Whether most of us like it or not, money is how success is quantified it the real world. The more money you have, the more successful you are. Most of our lives revolve around the idea of making more and more money in order to lead a better life. While the societal system has programmed and manoeuvred into chasing money all our lives, most of don’t know where the money comes from? And our ignorant behaviour is not just limited to not knowing the answer to the aforementioned question. Despite using paper money as means of exchange, most of don’t know why it has been ascribed any value in the first place or how did we agree on to accept it in exchange of goods and services.
To find unravel all the mysteries, we shall travel thousands of years back in time to know about the evolution of money. The story began this way.
Long long ago, one of our ancestors ( Let’s call him dash for the sake of this example) left for hunting and returned with a dead mammal. On seeing the dead mammal, every villager demanded some meat from him. Now, every time he gave some amount of meat to a villager, he had to keep track of how much meat they owed him in exchange. The villagers would repay him in the form of meat whenever they hunted another animal. However, keeping a track of all the transactions that happened with every villager was a laborious task for Dash.
Fast forward few thousands of years
To solve the problem of keeping track of each trade, the barter system was introduced. With the barter system, people could exchange meat for some other commodity without worrying about keeping track of the meat the other person owed them in return. However, the barter system had its own set of drawbacks too. If dash wanted to exchange his meat for rice, he had to find someone who had rice and wanted to exchange it for meat. Also, there was no fixed exchange rate and all exchanges were made on the speculative value of goods.
Fast Forward to the barter system
To fight the problem of barter system we discussed earlier, the rudimentary system was updated and items like rice, salt, and cattle which have high intrinsic utility were set as mediums of exchange. However, mediums of exchange varied on the basis of geographical locations and demands, making it difficult for universal trade to prosper.
Fast Forward to the Metal Age ( Gold and Silver )
The solution to the problem highlighted earlier was to use a commodity which had high utility, was universally valued and had universal acceptance. Gold and Silver entered the scene and played the role of saviours back then. While precious metals were great as a medium of exchange, it was difficult to transport and divide them.
Fast forward to age of paper currency
The first mainstream adoption of paper currency came into existence after the European government paid soldiers of the French North American colony in 1685, using paper notes. Before that, paper currency was being used only in China and had been privy to the world. Eventually, the entire world started adopting the paper currency. Despite this, paper currency could still be redeemed for gold and silver. Later on, the US Government moved on the gold standard.
The gold standard meant US government was empowered to print a certain amount of money equivalent to the gold they held in their vaults. It also meant that the value US dollar was backed by gold. After World War two, the dollar became the international standard. Currencies all over the world now based their value on US dollar, which remained tied to gold. With the world economy growing rapidly, all of sudden there wasn’t enough gold in the vault to justify the printing of money. In 1971, President Nixon announced the abandonment of the gold standard. After that phenomenon, all other currencies remained tied to gold and all commodities are quoted in US dollars internationally
Fast forward to 2009 – The birth of the Bitcoin
After the 2008 financial crisis, a developer or a group of developers invented the world’s first digital currency named bitcoin under the pseudo name Satoshi Nakamoto. While most bankers and economist are sceptical about bitcoin and argue saying it has no intrinsic value, it has seen an unprecedented rise in terms of its price as an asset class. Whether or not it will reach a point of mass adoption, only time will tell.