A Brief History of Money: From Ivory tusks to Bitcoin
“Money is the most universal and most efficient system of mutual trust ever devised.”
Have you ever wondered what you really need? What do you really want to do in life?
I am sure, you all want different things. But, for most of us, it would somehow involve a lot of money. Thinking about my college days, everyone gets excited when a company offering extravagant CTC comes to campus. Everyone wants to go backpacking through Western Europe, and yes, everyone wants a MacBook.
Anyway, let’s get straight to the point, we humans, across our voyage of history, have been testing our hands with ways to keep civilization growing. Most of the time in our experiments we failed, but sometimes we won too. And that’s what matters. Economics is a huge part of the growth story since ancient times. We always build on the back of the greats that lived before us. It’s sometimes worthwhile to look at what did they do good as well as bad, to progress in the future.
Often, the ones who are ignorant of history’s mistakes are doomed to repeat them.
Truth be told, money is the blood that keeps the body of civilization healthy and alive. Why do you think a little 3-year-old “you”, went to school, with a heavy bag every weekday? Because, the chances of you succeeding in life, are proven to be higher with a good education. Money is directly responsible for life in hospitals, and sadly, deaths in the war too. We all can agree, Money is important. If not the most important, still it’s really important.
As a person, who loves being curious around things, and their history in my free time. Let me tell you how we evolved the monetary system we all are familiar with today, from its origins in a small primitive society. Hope you like the read.
How the concept of money came up?
Humans, long back, lived in isolated groups of a few hundred people. They were happy, growing crops, and building stuff, for each other. Often they exchanged stuff (let me trade my 3 bananas with your 1 apple). As they were a small group and knew each other, it was easy to remember, who owes me and to whom I owe. This was a simple barter system economy. But as the groups began to grow, it was increasingly difficult to keep track of all this, and they invented basic mathematics and writing systems to record that.
Even, the taxes given by farmers to the village head was given in X weights of crops. But, what about taxes on people, who didn’t grow anything, and did other works like accountancy, masons, priests, doctors, etc? Also, in parallel, the barter system was highly unregularised, and often allegations of fraud, overpayment, underpayment, etc came up to the village head. So, they needed to develop a token for these I Owe You (IOU) transactions.
A good token should have some basic properties. It should be scarce and nearly impossible to forge. A good start was the ivory tusks of elephants. And our ancient ancestors started using it as a currency, Another benefit of these durable ivory tusks was that, they did not perish with time, and often can be used for future payment (Let me buy 3 bags of mango seeds from you, and you can keep 2 tusks for that. I promise to return you 4 bags of mango seeds 6 months from now). As you can understand, the concept of debt was created as soon as we invented money.
Metal Money
Times progressed and different people started using different tokens of money in the form of either sea shells, ivory tusks, rare bird feathers, or even barley. They gradually identified, some of the major characteristics of a good currency, namely, legitimization, hard to forge, durability, portability, easy-to-carry, intrinsic value, and divisibility. Token forms like barley were difficult to carry as well as non-durable for a long time. Sea shells were not exactly scarce. Feathers did not carry any intrinsic value. And as different groups of people used different tokens of currency, it was extremely hard to trade with each other.
Another thing that became quite clear was that having lots of money gives you power, and power in turn can get you lots of money (Corruption in politics these days). So kings started metal coinage, mostly in the form of gold, silver, and iron. They put up their face, so as to legitimize the currency, and standard practices of minting coins, with the proper ratio of metals started coming up. This satisfied a lot of the base characteristics of a good enough token, but as you know, people started forging the coins, by either slimming down the coins, mixing cheaper metals as well as sometimes just melting the coins for their intrinsic value.
Paper Money
As civilization evolved, kingdoms dominated the landscape. People traveled far. Often for long voyages of trade, people found it difficult to carry heavy metal coins with them. The Chinese at that time were inventing paper and realized, they can sign an IOU in the name of the king, which often mentioned that you can exchange it with the King’s office for a given amount of gold, land, etc. As you can predict, these exchanges often did not fare well as the kings changed in the home kingdom, sometimes violently, and new kings did not want to respect that IOU document.
People understood that the better way of basing the IOUs was directly on the weight of gold. Often rich middle man acted as the ones who ensured that the contract is followed well. This also smoothened the exchange rates of different coins of different kingdoms. Banks started forming, where people can exchange their gold and silver with these promissory paper notes. And people started effectively buying and selling in these promises. Which we even do today.
Money and building banks
As humans progressed further and further, banks start popping up. A place, where you can safely deposit your money and even gain x% interest after some time, A place, where you can borrow money from at y%. As you can guess, y was more than x and this is where the banks started to earn profit. Ideally, you can not lend more than what you already have in your deposits. But, as the demand for borrowing went up, some really smart bankers of the time realized that they can lend more money to their borrowers, as long as all the depositors did not ask for their money back at the same time, and thus, something called fractional reserve banking was invented, which is at the heart of all the banking these days.
The power of money
Backing paper notes with the gold standard is a thing of the past now. Now exchange rates are governed by sophisticated systems of import and exports as well as faith and geopolitics. Most of the major world currencies gave up the gold standard in the last century. So, you might think, why can’t a country just print lots of currency and just distribute it to its poor people? The trick is, though currency nowadays is not backed by anything. Still, printing a lot of a given currency can lead to exchange rate collapses and hyperinflation in your home economy. The reason is, as people get more money, the price of daily things like rent and food also blow up. This is the general trend, and the relative stability of the currency is more or less based on faith these days. US Dollar is the top most in this.
Future Currency
A currency is just a token, agreed upon by most people to facilitate their transactions. A simple token becomes a legitimate currency when either government starts collecting taxes in the token, or the banks simply starts lending and allow depositing in that token. You can easily understand, why the Indian rupee is a legitimate currency, and packets of Maggi will never be. Also, across history, it is seen, that often the signs of an upcoming currency are that governments and banks want to control it.
What about future currencies? One, that doesn’t obey national boundaries or government control, sounds cool as hell for all of the tech-savvy people like us. What about the hyped blockchain-based Bitcoin and other similar currencies?
It’s true they seem to follow most of the fundamental characteristics of a good currency as well. They are durable, divisible, difficult to forge, portable, etc. Also with the added benefit that they record transactions, and can be used for curbing corruption and social benefit schemes.
So, are they the future? Sadly, the answer is not that simple. Governments and banks across the world like to control the supply of currency as much as they can, and they are kinda right in doing so. Slight disruptions in economic markets, just snowball into famines and wars. So, we need to be careful here. I am not making an argument about cryptocurrencies or against them. I am excited to see how they unfold in the future. It’s going to be a great battle and I am ready with my popcorn.
Remember, governments will try to divide what the internet unites, and the Internet will try to unite what the Governments divide.
