History of Money (from barter to cryptocurrencies, and the future of money)
History of Money (from barter to cryptocurrencies, and the future of money)
History of money
Well, you might have heard the phrase, “Money makes many things.” And, as the expression goes, money does help us survive and enjoy life most comfortably. For most people, money is merely a piece of paper with monetary value to buy products and services. Did we start with paper cash, or was it something else? Nowadays, people transfer money online without using physical currency and sometimes with no constraints without the government’s involvement or any other intermediate organizations, especially in cases like cryptocurrency.
How did it all start?
How has the monetary system evolved from the barter system and developed into digital currency?
As humans began to evolve from hunter-gatherers to agricultural societies, they started to exchange things or commodities, and this system was called the “Barter System.” Barter refers to the mutual exchange of resources or services, and it is believed to have been practiced for more than a thousand years.
The barter system is the genesis of trade, exchange, commercial activities, and monetary system. People exchanged cattle, sheep, camels, and other livestock, throughout history and across the world, which is considered the world’s first and oldest form of money. In many societies, the introduction of agriculture brought grain and other vegetable or plant products as a standard form of barter. Even today, individuals, businesses, and governments still utilize and prefer barter to exchange products and services.
The Bater system can be best understood from this example. Assume that you want to trade a sack of wheat for a bag of beans, and you have a friend of yours who agrees to the contract. Congratulations, you have successfully completed the transaction. But, the question arises whether the bag of wheat can be considered equally valuable to the value of a bag of beans?
The lack of a uniform exchange rate was a fundamental flaw in the barter system. The parties couldn’t agree on the worth of the traded products or services and the double coincidence of needs to make barter exchange complex.
The Age of Metal Coins
The first evidence of the usage of metal coins was found in China, where the ancient Chinese produced bronze and copper coins around the end of the Stone Age, and these are regarded as the first metal coins. Chinese archaeologists from Zhengzhou’s State University revealed in early August 2021 that they had unearthed the world’s earliest known, securely dated currency minting facility. Around 640 BCE, this factory in Guanzhuang, Henan province, China, began striking spade coins, which are thought to be the earliest standardized metal currency. Meanwhile, in the west, the Lydians were credited with creating metal money by the Greek poet Xenophanes, as reported by the historian
Herodotus. Lydia’s King Alyattes issued the Lydian stater, which is said to be the first official money of the kingdom. The coins were composed of electrum, a naturally occurring alloy of silver and gold, and were embossed with images that served as denominations.
The History of Money: Evolution to Paper Currency
Until the 16th century, metal coins were the only form of cash in several parts of Europe. Colonial conquest of new areas supplied fresh supplies of precious metals and allowed European powers to continue minting enormous coins.
Meanwhile, China was the first country to adopt paper currency during the 9th century AD. China was subject to more than 500 years of early paper money from the ninth through the fifteenth centuries. During this time, the manufacturing of paper notes increased to the point where their value quickly degraded, and inflation surged. After the incident, from 1455, paper money was no longer used in China for many hundred years.
Their North American colonial rulers gave the first paper currency issued by European countries. Because shipping between Europe and the colonies in North America took so long, the colonies sometimes ran short of money, which led to the issue of paper currency. On the other hand, banks soon began issuing paper banknotes to depositors and borrowers in place of metal coins. These notes could be given to the bank at any time and exchanged for silver or gold coins.
Slowly, physical cash was replaced by electronic transactions in the digital age by using payment gateways with no actual money. This was powered by the discovery of mobile payments, which can be easily made using a portable electronic device such as a cell phone, smartphone, or tablet and software to pay for a product or service. Money can be sent to friends and family members via mobile payment technologies.
The rise of Apple Pay and Google Pay is the best example of the market for mobile payments platforms, which persuade shops to use their systems. At the same time, many predicted that the future currency would undoubtedly be digital cash in the form of bits and bytes. And well, this moves us to the next part, which is the rise of cryptocurrencies.
The era of digital currency
The world’s first cryptocurrency was released in 2009 by an anonymous man named Satoshi Nakamoto. It swiftly became the de facto standard for virtual currency, and it stands as the number one cryptocurrency in the world of cryptocurrencies. Well, after such a long description, how can one not know that it is Bitcoin? With a market capitalization close to $1 trillion (News of the Russian invasion has led to a fall in the price of the currency is to be noted) or about 3% of all of the world’s money, it can be described as the king of the Crypto World.
