The history of money in ten minutes
number one early money
Long before money was invented people were quite happy making doing and growing things from one another
in small communities they could largely
remember the payments and receipts of what was exchanged
keeping tabs or
tallies of these exchanges helped with a key requirement which was to record who
had been paid and who was still owed but as communities grew so the exchanges
became more and more numerous and as people created things for the common
good and rulers began to impose taxes so the accounting was increasingly hard to
keep track of
IOU notes might have been a neat solution but unless you knew the
individual issuer personally they were hard to enforce or verify
so instead people started to use objects such as whale's teeth as a kind of IOU
This intermediate step in the exchange process meant that people were free to
trade with anyone and they could even store up purchasing power for later use
with their REIT ratable IOU tokens so at the same time that humans invented money
they'd also invented debt
Number two
metal money
Once people start using
money to facilitate trade whether in the form of shells barley feathers or
whale's teeth some useful characteristics of money become apparel
barley for example is heavy to carry so not portable or even durable.
Whales teeth neither are to split into two so not easily divisible shells can be picked up
on any Beach so not exactly scarce and if the token standing as money doesn't
have much intrinsic value like feathers it's hard to trade outside your immediate community
Another noticeable feature of money was that having a lot
of it made you powerful and power could get you a lot of it so kings hit on the
idea of minting coins from precious metals sounding them with an emblem that
guaranteed their weight and value metal money ticked all the money boxes
and because it had intrinsic value that could be used to trade with other
communities but the success of metal money brought temptation and sovereign
soon realized that by slimming down the coins or slipping cheaper base metals
into the mix they could make money by circulating debased currency worth less than face value
Number three
Paper money
Carrying around large quantities of coins could be exhausting work and it was early Chinese rulers
that hit on the idea of keeping their heavy coins back in the palace of
issuing IOU certificates on paper for long distance trading.
Although the paper had no intrinsic value people trusted that it was worth what it said it was
worth and they could always exchange it for gold or silver or the coins it represented.
As global trade grew the idea of paper money caught on but
traders and lenders were concerned that it was a bit too easy just to print
money so they tried to link the value of money to the value of gold which had the
benefit of creating a standard for exchange between different currencies
attempts to peg currencies to a fixed gold standard continued for centuries
but the need for flexible exchange rates always prevailed and since the early
1970s the world has stopped trying to keep to a gold standard.
So today the only thing that distinguishes the value of a banknote from any other paper
is trust.
Number four
Controlling money
Years ago on the Pacific island of Yap the nearest
thing to gold was the race tone notable for its enormous size and weight from
the day the Chiefs decided to ask their taxes in race tones it meant that for
all taxpayers the currency became universal unavoidable and under the
control of the chief
The most valuable race tones were just so heavy that the
Yap population tended to leave their currency in one place and then trade
effectively in promises
Any trader who owned a race tone on Yap could issue a
promissory note against the value of their stone and thus banking was born
and once the Chiefs accept these promissory notes instead of race tones
for their taxes they effectively lose control of the amount of money in
circulation the money supply
In the 20th century some economists argue that the
amount of money in circulation directly affects economic performance and it is
important for governments to try to control it but this is not easy
especially when it's private lenders that create most of it
Number 5
Money and inflation
In the 16th century Spain brought home massive additional supplies
of precious metals from the colonies.
But what seemed like a dream come true
and should surely have boosted trade turned sour when traders simply put up
the price of their goods to match this new purchasing power.
So the returning explorers were no better off and those without the new gold were even worse off
it was only those who had debts which had in effect got smaller
who were actually better off
This was the first appearance of a theory with too much
money chasing too few goods can cause inflation.
Unless that is that traders produce more goods
or unless the newer bigger money supply circulates less
rapidly by people saving more either because they are rich enough or because
they're particularly gloomy about the future.
Number six
International Money
In the 18th century the British forced their
colonies in America to pay their taxes in pounds and they made it illegal for
the British colonies to print their own money this meant that the colonies were
forced to trade with the motherland to access the currency
According to Benjamin Franklin the American War of Independence was caused by the sheer
burden of British taxation and the disadvantageous trade needed to access British pounds.
And the hard-won freedom after the war allowed the Americans to create the American dollar
Which because of the country's vast trade and
trustworthy tax base eventually became the most widely used currency on the
planet, leading many countries including Britain to store large reserves of dollars,
But by choosing to keep a reserve currency in dollars the UK ceded
at least some power back to those runaway Americans.
Number 7
Money and building banks
By the 19th century banking had become a thoroughly respectable business.
Making a profit by basic money lending banks paid a lower
rate of interest for the money they took in than they charged on the money they loaned out
But the bank soon realized that as long as depositors didn't all
ask for their money at once, they could in fact lend out many times more money
than they had on deposit
This is known as fractional reserve banking
On rare occasions when depositors all tried to get their money out at once
there was a run on the bank and the effect on the wider economy was so serious the
government started to ensure customers deposits to prevent it happening and
thereby enabling banks to loan out more and more
By the 21st century some banks
had taken fractional reserve banking to a whole new level funding most of their
loans not from cash deposits from savers but with loans from other banks often
secured against bundles of previous loans.
So when there was a run on the
bank in 2007 banks like Northern Rock not only didn't have enough money to pay
out but the effect went way beyond just one bank
Number eight
Money and saving The banks
To understand how government's tried to prevent
global financial meltdown after 2008.
Economists distinguished between two kinds of money.
Money created by banks inside the banking system and
money created by governments outside the banking system
When a bank creates money
by making a new loan. The bank acquires a new private asset the loan with an
equivalent private liability to the borrower to pay it.
This is money created inside the banking system.
Governments can create money by selling new bonds
these bonds go into circulation as new private assets but there is no
equivalent private liability to pay them instead this outside money is added to
the public debt although it's normally a very small percentage of total money in
the economy it was this outside money that was used to buy up the bank's bad
private debts and write them off.
The private sector retained its wealth with
new assets inside the system supported by government with public debt from
outside the system.
Number nine
The power of money
Since the last traces of a gold standard disappeared in 1973.
The world has carried on trading in u.s. dollars even
though these aren't backed by anything of intrinsic worth.
The US government's decision to borrow billions for its bank rescue and stimulus plan dramatically
increased supply of dollars and some predicted that this would lead to a big
fall in the dollars value on the basis that economies which print money so they
can consume more than they produce will suffer price inflation and exchange rate of depreciation.
But six years on this still hasn't happened.
Why then does the dollar retain its value?
perhaps with so much of the world
holding its wealth in u.s. dollar assets people simply have faith that the dollar
will retain its value and the knowledge that so many others share that faith
reinforces the general optimism that the dollar will stay strong
Number 10
Future money
Minted coins and paper money once the cutting edge of technology are now
used in only 2% of transactions
Credit card and electronic banking technology
has enabled massive global transactions to take place in the fraction of a second.
And digital technology is enabling new currencies to be created
Linden dollars Bitcoin and other cryptocurrencies which exhibit the
enduring characteristics of money being hard to forge durable portable divisible
and limited in supply and which may even challenge the power of government backed
money but until a government accepts taxes in bitcoins or other privately
issued currencies or banks start lending in them they are not much different from
any other token such as whale's teeth.
one sign that a new form of money has
become important will be when governments and banks try to control it
and if governments and banks continue to have the power to control money those
who use it will always wonder to what purpose will they put that power
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