The History of Money

Coinage

If a person was stranded on a barren island and they found 50kg of gold, they would not be celebrating as they would much rather find water. After finding that, they would find food, then a partner, then friends, then tools and so on. Point being, gold has no intrinsic value to people, and the only things they do are water, food, shelter and other people. However, when a society is at a stage where these things are relatively abundant, different people would use their unique skillsets to acquire different things of intrinsic value. Naturally, when one person, a hunter, has the skills and ability to access meat and another person, a clothier, has the skills to make clothing, the only way for the two of them to benefit . The problem is that meat spoils so cannot be stored for long periods whereas clothing can last a long time. On the other hand the demand for meat is daily, whereas the demand for clothing can range from monthly to quarterly. The clothier and hunter both need each other as they both prefer to to specialise in their field of expertise without rather than expending energy on learning additional fields. This is why they need to trade with each other but if the clothier were to initiate a trade with the hunter, he might find that the hunter is not in the market for clothing today as he bought some recently. To trade, the clothier would have to visit the hunter first to find out what he is in the market for, then must go and trade clothing for that item, then come back and trade that for meat. This shows that trading items of intrinsic value via bartering is an impractical way of trading. For this reason people were driven to creating a more practical system of trade. The token system, where a solid piece of metal is used to represent value, provided a solution to this problem. While the tokens themselves cannot directly quench thirst or satisfy hunger, as long as people value them, they can access a diverse array of items that can. The token system allowed for an efficient store of value for through time. Seasonal businesses became more practical as owners could store value in tokens when sales were low. Metallic tokens could not be easily reproduced or replicated. Materials that were too abundant could not be used as tokens after-all, if stones were the chosen token, there would be no need for a clothier to spend time making clothing for other people in return for 5 tokens if he could pick up 5 more units of the token from the ground on his lunch break. The first coins would be made of metals like iron and brass and the abundance of the metal in the local area dictated the value of each coin, creating a natural and decentralized self-governance system for coin valuation.

Paper Slips

While metallic coinage made trade more efficient, it created a new problem. People had to carry a lot of coins to make a purchase so they were difficult to take on long journeys and the risk of theft was also high. This is where the concept of a bank was born. Someone who had access to a secure space could store the coins that people owned in a vault in return for signed slips of paper. For example, if a person placed 100 iron coins in the vault, they could receive 10 signed slips that represented 10 iron coins each. This person could carry paper instead of stacks of metal and could use that paper to make purchases instead of using the coins. The person who accepted the slip could then go to the vault and claim their iron coins. Alternatively, they could use the slip to make a purchase without ever seeing the iron coins. So long as any person along the chain of ownership of any one particular slip could turn up at the bank to get their physical metal, the slip was pegged to the value of the number of metal coins written on it.

Gold

As time went by, goldsmiths entered the storage game. Upon discovery, gold had a higher value than other metals due to its low abundance. This made it a more efficient store of value. The fact that it is one of the least chemically reactive so it doesn’t rust unlike iron also increased perceptions of its value. Eventually, between the late 1600s and early 1800s the USA developed the gold standard, where the government would buy gold in bulk and issue printed paper notes that represented a certain amount of gold. The people couldn’t exchange their money for real gold from the government's vault but they could buy real gold from a trader for the same price unlike the goldsmith storage system, but they could purchase the same amount of gold that the note was worth from a gold trader. At the time, this increased the security of the paper money as small banks and goldsmiths were not as secure as government vaults, protected by the army, and the paper money wasn’t as easy to forge as paper slips. In 1821, England became the first country to adopt the gold standard and most nations followed suit and global trade was settled in gold and currencies where couples to the gold standard. The value of a currency was calculated by how much gold they had in reserve divided by the number of units of currency they created. For example, if a small country of 100 people run by a government that secured 1000 grams of gold in its vault and issued paper money backed by gold, 1000 notes would represent 1g of value each. If an item was worth 1g of gold, one note would be sufficient to make the purchase. If the government printed 1000 more notes, the item would still be worth 1g of gold. Now that 2000 notes are worth 1000g of gold, the item would cost an inflated price of 2 notes instead of 1. If this government discovered 1000 more grams of gold and put them in the vault, 2000 notes would be worth 2000g of gold meaning that the price for the item would reduce back to 1 note. If the government secretly printed the new notes without informing the people of the reduced value, it is true that the people wouldn’t notice that change as they would not all be claiming their gold at once and would continue trading based on notes, not gold, but, the influx of notes would slowly lead to an increase in the number of customers with money leading to higher demand, lower supply, and higher prices also known as inflation.

