11,000 years and counting! Will money ever stop evolving?
A brief journey through time with money
If you haven't read my last few posts about money, I recommend you do so as this is the third post in my series on money.
In my first article, I shared my learnings with you when exploring the question, "What is Money?" Then I shared my insights on the role of bartering (if any) in pre-money society in the article, "Was Money invented to solve the problem of "a double coincidence of wants?". Bartering may not have been a very effective way to transact, but early humans still needed some form of money.Â
If I told you that the history and evolution of money are super fascinating, you would probably laugh at me. Money has played a crucial role in human advancement for most of our modern history. But what I found interesting was how the evolution of money actually made so many of our advances possible. I went deep into the rabbit hole, and the history of money is not only super exciting but super convoluted.
This time around, I am exploring the evolution of money through the ages and studying this should help me understand CryptoCurrency better (The reason why I started this blog. Trust me, we'll get there soon).Â
Let's go back and explore early human history. There were examples of humans using commodities like Cattle / Grain as far back as 9000 BCE. I learned that this type of money can be broadly classified as commodity money. While the term is self-explanatory, I think it's important to condense its meaning down to a single sentence:
"When commodities that have an intrinsic value are used as money, it's called commodity money".Â
But what is intrinsic value? Any guesses what the inherent value of Cattle / Grain is? Hmm... Basically, you can feed yourself and possibly your family with it, so it has intrinsic value. But does that make these commodities "good money"? Does it satisfy the different roles that money should ideally meet?Â
REVISION TIME PEOPLE
The roles of money are:
Medium of Exchange
Unit of Account
Store of Value
I thought it would be fun to explore how well cattle/grain satisfy these roles.Â
"Medium of Exchange" - Since commodities like cattle/grains have an intrinsic value, they are a suitable medium of exchange. To clarify, everyone has to eat, so you don't mind exchanging cattle/grains for other goods and services.
"Unit of Account" - Commodities with intrinsic value can be used as a unit of account. Put it simply, if everyone agrees on the value of a cow or a quintal of grain (rice/wheat), you can use it to measure all other assets. For example, you could say that your land, house, and other assets are equivalent to 50 heads of cattle or 10 quintals of grain. This may not make much sense to us (just like modern sovereign currencies wouldn't make sense to our ancestors), but that doesn't make it less effective as a Unit of Account.
"Store of Value" - Commodity money, like modern money, isn't a great store of value. For example, grains like wheat and rice are perishable. Similarly, in the case of cattle, the value varies based on breed, weight, gender, and many other factors, not to mention mortality. On the surface, the argument against cattle/grains as a "Store of Value" makes sense. Until I realised that cattle and grain are used as "Store of Value", even today.Â
Grains and pulses actually have a very long shelf life when compared to several other forms of perishable commodities. The value of these commodities can appreciate based on several factors like Scarcity or Excess demand. Sounds familiar? Wholesalers and super stockists have been using this basic economic principle to earn more money by creating artificial scarcity. There is a delicate balance, but you could leverage grains as a "Store of Value" if you understood the market.
Cattle, on the other hand, can be a store of value because of two reasons:
1. They can produce milk through their life cycle, which is like getting dividends on an investment
2. They can produce more cattle, which is like getting interest income against an investment
Of course, cattle are not really a practical store of value unless you have a massive herd because of the inherent risks associated with disease or death.
Another type of "commodity money" came into existence around 2200 BCE with the adoption of silver. Unlike cattle/grain; silver and other precious metals didn't have any intrinsic value. However, since these precious metals were rare and beautiful, they had an extrinsic value.Â
In the world that we live in today, we can easily equate precious metals to money, but I am not sure it was an easy token to adopt as money when first introduced. I can imagine it being as controversial as Bitcoin is today. After all, just like Bitcoin or Ether, neither Silver nor Gold has an intrinsic value (see how I am slowly tieing things together).
Eventually, humans moved over from commodity money to representative money. "Representative money" is essentially a promissory note or receipt that lay claim to an item with underlying value. To simplify, let's assume that Bill (fictional character from the last post) stored his grain in the community warehouse. When Bill needs to buy some goods or services, he would use the warehouse receipt, transferring a portion of the grains stored there to the seller.
Similarly, if Rob (another fictional character) kept his gold or silver at a depository managed by George (I’m all about fictional characters), he would get a receipt. Rob can exchange the receipt for goods or services, and the seller intern can claim the gold or silver with the receipt. However, unlike the previous system of directly trading in the commodity, there was an additional risk element involved. The actual item of value is held by a third party.Â
The warehouses and depositories eventually turned into Banks, and the receipts they issued were used for transactions. Ultimately, governments got involved and created their own promissory notes/tokens based on the silver and gold standards, which became the sovereign currency of nation-states. For a very long time, sovereign currencies acted as "Representative Money". But as we have seen, nothing stays unchanging for too long.
Fortunately or unfortunately (depends on which side of the coin you are on), almost all major and recognisable sovereign currencies are no longer pegged to any commodity. Modern currency is known as "Fiat Currency". Wikipedia has a straightforward and concise definition of "Fiat money".Â
"It is a type of money that is not backed by any commodity such as gold or silver and is typically declared by a decree from the government to be legal tender."Â - Original Source
Open your wallet and take out any note, and you will see that it only says, " I promise to pay the bearer a sum of .... Rupees / Dollars / Euros". Suppose you take your currency note and go to your local reserve bank. In that case, the only thing you can expect in return is a replacement note (if they even let you enter the premises).
The two primary reasons why modern value has any value at all is:
Your government has made it legal tender
It can be used to pay the government tax and other fees. After all, everyone has to pay their taxes!
But why de-link currency from commodity? Why abandon the Gold standard? Well, there are numerous reasons, but the ones that I found particularly interesting are:
1. The "gold standard" benefits gold producing countries more than the others. Essentially, even if the rest of the economy of these gold producing countries isn't thriving because they have gold reserves, the country continues to be wealthy (like today's oil producers)
2. The Gold standard was based on a scarce resource like gold, which has always proven to have short-term price volatility. This can be a hindrance to a growing economy
3. Printing and distributing money has been an extremely effective way to manage economic crises. This isn't possible if the currency is pegged to a commodity like gold.
I would like to leave you with one last thought on the pace of progress and how it has been progressively accelerating. We were comfortable with the commodity-based form of money and trust-based societies for several thousand years. The transition from commodity to representative took around 7000 years, as tribes began to grow. The change from representative money to fiat currency has taken another 4000 odd years. There were several versions and evolutions of money during both these transitionary stages. But to believe that the transition from Fiat currency to the next change will take a few thousand years is naive. The impact that technology has had on "representative money" initially and "fiat currency" more recently is nothing compared to the effects that it will have in the next 10 to 20 years.
When "representative money" was based on silver ingots or cowrie shells, it was based on its extrinsic value at the time. Over several hundred years and a significant understanding of metals and metallurgy, primary ingots were replaced with metal alloy based coins that acted more like tokens. The invention of paper and subsequently the printing press accelerated the adoption of more portable tokens like paper currency. But, all this was still very much analogue. The internet's impact on money in just 30 years is unparalleled. Something that I look forward to exploring in my next article.
I never intended to write such a long article. Still, there are so many exciting things about the evolution of money that I couldn't help myself.
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