The Evolution of Money

For any business owner, it is extremely important to know how to handle money. This article is to tackle upon the existence and evolution of money as we know it today.

The Evolution of Money

Early Money

Long before money was invented people were quite satisfied by making, doing, and growing things from one another. In small communities, they could largely remember the payments and receipts of what was exchanged. Keeping tabs or tallies of these exchanges helped with a key requirement which was to record who had been paid and who was still owed. As communities were growing so the exchanges became numerous. People started creating things for the common good and rulers began to impose taxes which made accounting increasingly hard to keep track of.


IOU (I owe you) notes might have been a neat solution but unless a person knew the individual issuer personally, they were hard to enforce or verify, so instead, people started to use objects such as whale's teeth as a kind of "IOU" kind of note. This intermediate step in the exchange process meant that people were free to trade with anyone and they could even store up purchasing power for later use with their ratable "IOU" tokens.


So, at the same time, humans invented money they had also invented debt.


Metal Money

Carrying around large quantities of coins could be exhausting work and it was early Chinese rulers that hit on the idea of keeping heavy coins back in the palace of issuing "IOU" certificates for long-distance trading. Although the paper had no intrinsic value, people trusted that it was worth and that they could always exchange it for gold or silver or the coins it represented.


As global trade grew the idea of paper money caught on but traders and lenders were concerned that it was a bit too easy to make money that way so they tried to link the value of money to the value of gold which had the benefit of creating a standard for exchange between different currencies. Attempts to peg currencies to a fixed gold standard continued for centuries but the need for flexible exchange rates always prevailed so since the early 1970s the world has stopped trying to keep to a gold standard. Today, the only thing that distinguishes the value of a banknote from any other paper is trust.


Controlling Money

Years ago on the Pacific island of Yap, the nearest thing to gold was the race tone, notable for its enormous size and weight. The most valuable race tones were just so heavy that the Yap population tended to leave their currency in one place and then trade effectively in promises. Any trader who owned a race tone on the Yap could issue a promissory note against the value of their stone. These were the initial steps of the development of a huge banking system as we know it today. Once the promissory notes were accepted instead of race tones control of the amount of money in circulation the money supply would be lost. In the 20th century, some economists argued that the amount of money in circulation directly affects economic performance and it is important for governments to try to control it. This is not easy especially when the private lenders are the ones that create most of it.


Money and Inflation

In the 16th century, Spain brought home massive additional supplies of precious metals from the colonies. The trade turned sour when traders simply put up the price of their goods to match this new purchasing power. So the returning explorers were no better off and those without the new gold were even worse. This was the first appearance of money inflation.


International Money

In the 18th century, the British forced their colonies in America to pay their taxes in pounds and they made it illegal for the British colonies to print their own money. This meant that the colonies were forced to trade with the motherland. According to Benjamin Franklin, the American War of Independence was caused by the sheer burden of British taxation and the disadvantageous trade needed to access British pounds. The hard-won freedom after the war allowed the Americans to create the American dollar which because of the country's vast trade and trustworthy tax base eventually became the most widely used currency on the planet. This led many countries including Britain to store large reserves of dollars.


Money and Building Banks

By the 19th century, banking had become a thoroughly respectable business. Making a profit by basic money lending banks paid a lower rate of interest for the money they took in than they charged on the money they loaned. The bank soon realized that as long as depositors didn't ask for their money at once, they could in fact lend out many times more money than they had on deposit. This is known as fractional reserve banking. On rare occasions when depositors tried to get their money out at once, there was a run on the bank and the effect on the wider economy was so serious, the government started to ensure customers' deposits to prevent it happening while enabling banks to loan out more and more.


By the 21st century, some banks had taken fractional reserve banking to a whole new level, funding most of their loans not from cash deposits ratio from savers but with loans from other banks often secured against bundles of previous loans. So when there was a run on the bank in 2007, banks like Northern Rock not only didn't have enough money to pay out but the effect went way beyond just one bank.


Money and Saving The Banks

Economists distinguished between two kinds of money. Money created by banks inside the banking system and money created by governments outside the banking system. When a bank creates money by making a new loan with an equivalent private liability to the borrower to pay it - this is money created inside the banking system. Governments can create money by selling new bonds. These bonds go into circulation as new private assets but there is no equivalent private liability to pay them but instead, this outside money is added to the public debt although it is normally a very small percentage of the total money. In the economy, it was this outside money that was used to buy up the bank's bad private debts and write them off. The private sector retained its wealth with new assets inside the system supported by the government with public debt from outside the system.


The Power of Money

The world has carried on trading the U.S. dollars even though these aren't backed by anything of intrinsic value. The US government's decision to borrow billions for its bank rescue and stimulus plan dramatically increased the supply of dollars and some predicted that this would lead to a big fall in the dollar's value. This would happen on the basis that economies that print money can consume more than they produce. It should have ended in price inflation and the exchange rate of depreciation. But six years on this still hasn't happened. Why then does the dollar retain its value? Perhaps with so much of the world holding its wealth in U.S. dollar assets people simply have faith that the dollar will retain its value. 


Future Money

Minted coins and paper money with the rise of cutting-edge technology is now used in only 2% of transactions. Credit card and electronic banking technology have enabled massive global transactions to take place in a fraction of a second, and digital technology is enabling new currencies to be created.

   

Linden dollars Bitcoin, Etherium, and other cryptocurrencies which exhibit the enduring characteristics of money being hard to forge durable portable divisible and limited in supply. However, until governments accept taxes, in bitcoins or other privately issued currencies or banks start lending in new values, they are not much different from any other token such as whale's teeth. One sign that a new form of money has become important will be when governments and banks try to control it and if governments and banks continue to have the power to control money those who use it will always wonder to what purpose will they put that power.




References

BOOK: The History of Money - Jack Weatherford, 50,51,60,68,70 ... 0609801724

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