The thing that appeals to virtual money is that it promises lower transaction costs than standard online payment methods and is managed by a decentralized authority compared to the currencies issued by the government. They are simply digital assets that may be traded for other currencies, items, and services. To safeguard financial transactions, regulate the production of extra units, and verify asset transfers, they use robust cryptography technologies to prevent data loss or financial information leakage. And here comes the “Blockchain technology”.
Blockchains are ledgers that keep track of these transactions, which involve a cryptographic hash of the preceding block, a timestamp, and transaction data, all included in each block of the chain. In general, blockchains are immune to data manipulation and modification. So, that’s how humanity grew from barter exchange to the now cryptocurrency transactions.
So, for a better understanding of what occurred in the history of money, we need to get deep into few examples of the monetary system.
Generally, economists distinguish money into two different types. One is generated by banks inside the banking system and the other is the money created by governments outside the banking system.
When a bank produces money by making a new loan, it gains a new private asset, the loan, as well as an equivalent private liability to pay the loan to the borrower. This is money that has been produced within the banking system.
If a country’s economy were a human body, the central bank would be its heart. The central bank, like the heart, pumps money into the economy to keep it healthy and thriving, much as the heart pumps life-giving blood throughout the body. Economists argue that the amount of money in circulation has a direct impact on economic performance and that governments should endeavour to limit it. But this is difficult, especially since the majority of the debt is created by private lenders.
Inflation and History of Money
While it is simple and clear to observe pricing changing with time for certain items as human desires are significantly more complicated. Individuals require a huge and varied range of items as well as a variety of services in order to live comfortably. Inflation is a terminology used to express the overall impact of price changes across a wide variety of products and services, and it represents the rise in the price level of goods and services in an economy over time with a single figure.
Because all international currencies are fiat money, the money supply might expand quickly for political reasons, causing price levels to rise swiftly. The most well-known example is the hyperinflation that hit Germany’s Weimar Republic. The victorious nations in World War I requested reparations from Germany, which could not be paid in German paper money since it was devalued due to government borrowing. Germany sought to produce paper currency, buy foreign currency with it, and pay its debts with it, which resulted in hyperinflation. Another example is during the Covid-19 crisis as all global markets shut down abruptly it caused a huge spike in inflation in developed as well as developing economics of the world.
The British ordered their colonies in America to pay their taxes in pounds and made it unlawful for them to issue their own money. As a result, the colonies were compelled to trade in order to get money. But after getting independence from the British, Americans utilized their hard-won battle to develop the American dollar, which, because of the country’s massive commerce and reliable tax base, eventually became the world’s de facto currency, prompting several countries, including the United Kingdom, to keep large reserves of dollars.
Money and Saving the Banks
Selling new bonds allows governments to produce money. These bonds are issued as new private assets, but there is no corresponding private responsibility to pay them off. Instead, the money comes from outside the country and is added to the national debt. It helps the private sector maintain its wealth by acquiring new assets inside the system with the support of the government.
The Power of Money
Since the last gold standard crisis in 1973, the world has continued to trade in US dollars, despite the fact that they are not backed by anything of real value. Some predicted that the US government’s decision to borrow billions for its bank bailout and stimulus plan would result in a sharp drop in the value of the dollar.
But, this hasn’t happened even after years. It’s because people have trust in the dollar’s value since so much of the world’s wealth is held in US dollar assets. And knowing that so many people believe the same thing adds to the prevailing belief that the dollar will continue to strengthen.
The Future of Money
Minted coins and fiat money, which were once at the forefront of usage, now account for barely 2% of all transactions. Massive worldwide transactions are now completed in a fraction of a second with the help of credit card and electronic banking technologies, and digital technology is allowing new currencies to be formed. Bitcoin, Ethereum, XRP, and other cryptocurrencies are examples of cryptocurrencies that have the properties of money that are difficult to counterfeit, durable, portable, divisible, and restricted in supply, and they may even threaten the power of government-backed money.
In addition, the persistent and global nature of the pandemic continues to highlight inefficiencies within the world’s domestic and cross-border payment systems. This was exacerbated as remittances to low- and middle-income nations roared back to growth in 2021, putting pressure on inefficient cross-border payment systems.
There is strong potential for new CBDC initiatives, increased investment in, and activity by, crypto-based payment innovators, and collaboration between traditional financial institutions and crypto companies.
Will CBDCs be a gamechanger in the monetary system?
Let me know your insights about the future of the monetary system in the comment section.
History of Money
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Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.