All of us use money each and every day, but rarely do we think about what they represent or where they come from. Meanwhile, money has a rich and complicated history. It also has a number of functions that may not be as obvious as you think.
What is money, anyway?
The Mirriam-Webster dictionary defines money as «something generally accepted as a medium of exchange, a measure of value, or a means of payment». So, as we can see, money is not necessarily a coin or a bill. It can actually be anything under the sun, provided it satisfies certain criteria.
In order to qualify as money, something needs to be:
- A measure of value. That means any good or service can be measured in terms of money.
- A universal means of exchange. Like we’ve just said, when something is recognized as «money» it represents a certain value in goods and services. Therefore, wherever that money goes its worth follows. The actual purchasing ability may fluctuate from country to country, but once something as accepted as a stand-in for material value, there’s no border it can’t cross.
- A means of payment. While money is indeed an equivalent to worldly possessions, it can also be appreciated on its own. For example, when you’re paying a debt, filing taxes or receiving money from your employer it’s not a transaction intended to get something in return.
- A storage of value. Money doesn’t only travel across space, it also travels through time. That’s what savings are for! Whether you’re using a piggy bank or a savings account, you’re using money as a storage of value — sort of like a time capsule for everything you’re going to buy in the future.
- A factor in international affairs. Whether we’re talking about national debt or international bailout and loans, money can be a pawn in the international affairs.
Commodity and fiat money
There are lots of ways to classify money. We’ll stick to the most general approach and break it down into commodity and fiat money. Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects that have value in themselves (intrinsic value) as well as value in their use as money. Fiat money is a bit more complex. It’s the kind that a government recognizes as a medium of exchange in spite of it carrying no intrinsic value and not being backed by any storage of value such as a gold reserve, for example.
Almost all modern payment systems are fiat-money based
You may be wondering «How is it even possible for something to be considered valuable when it’s basically worthless pieces of paper?». That is the most magical aspect of it all. You see, the value of fiat money is based on a mere convention, an unspoken agreement that should you offer someone a certain currency (even outside its country of origin) goods and services would still be provided in exchange.
That faith is not blind, however. In cases when a country’s government loses its credibility the money does lose its value too. Such was the case of the Deutsche Mark, when a 1923 hyperinflation turned the currency completely worthless. So much so that the Germans would paper their walls with money or give it to their children to play with.
From gold to exchange rates
Let’s go back to the times of The Gold Standard. The Gold Standard is a monetary system where a country's currency has a value directly linked to gold. With the gold standard, you could be certain that your paper bill could be exchanged for an equivalent weight in gold whenever you pleased. It’s important to note that the Golden Standard also forbade a government from printing new money if there wasn’t enough gold in the treasury to back it up.
In 1944, however, the Golden Standard was replaced by the Bretton Woods system. The system assigned a fixed price to gold. A price of 35 American dollars per ounce. What it did in all actuality is establish the Dollar as the new international standard of exchange and ushered the greenback’s global domination.
Somewhere between the late 60s and early 70s, a new paradigm shift in finance forced governments to step away from the fixed exchange rates and let the free market take over. From that point on, the Jamaican system set in with its ever-fluctuating rates.
Origin and evolution of money
Before there was money as we know it now, the economy used to function on the basis of barter, gift and debt. That means that people would exchange their possessions, give presents and lend things.
Later on, people started using various things that presented value to them in place of money. For example, Native American tribes used beautiful seashells and pearls, while Northern nations used fur, honey and even cattle.
Slowly but steadily, the role of a precious medium of exchange shifted to metals: at first, it was metal utensils, such as arrowheads, but then it was inglots. However, using inglots for payment presented certain challenges: first of all, each slab needed to be weighed, secondly — it needed to be verified, which could be problematic.
The later problem was solved by implementing state seals, which foreshadowed the creation of mint courts
VII century B.C. saw the spread of minted coins, while paper money did not appear until 910 A.D. And those weren’t even officially recognized until 1661, when the Stockholm court started printing their bills, but ever since then paper money has been circulating the globe on par with their metal counterparts.
The next era in the history of money began in the early XX century. In 1918 the Federal Reserve of the United States of America successfully performed the first wire transfer of money. This event can be considered the birth date of electronic money. Some 50 years later, in 1972, the Federal Reserve founded a clearinghouse for derivatives contracts settling in digital currencies. Cut back to present day and digital money is widespread and common, and in some countries it’s even more popular than physical bills and coins.
Is that the entire history of money?
Pretty much. The history of money is rich in nuances and curious facts, but a short article is not enough to cover all of those. However, we’ve still made a dent in it and covered the basics, haven’t we? There are plenty more interesting subjects from the world of money to be covered, so stay tuned!