Oil

In 19XX, President Nixon decoupled the US Dollar from the gold standard. The theory was based on the fact that people see and use money that was backed by gold but never wanted to see the or exchange for the gold that this money was backed by. Furthermore, people value gold as simply a facilitator of trade so people choose to value it and are not intrinsically tied to it like they are with water for example. If the USA could change to make the world value the US dollar token itself instead of the gold it was backed by, the USA could control world trade and print new money to help pay its debts. The way to do this was to do a deal with a nation that has a heavy influence over something that has intrinsic value. Saudi Arabia had the highest influence over the energy market with the largest oil reserves meaning that they coupled control the world’s energy supply. Nixon did a deal with the Saudis where he promised to buy oil, provide military aid and equipment to them and in return the Saudis would only accept payment for oil in US Dollars. This meant nations that needed to purchase oil from Saudi Arabia, every nation, had to purchase dollars to make payments instead of gold. Naturally, these nations decided to take payment in dollars to increase efficiency. This made the US Dollar the new global reserve currency and this concept is called the petrodollar and serves as a replacement to the gold standard. Valuation of a nation’s currency would now become more complicated as it would be pegged to the total amount of assets that the nation owned with the most important asset being the amount of dollars that they owned. Now that every nation relied on the dollar token itself, the nation who controls the dollar, the USA no longer needed to peg the dollar to gold so they didn’t need to produce and sell products to other nations. They could also print new money and control international money supply as would be equivalent to discovering new gold reserves in the previous system. While this was beneficial to the USA, the petrodollar system is dependent upon the USA being the strongest political force in the world. If they lose this status, nations may abandon the petrodollar as some nations such as Saudi Arabia, China and Russia have already begun doing.

Gold and Inflation

While international currencies are no longer pegged to gold, the value of gold has not changed because scarcity as a concept has not lost its value. For this reason, the reduced scarcity of money, caused by governmental decisions such as excessive printing and tampering with energy production has increased the token price of gold but has not changed the value of gold. This is because the demand for scarce items has not changed and gold is still scarce. But because international payments are no longer made in gold, it is not prone to deflated value when governments make decisions that increase inflations. Previously, if a government tampered with its energy supply and energy costs increased as a consequence, the amount of gold required to purchase energy would increase.

Inflation, the increase of prices, occurs because money cannot afford as much as it once could. For example, let’s say in month 1 when inflation was 0, £10 could purchase 10kg of bread, but let’s just say energy prices rose since then and it is now month 6. Let’s say that this rise in energy cost has increased the cost of production for bread makers by 10%. This means that they have to spend more money to produce the same amount of bread, leading to them having to sell the same 10kg of bread for a higher price of £11 (£10+10%). For this reason, many investors buy gold when inflation rises as they know that the price of gold will rise but its value will stay the same. This is because, when inflation rises, in this case due to rising energy costs, gold miners and transporters also have to pay higher energy prices much like the bread maker. Let’s now assume, for this example, that the energy costs associated with gold extraction and transport have also risen by 10%. This means that in month 1, £10 could buy 0.2g of gold but today, in month 6, that same 0.2g of gold costs £11 (£10+10%). So, if investors sells the gold that they bought in month 1, they will get £11 which they can use to buy the same 10kg of bread. Essentially, the gold investor aims to store and increase value, not necessarily cash. They will store cash if they believe it will store or increase in value in a certain timeframe. In this case, money lost some access to fuel which meant that it also lost some access to food, clothing and shelter. Gold on the other hand did not, it maintained value.

Centralized Digital

Moving from a barter system to a metallic coin system allowed people to store money for long periods by transferring trust from ownership of items to levels of abundance. The paper slip system allowed people to lighten the weight of their wealth for long journeys by transferring trust from ownership of physical coins to owners of storage centres. Government-issued gold standard tokens reduced the chances of forgery by transferring trust from local storage centres to the government’s ability to discover and earn gold through trade. Finally, the creation of the petrodollar allowed the USA to reduce its need to earn gold and forced a global transfer of trust from sovereign governments to the government of the USA. The consistent challenge’s that all of these financial innovations have had to solve have been trust and security. Increasing trust in someone else’s security system also increases reliance on that person or institution as a consequence. They may be trustable today but in the future they may be influenced by factors outside of their control and people and may act in hostility against the interests of the people whose assets they hold. On the other hand, increasing trust in one’s own security system also increases risk of theft while decreasing one’s own ability to trade efficiently.

Today, most money doesn’t exist in physical form, it exists digitally on banks servers. In fact 90% of British Pounds money exist digitally, showing that digitalisation has proved to be even more efficient than physical notes as it circumvents the need to physically print and store notes. This means that people now transfer digital bits of data to each other by trusting software freely provided by banks that are regulated by governments.

Decentralized Digital

In 2009 an anonymous character who goes by the name Satoshi Nakamoto invented a new type of money that attempted to solve these problems. He created an open source software that allowed individuals to securely transfer digital assets to each other. Because the code is open source, everyone can see it, meaning that it is fully transparent as people can see if its features are as claimed. Furthermore, it must be built with flawless security because if there are any exploitable features, people will be able to use them to steal the digital assets.

Return of Gold