History of money:
What is money?
Money is an objector record that is generally accepted as payment for goods and services or in repayment of debts. As such a given amount of money represents a value of good or services. In order for a form of money to be useful in this role it must have advantages over using good or services themselves as in a barter economy. The three most important of these are the ability to maintain value, be relatively rare and to be easy to transport between traders. This is because the utility of money is to provide a more convenient representation of value than carrying goods themselves.
Any form of money which has been assigned a greater value than the raw materials it is made from alone is at risk from counterfeiting reducing its value. In order to prevent this, money can be made hard to copy and laws enforced to prevent copying of money.
Barter instead of money:
If there is no suitable tool for representing value between traders the only option for them is to trade by directly exchanging good and services. This method is inefficient as a method of trade however as it relies on both sides having products the other desires. It also removes the ability to ‘shop around’ as if one trader wants what the other trader has they must accept the prices that they are offering, removing the ability to route the transaction through other parties who have different levels or desire for either object. Barter was mostly used in pre-historic societies between individuals in which one of the parties would be unlikely to pay off a verbal debt in the future. For instance if they may not come back to that location again.
Kudos as money:
Even pre-historic societies rarely used barter as a method of trade. Gift-giving societies used the practice of members of the tribe or group giving out gifts in exchange for respect from the rest of the group and possibly a similar valued good or service in the future.
Verbal Contracts as money:
Another method of trading in prehistoric societies and one that has survived into the modern world is that of a verbal contract in exchange for good or services. So an individual promises to pay a certain amount of a good or service in the future for a good or service today. However this method is unreliable as it relies on memory and the trustworthy of the debtor both of which could devalue the verbal contract. Like the barter this method does not allow ‘shopping around’ between different traders due to the lack of physical entity to pass around. It does however allow differed payment of goods or services.
Objects as money
Gradually objects began to take on significance as items of money. The best items were items that were rare (so they would maintain a high enough value for few to be carried and still have a high value), that would not degrade over time (so that they it did not rely on a ‘coincidence of wants’) and objects that also had their own practical value so they maintained value over time. Examples of objects that became used as money include grains, metals, cowry shells. However a disadvantage of these objects was that the society had little control over the amount of an object that was present as it dependent on how abundant it was in the environment. And many of them were too abundant which kept their value low which meant that many had to be carried.
Precious metals as money:
One way of solving the value problem was to use precious metals like gold and silver as money. Because of their rarity only small amounts of gold and silver needed to be carried by traders, this meant it was useful as a currency increasing its value, this made it more useful as a currency increasing its value still further. However there could still be too much or too little(preventing easy division to purchase low value items) of those precious metals to be an ideal currency what was needed was a way to control the money supply.
Coins as money:
Coins as money began to be produced after 700bc in Greece and separately in China. The first printed coin that has been discovered has been dated to 700bc from the island of Aegina. The production of coins allowed the value of the metal to be combined with the practical difficulties of copying the coins to create a maximum value of the metal. This value could then be controlled by producing more or less of the coins and the maximum value could be raised by creating laws prohibiting the copying of these coins..
Trade Bills of exchange:
Trade bills of exchange were the first forms of paper money in the world, they were essentially medieval IOU’s given by reputable customers or written by reputable merchant banks that money had been deposited with in order to pay a debt. Trade bills of exchange were an efficient type of money but they were limited by the reliability of those writing the trade bills and this meant that they were not acceptable to all traders. They were also only IOU’s representing a specific amount of coinage and therefore could not act a currency by themselves.
Gold backed paper money:
In the 17th century in London, England goldsmiths began operating essentially as banks taking in quantities of gold and in exchange giving promissory notes which could be redeemed for the gold at any time. This could be described as one of the first examples of fractional reserve banking as both the gold in deposit and the promissory note representing it would then be used a currency. Later countries issued paper banknotes backed by gold reserves in similar but more centralized fashion.
Fiat money refers to money that is not backed by reserves of another commodity. It is however backed by the authority of the issuing nation state(and the currency’s value in paying taxes) and the goodwill generated by the value of the currency in the past. Fiat money allows any value to be chosen for a currency based on the amount of money within circulation. Of course if a coin or note has a high value it will be more profitable to copy and therefore must be made harder to copy in order to maintain its high value.
Post physical money?
Fiat money can also be represented by digital data on the computer systems of banks. This can be considered a new sort of money as due to fractional reserve banking only a percentage of this money is actually represented by actual notes and coins.
Cryptographic money is a new type of electronic money which can be completely free of government or other organisational authority. Bitcoin is a good example of this type of money. In Bitcoin new coins which fit the mathematical model of Bitcoin are discovered using processing time. There a finite number of possible bitcoins and they are discovered at a predictable rate. Once they are discovered they are added to the users unique electronic wallet with the bitcoin network accepting them as valid. Transfers are made through the recorded transfer of a bitcoin from one wallet to another. Because there is no central authority deciding the value of bitcoins they act in a similar to money did when commodity items were used as money.
A possibility in the not too distance future is that energy might be used as a form of currency. Because it is intrinsically valuable it cannot be reduced in value by being copied and given the speed at which it travels and the relatively low cost of transporting it it could be a convenient currency. However such a use would require methods to store energy more cheaply than is currently possible.