We often take money for granted. It’s an easy thing to do, considering how ingrained cash and credit cards are in our lifestyle. But before these instruments of trade ever existed, bartering was the only road to wealth. And if you were a medieval person without access to anything that could be traded, your wealth rested on the value of your labor or skills.
Money is a medium of exchange. It makes it easier to trade and provides a trustworthy, universally accepted form of wealth. Money comes from coins, paper bills, and electronic credits.
It’s been a long road from flint knapping to creating Bitcoin and other cryptocurrencies. But understanding how money came to make it easier for people to use it effectively today.
The global economy was supported for several decades by gold-pegged currencies and fiat currencies. Decentralized finance, often known as the alternative financial system, is evolving because of bitcoin and alternative cryptocurrencies (DeFi). This section discusses how humanity transitioned from utilizing gold and paper money to adopting cryptocurrencies like bitcoin as legal cash.
You should also check out the first part of the series on the history of money. This part examines the historical origins of money in exchange for goods and how the system evolved from trading cows to trading shells as coins and current dollar bills. If you want to learn more about the history of money, check out part one of the sequence on the history of money.
Banking is a vital service since money can only be used if it remains in possession of another party or entity. Most humans get their money from banks, which comes from fiat currency.
This means it’s not backed by any physical commodity but by an organization such as a government or central bank. The ultimate purpose of banking is to allow for easy exchange and to make financial transactions easier for people and businesses who don’t want to deal with cash.
What is Commodity Money?
Gold and silver are examples of commodity money. This means that physical substances like gold and silver are used to back the value of currencies. These precious metals aren’t used as money since they don’t have any value outside their use as jewelry or money.
However, other items can substitute for gold or silver as a medium of exchange. These items include cattle and salt, often used as trade goods in ancient times and today. Since they can be used as money, they are important to understand as a form of money.
The History of Money in the Ancient World
Before moving on to the next section of this article, it’s important to review the history of money since it puts today’s developments into context. The next section focuses on how bitcoin and DeFi could function with commodity money such as gold and silver. But first, let’s look back on how money came to be.
The earliest forms of money were based on barter. People would exchange goods and services for getting what they needed or wanted. In some situations, people did not have anything else they could trade for the goods or services they required. This is where commodity money comes into play.
The most common commodity money is salt because it has many uses and is easy to transport. Salt is just one of the many items that have been used as commodity money. Other items include cattle, tea, and shells.
Salt was also commonly used as currency during the Middle Ages in Europe and other parts of the world due to its ability to preserve food over long periods and widespread availability in Europe. The most popular salt currency form was “salt money.”
The Modern Art of Money: Gold, Paper Bills, and Fiat Currency
After the Middle Ages, salt was replaced by other items as a form of commodity money. The most popular commodities in the 1600s were tulip bulbs and sardines, which were relatively easy to transport.
In the 1700s, merchants started to use paper bills because they were easier to carry and transfer than metal coins. Even though paper currency did not have intrinsic value like gold or silver, it increased the amount of money in circulation so that people could trade more easily. The paper currency also allowed for greater flexibility for the central bank since it allowed monetary policy to be implemented more easily.
This is where fiat currency comes into play. Fiat refers to legislation that says a government can issue money. Fiat currencies, like paper bills and coins, have no intrinsic value and are not backed by any commodity.
All fiat currencies are based on the value of their country’s ability to produce goods and services. This is one of the main reasons why they are so widely accepted by people worldwide. The physical representation of money is gradually giving way to a more conceptual one.
The earliest kinds of money, such as agricultural goods and sea shells, were concrete because they represented an immediate benefit that could be consumed. These early types of money were also among the first to appear.
To put it another way, they are items for personal consumption. This was eventually replaced by coins made of metal, with the underlying materials (i.e., metal) functioning as capital commodities (i.e., used in the production of equipment).
The move from commodity money to representative money was signaled by the introduction of banknotes, which solely serve as a peg to metal coins but have no value of their own in and of themselves. This ushered in the modern era of fiat currency.
Following the removal of the gold standard, banknotes were transformed into fiat money, which is not tied to any commodity and has no inherent value. Fiat money is a government-issued currency, usually the national currency of a sovereign state, intended to be accepted as a means of payment by the public.
Fiat currencies are generally distinguished from precious metals that have monetary value in their own right due to demand independent of any fiat currency or legal tender laws.
The Fiat Money System: A Summary
For fiat currencies to work, laws and regulations must force people to follow the rules. No such law in the world can punish people for not using any currency that isn’t backed by precious metals or gold. Thus, a system based on fiat currencies will work only as long as it’s enforced and supported by powerful institutions.
The monetary system known as fiat money has been steadily established over the previous few centuries and has emerged as the preeminent system worldwide over the previous few decades.
It is defined as “money without inherent worth that is utilized as money because of government edict,” according to a student economics textbook that is frequently used.
To put it another way, printed notes and minted coins (as well as deposits in banks) only have value because the government has recognized them as “legal tender” to discharge the debt. As a result of the government’s insistence that tax payments be made in legal cash, there is a persistent demand for that money.
This is backed by the government’s ability to enforce tax payments in the legal tender through its police and judicial organs. That is why the monetary system based on fiat money is referred to as “fiat” or government-backed money.
Money issued by governments was first made of metal, as precious metals can be used to produce equipment and goods, functioning as capital commodities. In this respect, paper currency is a form of representative money that does not have any value in itself but can be exchanged for metal coins with value.
Conclusion: A History of Money
Money has come a long way over the past few centuries. Though we have yet to get to where everyone uses digital currency, we have come far. What was once a bartering system has progressed into the modern banking system that everyone relies on.
The only difference is that along the way, people have created money out of thin air in exchange for goods and services. One form of money has transitioned into another over time, and now we are on the brink of another transition. It will be interesting to see how digital currency changes the way we use money in the future.
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