A Simplistic View at How Money Evolved To What We Have Today and Why Cryptocurrencies Are the Next Logical Stop!

It’s still a crazy idea, isn’t it?

Why should any reasonable person in this world even remotely consider exchanging the paper money that they can hold in their pocket for a digital currency or cryptocurrency?

Especially considering that, the tag “digital” fully discloses that you can’t hold it physically.

That’s the questions and thoughts of everyone who doesn’t understand the use of digital currency. And it’s actually okay to not understand the rationale behind having another form of currency — one that you can’t hold at that. After all, all that have existed as money in most of our lifetimes is paper money. Still, this doesn’t mean that the idea of a digital currency is a huge needless and irresponsible party.

To understand the rationale of a digital currency, it would help to look at the history of money and how we started using the paper money we treasure so much.

There Was a Time In History When There Was No Money

Unbelievable, right? But it’s true.

It helps to begin by being sure that you understand the definition of money. Money is simply a medium of exchange. And a medium of exchange simply means an intermediary item that’s generally accepted among a group of people or in a region to ease the buying and selling of goods.

Glyn Davies pointed out in his book “A History of Money: From Ancient Times to the Present Day” that the earliest indication of money was between 9,000 and 6,000 B.C. At the time, livestock, cattle in particular and farm produce like grains were used as a medium of exchange — aka money.

Bartering, which simply means two parties coming together to exchange what they each have and need, was the most popular way through which people acquired stuff. Of course, the world is a little too complex for it to be this simple. If this was all that existed, the chances of some people being significantly wealthier than others is limited. But there have been wealthy people throughout history.

The philosopher Aristotle offered some insight into the dynamics of the bartering system by pointing out that every object has two uses. The first is the fundamental purpose for which the item was designed. The second use is the possibility of the item being sold or used in a barter.

So in a barter system, an individual who have certain item in surplus quantities, say corn, would typically exchange these items directly with another individual who has surplus quantities of other item, say cotton. Typically, some would always have surplus quantities of items available to trade for other valuable items, which is one way wealth was built.

As societies became bigger and more advanced, batering wasn’t just enough to satisfy the needs and wants of individuals. The inherent problem with batering as an economic tool was that it depends on coincidence of wants — which simply means that for a bater to occur, you have to look for an individual who needs what you have and, at the same time, has what you need in surplus. In addition, bartering had timing constraints too because if you want to exchange corn for cotton, the two commodities have to be available for barter at the same time, which could be time consuming.

As societies became bigger and more advanced, batering wasn’t just enough to satisfy the needs and wants of individuals. The inherent problem with batering as an economic tool was that it depends on coincidence of wants — which simply means that for a bater to occur, you have to look for an individual who needs what you have and, at the same time, has what you need in surplus. In addition, bartering had timing constraints too because if you want to exchange corn for cotton, the two commodities have to be available for barter at the same time, which could be time consuming.

How We Got Money

While there are a number of competing views of the events and circumstances that led to the development of the concept of money, we know that the concept of money is centered on improving trust, speed and efficiency of trades.

One of the first places where items were designed and assigned a value to function as a medium of exchange was in China, around 1,100 B.C. The Chinese used minuscule versions of their weapons, cast in bronze, as medium of exchange, or money. Because nobody wants to incur an injury simply because they want to transact, the miniature arrows and the like were ultimately abandoned in favor of rounded coins, effectively making China the first nation to design a coin money.

However, it was in Lydia, now part of the modern western urkey, where the first minted coins was made official. The coins were made from a naturally occurring mixture of gold and silver known as electrum. The coins were also imprinted with the images to differentiate between denominations.

It worthy to note that there were other forms of early money such as cowries in Africa. The point here, however, is to point out how the need for better trust, speed and efficiency in trade brought about the development of money.

The Mainstream Transition to Paper Money

Seeing the ease of trade that coin currency, mostly made from precious metals brought to pioneer economies, many economies around the world moved to the use of coin currencies, which in turn aided international trade.

The popularity of coin currency brought another inherent problem: bulkiness. In Europe, for instance, coins were still in use until about 1,600, assisted by the precious metals that European nations acquired from colonies. It eventually became inefficient for merchants to trade with heavy bulk of coins in large transactions. To make things easier, banks started issuing paper notes to depositors to work with instead of bulky coins. A merchant could buy goods and issue the seller a bank note, which the seller then takes to the bank to redeem the face value of the note in coins.

Sound similar to today’s currency? Yeah, that’s where it started. The only difference is that the notes were issued by banks and private institutions and not governments as we have today.

So How We Arrive At Government Issued Paper Currency?

Two things: International trade and trust.

The limitation of the early bank notes is that it doesn’t have much value when you’re travelling to a location where the bank that issued the promissory note is unknown, your money in that bank is almost of no use, simply because there was no way to validate the authenticity of the note.

What if the government that most people knew issued these notes? It would be easier to gain trust, right? Voila! That was the beginning of government issued paper currency. For instance, the first paper currency issued by European governments were from colonial governments in North America. Due to the fact that it usually takes long to ship items between Europe and the colonies, colonists frequently run out of cash when they expanded their reach. Again since the barter system isn’t efficient enough to help out, colonial governments had to start issuing I Owe You, IOUs, to use as currency for travelers.

The creation of this form of paper currency facilitated international trade and effectively meant that people and institutions started buying currencies from other nations to facilitate trades. Yes, you’re correct, that’s part of the history of the foreign exchange, or forex, market.

One thing to note in all of this is that precious metal coin, mostly made of gold, silver, bronze and copper, largely remained the power behind the paper currency. In essence, these paper notes were nothing without the precious metals.

The Mainstream Transition to Paper Money

Seeing the ease of trade that coin currency, mostly made from precious metals brought to pioneer economies, many economies around the world moved to the use of coin currencies, which in turn aided international trade.

The popularity of coin currency brought another inherent problem: bulkiness. In Europe, for instance, coins were still in use until about 1,600, assisted by the precious metals that European nations acquired from colonies. It eventually became inefficient for merchants to trade with heavy bulk of coins in large transactions. To make things easier, banks started issuing paper notes to depositors to work with instead of bulky coins. A merchant could buy goods and issue the seller a bank note, which the seller then takes to the bank to redeem the face value of the note in coins.

Sound similar to today’s currency? Yeah, that’s where it started. The only difference is that the notes were issued by banks and private institutions and not governments as we have today.

So How We Arrive At Government Issued Paper Currency?

Two things: International trade and trust.

The limitation of the early bank notes is that it doesn’t have much value when you’re travelling to a location where the bank that issued the promissory note is unknown, your money in that bank is almost of no use, simply because there was no way to validate the authenticity of the note.

What if the government that most people knew issued these notes? It would be easier to gain trust, right? Voila! That was the beginning of government issued paper currency. For instance, the first paper currency issued by European governments were from colonial governments in North America. Due to the fact that it usually takes long to ship items between Europe and the colonies, colonists frequently run out of cash when they expanded their reach. Again since the barter system isn’t efficient enough to help out, colonial governments had to start issuing I Owe You, IOUs, to use as currency for travelers.

The creation of this form of paper currency facilitated international trade and effectively meant that people and institutions started buying currencies from other nations to facilitate trades. Yes, you’re correct, that’s part of the history of the foreign exchange, or forex, market.

One thing to note in all of this is that precious metal coin, mostly made of gold, silver, bronze and copper, largely remained the power behind the paper currency. In essence, these paper notes were nothing without the precious metals.

To be continued…

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