A brief history of money - From gold to bitcoin and cryptocurrencies - The Comprehensive Minds

A brief history of money - From gold to bitcoin and cryptocurrencies

A brief history of money

 Now, let's consider the concept of money as an abstraction of value. Money is as old as human civilization and civilization itself is reliant on possessing ways in which to exchange, account for, and transfer value. What once started as barter trade (trading goods for goods) was replaced using standardized token money. 

Gold and silver were the first universally accepted natural choices for money. Actually, they fit the bill so well that they were the primary form of money for centuries across the globe and have been instilled in human culture... I bet when you read "gold" you instinctively think of value or wealth. 

After this came paper money – a more user-friendly way to carry and move around value compared to precious metals. China was the first to adopt it in the 7thcentury. However, the western world didn't catch up on this monetary innovation until Marco Polo introduced it to Europe around the 13th century. 

Even then, the first European banknotes weren't issued until the 17th century. It took people several centuries to accept the new paradigm at the time and shift from gold and silver coins to banknotes backed by these same precious metals as the widely used form of money. This led to the birth of 'the gold standard. The banknotes themselves didn't hold any intrinsic value like gold and silver coins do. 

Instead, paper money was backed by precious metals (like gold and silver) stored in a treasury vault somewhere. Think Fort Knox. The banknotes represented the right to collect said precious metals from a bank. More convenient than taking a wheelbarrow of gold bullion to the post office to pay the mortgage! 

This was the case until 1944. At the end of World War II, yet another related system was introduced, the "gold exchange standard", under the Bretton Woods agreement. This meant that many countries fixed their national currencies’ exchange rates to the US dollar which was, in turn, convertible to gold at a fixed rate. Not only that but this convertibility was no longer available to individuals or companies, only to central banks. 

However, the Bretton Woods system ended in1971, when the US dollar convertibility to gold was terminated. So long "the gold standard" and commodity-linked money. Paper money is no longer backed by gold or anything else tangible but just faith! Welcome to the world of fiat currencies! 

So how does paper hold any value if it's not backed by anything? Well, that's where concepts like legal tender come in. The fiat system, which we still use today, has governments assign value to a currency, declaring it a legal tender. This means a government decides whether a medium of payment will be recognized for financial transactions, trade settlements, or commerce in a country or jurisdiction.

From gold to bitcoin

Some fiat currencies like the US dollar and the Euro are recognized internationally and used for global trade because they are backed by some of the most credible governments and largest economies in the world. To sum up, a fiat currency has value because a government uses its power to enforce this value or because exchanging parties agree to its value… Some may even describe this as a collective illusion. 

It’s not hard to see how problems could occur with this. Let’s see some examples when the fiat currency system backfired under the control of irresponsible or corrupt governments prone to economic and political mismanagement. 

At the time of the independence of Zimbabwe from British colonial rule in 1980, the Zimbabwean dollar (ZWD) was worth about 1.25 US dollars. Soon after, inflation started creeping up and got completely out of control when President Robert Mugabe began confiscating land from the white farming community in 1998, resulting in a near-total collapse in food production and the decline of foreign investment. 

In order to help pay the government’s expenditures, the Reserve Bank of Zimbabwe started printing more and more banknotes with higher and higher face values. 

Reserve Bank of Zimbabwe

As a result, the annual inflation rate rose from 32% in 1998 to 231,000,000% in July 2008 when official statistics stopped being reported. After that, it was estimated by international economists that the hyperinflation peaked at a staggering annual rate of 89.7 sextillion percent (89,700,000,000,000,000,000,000%) in mid-November 2008. 

The peak monthly rate was 79.6 billion percent, which is equivalent to a 98% daily rate, in other words, prices were pretty much doubling every day. In April 2009, the Zimbabwean dollar was completely abandoned in favor of using only foreign currencies. Once one of the richest countries in Africa, Zimbabwe descended into economic chaos largely blamed on its government’s policies. 

This is an extreme example of how the trust in a fiat currency can be lost leading to economic turmoil. In Zimbabwe, the collective illusion quickly turned into collective disbelief. This is not an isolated example of a currency crisis though. 

There are many countries around the world where local currencies hold hardly any value and people prefer keeping their savings in the so-called “hard” foreign currencies, or other alternatives like gold, and most recently – Bitcoin! 

Venezuela is undergoing a period of raging inflation

Currently, Venezuela is undergoing a period of raging inflation of its own. In January 2018, inflation was 84% for the month, implying an annualized rate of 150,000%, meaning prices would double every 35 days. Now, the Venezuelan government has come up with an innovative proposed solution for a stable currency – the Petro, a government-issued cryptocurrency running on blockchain and backed the country’s oil reserves. 

The Petro is intended to be a legal tender in Venezuela, which becomes the first country in the world to issue a sovereign cryptocurrency. It remains to be seen how successful or not this experiment will be. Such a centrally-issued cryptocurrency is a far cry from the decentralized nature of Bitcoin and its digital siblings. However, it should also be noted that with its actions, Venezuela is recognizing and reaffirming the great advantages and potential blockchain holds.2.3. 


Also Read:  The Economy of Switzerland, Unraveling Swiss Economy

To conclude and summarize – we have seen how the idea of money has evolved through history from a more tangible to a more intangible concept, with each stage having its pros and cons. From barter trade, we moved to commodity money, through commodity-backed paper money, all of which have some intrinsic value, on to the fiat money we use now. 

This was a historical journey from real goods and commodities to numbers on a computer screen representing value and money. Throughout all these stages we had an idea of value in our mind but it has evolved hand in hand with our civilization and technology. 

From something, you can touch and actually use, to something you can touch but cannot use except for trade, to just an abstract idea. As you can see – the form has changed but the idea of value has always remained the same. And we represent and communicate this idea of value in terms of money. 

Because this abstraction of value brings us to the next evolutionary step - digital cryptocurrencies powered by blockchain technology. Similar to the fiat system, this form of money has value because people believe in it. 

But there is more to it than just a government promise. Promises made by people have been broken many times in history. Here we have solid science, mathematics, and computer hardware guaranteeing the blockchain works as expected. 

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