What is money?
Hello everyone! I decided to discuss my thoughts on money and its journey from seashells to Bitcoin. What the heck is money? Why is it such a staple in this society? I hope to answer these questions in this write up. The history surrounding money is extensive and many civilizations have created their own versions of “money” over the last 7,000 years. Before money was widely used its believed that most folks used a bartering system to get what they needed. We will discuss this as well. So grab a cup of coffee and enjoy!
Bartering, a precursor to the creation of money
Well money was first developed ages ago (5000 B.C. approximately) according to Wikipedia. Before money it is believed human beings relied heavily on a bartering system. Just because bartering was around before money doesn’t mean it is a terrible way of doing things. Bartering was first recorded in Egypt around 9,000 B.C. Grains and cattle were the most popular things to barter with in that period. Plenty of people still barter even today. If I have a big bag of “Oregano” you would like to have, and you have something I want we can trade items with each other, and both leave happy. Bartering is basically the same trading. If you have something I want, I will offer you something I already own and if you accept the transaction occurs. If you don’t accept than we part ways, or I will increase my offer and see if that will change your mind. Now there are downfalls to this system. What happens if I am trading crops with my neighbor regularly and one season its dry and the crops don’t produce? It makes it impossible to barter the crops you depend on for your livelihood. So will you starve? It was certainly a possibility 7,000 years ago. This is one reason money was invented. Instead of using my crops to trade for other crops, I can now use another object called currency to obtain what I need. So even if I had a terrible crop production one year, so long as I had some money, I could still get the essentials. I believe that the creation of money was a natural progression in the evolution of human beings. Bartering is not rocket science. It is amongst the easiest things to grasp when we talk about the past. Trading one item for another. Now let’s take a look at currency and the reasons why it was created.
The history of currency
“Aristotle’s opinion of the creation of money as a new thing in society is:[22]
When the inhabitants of one country became more dependent on those of another, and they imported what they needed, and exported what they had too much of, money necessarily came into use.[33]” (Source: https://en.wikipedia.org/wiki/History_of_money) Money is essential to society today. You know how hard it would be to get your morning coffee from Starbucks using bartering? Try taking a bundle of corn into Starbucks to trade for your coffee and let me know how it works out! But what did we use before paper bills and metal coins? Let’s take a look at the different types of money over the past 7,000 years. Smaller societies were using sea shells or pretty rocks to trade for items. The idea behind this was people all seemed to come to a consensus that this item has worth, (even if it is technically worthless). How does this happen? Well money only has value because humans believe it does. That is how most things obtain value. The only reason it has value is we all agree it does. Even Gold works this way. If nobody wanted gold, it wouldn’t matter how rare it was. People must desire the currency, or it won’t be a good form of money. The amounts of different currencies in human history is extensive and intriguing. People have used anything from seashells to big statues (Easter Island) as a way to exchange things. It is similar to bartering in you are trading one item for another. But money is usually much easier to use. Your bartering partner might not want what you are trading. But with the creation of currency he would not have any issues accepting the money because he can just turn around and buy what he really wants. This is a big benefit when you speak of the advantages of money over bartering.
You can probably reach into your pocket and pull out some change. But how did we get to this point? When were the first actual coins created? According to the internet China was the first place to use money in the way it is used today. They used to trade weapons and tools for what they wanted until they decided one day that it wasn’t necessary to trade actual weapons or tools. They created mini replicas of the weapons or tools and started using these to transact with these instead of actual tools. This was their first step away from the traditional bartering system they used for ages. They even decided to “bronze” the miniature tools or weapons to make them last longer. This naturally progressed into the creation of coins. They decided that a coin was just as easy to use as the alternative. There was little control over the creation of currency at this time. Meaning anyone that could create currency could do so and nobody would regulate it. This may seem great to us poor folks but having thousands of people creating coins whenever they like is asking for trouble. If you want to understand more about this concept see my other writing on inflationary and deflationary currencies. The first minted coins that had some sort of regulations were created close by in Lydia (Now Turkey). The first instance was 600 B.C. and they used a mixture of gold and silver called electrum to make the coins. Making coins in this way ensured that not just anyone could create currency (counterfeit). The Lydians would stamp each coin with a picture which distinguished the denomination of the coin. Much like the system we currently use. In order to counterfeit you would need to create a stamp just like the one used by the “mint” to create the coins. While this isn’t technically impossible to accomplish, it makes it much more difficult to accomplish a counterfeit operation. Typically, any counterfeit coins would have slight differences than the truly minted coins. Not to mention the metal content of the coins. This was the first instance of minting a coin by a country. But it wouldn’t be the last. How did we get to the point of using paper currency? Just keep reading!
