critical because the medium of exchange must withstand wear and tear over long periods of time. In this regard, paper money is not very durable but gold and other metals, for example, are very durable in comparison. 

Portability of money refers to the ease with which we can move units of value. Gold is not as portable as paper money, but digital money – whether fiat or crypto assets – is far more portable than both fiat cash and solid metals. 

Divisibility allows users of money to spend and receive small amounts of value. Fiat cash is printed in various denominations that can be used to give and receive change when exact amounts are not available. Gold is not very divisible in this regard, as there is a limitation to how small gold pieces can be created. There is also a high cost associated with mining gold, melting and minting gold coins.

With its high value, it is possible that even the smallest fractions of gold cannot be used for small transactions.

Cryptocurrency is extremely divisible. Take for example the cryptocurrency Metal, or MTL. Even though the total supply of this currency is 66,588,888 MTL, each unit of MTL can be divided down to 18 decimal places. This ensures that users of MTL will always be able to spend extremely small amounts of value. 

Uniformity in the money supply helps users ensure that the money they receive is legitimate. Uniformity leads to a good user experience because it allows us to check for counterfeit currency against a standardized reference.  In this regard, fiat cash is more verifiable and uniform than metals. Individual units of solid metal can be of all different shapes, sizes, and weight.

There is also no instantly available guarantee that gold a user is paying you in is, in fact, real gold. In cryptographic monetary systems, uniformity is defined by the mathematical certainty of the code which created the system in the first place.

A Bitcoin user is always guaranteed to receive real Bitcoin. If it was not real Bitcoin it would never arrive on their wallet in the first place, as creating a “fake Bitcoin” requires hardforking the chain, resulting in a completely new asset altogether. Though the two codebases may be nearly identical, coins on a newly forked chain cannot be sent to the old chain and received as coins of the original chain.   

Scarcity of money increases its demand, as people desire things that are valuable or increase in value. A limited money supply increases its value and its purchasing power. In a healthy economy, the money supply is valuable and people can afford goods and services without inflationary price hikes. Fiat cash is controlled by the central banking system and can be created at whim, reducing its value. Theoretically speaking, central bank governance hopes to stimulate the economy by maintaining an optimal level of inflation to stimulate spending and economic growth.

However, central banks are often subject to the same levels of corruption as found throughout government institutions and monetary policy is often designed to benefit oligarchs, resulting in a form of crony capitalism. Gold is used as a hedge against inflation because of its scarcity and perceived value. Cryptocurrencies and crypto commodities are often hailed as “digital gold” due to their finite nature. Scarcity is defined by immutable, tamper-proof mathematical certainty, and their inability to be controlled by a few elected officials- one of the many merits of decentralization. 

Fungibility describes the ability for units of money to be interchanged and held as indistinguishable from each other. Paper money is very fungible. Imagine a swimming pool full of one dollar bills; we can interchangeably use any one of the bills and they will all be accepted equally without a unique identifying characteristic.

Gold is also fungible because it can be melted and mixed together into new forms, although individual units of gold coins may all be different depending on how they were minted, subject to human error.

Cryptocurrencies are generally not as fungible as fiat cash and gold because the blockchain is transparent and users of a public blockchain such as Bitcoin can trace all historical transactions as they interact with different addresses. Various solutions for fungibility in crypto are utilized such as coin mixers or privacy blockchain solutions that mask transaction history or hide it altogether.

A preferable form of money is generally accepted across the economy as a form of payment.

Acceptability is important because money that is widely accepted will have the largest pools of liquidity, therefore insulating the monetary system from volatile market conditions.

How is money created?

In our current central banking model, the money supply is controlled by the Federal Reserve and other centralized bodies that work closely with governments to dictate how to proceed with monetary policy. Proponents of central banking point to the improvement in quality of life that has been achieved by civilization over the past 100+ years in order to support their view, which maintains that central banking is a necessary component of a successful economy.

Critics of central banking, who are often the biggest crypto supporters, assert that although society is the wealthiest it has ever been, the gap between the rich and poor keeps widening- largely because of central banking policies and profit-driven financial institutions that do not see a business opportunity in providing financial services to underserved communities.

By decentralizing money creation and reducing the barrier to access financial services, crypto proponents aim to bridge the inequality gap present in society today. Although it may seem that traditional finance and this new paradigm of decentralization are at odds, leaders in both spaces are developing products and services to create a unified financial world that combines the best from both ends of the spectrum.

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