Paper Currency
How did we get to the widely used paper currency that is widely used to this day? Well way back when Marco Polo was cruising the 7 seas, He stopped in China and discovered they were using paper notes instead of coins. The currency even had “Counterfeiters will be beheaded” written write on the notes. This paper is a lot like the fiat currency used by most countries to this day. The reason they have value is we believe it does. But there was a time when paper currency was worth something due to the papers ability to be traded for gold or silver. America used this system for decades. American money used to be backed by silver and gold. So you could take a 100$ bill and go to a bank and trade the paper for gold or silver. This was called the gold standard and it wasn’t just an American concept. Europeans were using a similar system for ages. Even before the first Columbus set foot in the western hemisphere. Paper currency was just easier to carry around than gold was. Paper is light and easy to store. Gold is heavy and bulky. This system worked well in the US until 1933 (during the great depression) when people were hoarding gold due to the economy and the stock market tanking. Franklin D. Roosevelt declared by executive order that all Americans were required to be turned into the banks in exchange for new money that could not be traded for gold or silver. He basically criminalized the ownership of gold (unless it was a small amount or jewelry) in order to prevent a bigger economic crises (according to him). This wasn’t killing the gold standard completely, but it was the start. You could still keep gold notes under 100$ bills. This was done in order to increase the supply of money available to the govt. The true killing of the gold standard occurred when Nixon decided to move completely off the gold standard and to issue bank notes that were not tied to gold whatsoever. These new notes were federal reserve notes that were not backed by gold at all, but instead backed by consumer confidence and supply and demand. The more of a supply the less each note would be worth. This is called inflation. The reason the federal government decided to go this route is the gold standard only allowed the US govt to spend what they had. This limited the spending power of the government. This was not acceptable to the federal government and they decided that moving to the currency we use today was an acceptable alternative. The worst part about this was the idea that the federal reserve could print as much as they like and the US govt approved of this. Inflation of the supply has destroyed the value. The purchasing power of the US dollar has diminished severely since 1933. Especially in the 1970’s. Without the gold standard the government was allowed to spend money wildly and increased our national debt and destroy the value in our money in the process. Our national debt was 475 billion (seems like a lot huh?) Today the national debt is more than 22 trillion dollars. (Yes I said TRILLIONS!) How did this happen? Well the govt cant get funding for the projects and wars they wanted to fight, so they would borrow money from the federal reserve and pay it back with interest. The federal reserve is loaning the federal government money that they print out of thin air with nothing backing it and expected to be compensated in the form of interest for their “loan”. This is one of the reasons our US dollar is not worth what a US dollar used to be worth. Inflation. If you would like to learn more about inflation see my write up on the subject (https://medium.com/@timpace30/inflationary-currencies-vs-deflationary-currencies-654cf4cbb803) This system has been in place ever since it was implemented in the 70’s and any fool can see what the results are. The government likes to pretend nothing is wrong. Everything may seem kosher at this time but eventually it will hit the fan. Look at Zimbabwe and check out what happened to them when they created excessive amounts of fiat currency without anything to back it up. They were printing 10 trillion dollar bills just to fight the massive inflation they were experiencing. Is this the future we can expect here in the states? Only time will tell. Is there anyway to protect yourself from impending doom of massive inflation. Well lets look at Bitcoin!
The brilliance of Bitcoin
Eventually a few crashes in the economy and the stock market got the attention of someone that decided that we deserved an alternative to the US dollar. Satoshi Nakamoto (creator of Bitcoin) decided to take what had been discussed amongst “cypher punks” for decades and create Bitcoin. Bitcoin has a 21 million coin supply which cannot be inflated. There will only be 21 million coins ever “minted” (mined) This means there is not an entity actively printing Bitcoin regularly which would create massive inflation similar to what the US dollar is experiencing. When the supply is limited it creates a deflationary effect. This means the currency should increase in value over time. Its simple supply and demand. The US dollar is inflationary and loses value over time. According to many economists this encourages spending due to the fact that if someone just sits on their US dollars they will lose value. They have a point. But I still believe that people can use deflationary currency right next to the US dollar. We deserve an alternative. If we are going to have an alternative to the US dollar why not look at the shortcomings of the US dollar and try to improve upon them. Sastoshi did a great job creating a system that isn’t controlled by a small few, but the masses. Anyone can mine Bitcoin. Not anyone can print the US dollar though. This shows that the US dollar is highly centralized. While Bitcoin is mined in hundreds of countries around the planet and is considered to be decentralized as there is not a single controlling entity (among other reasons) Bitcoin is a part of the natural progression of the human race. The ability to send currency online that cannot be duplicated is a wonderful achievement. Now we can totally skip the whole bank system and we effectively become our own bank. The US govt destroys fiat currency regularly for many different reasons, but they print more than they destroy and it creates inflation. Bitcoin is different. If you lost Bitcoin it creates a smaller supply which creates a bigger demand. The benefits of Bitcoin are crystal clear. There are other cryptocurrencies out there as well, but in my opinion none of them are as transformative or as promising as Bitcoin is.
In conclusion
What does the future hold when we think about money? Will Bitcoin be around in 1,000 years? That remains to be seen. All I can tell you is I consider Bitcoin to be superior to the US dollar. Will something better come out? Perhaps there will be another cryptocurrency or even something totally different that cryptocurrency that will come out and kill Bitcoin. I love Bitcoin and I think it is a work of art. That doesn’t mean I wouldn’t entertain an alternative. But we are experiencing the beginning of cryptocurrency. With Bitcoin only being around for 10 years it is just a baby in the grand scheme of money. But I believe it is here to stay for a long time. Every time Bitcoin survives another day it is a testament to its success. I also believe we will live to see the destruction of the US dollar. It is not a matter of if, but a matter of when. There are a lot of different scenarios that can occur. But the only way to be prepared is to understand how currencies work. I hope that this write up was educational. I sure learned something. See you next time!
Written by: Tim Pace 3/4/2019
