A brief history of cash
Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
In the 21st Century, the world has experienced an interconnectedness like never before. Money has played a major role in the advent of globalisation. As finance becomes borderless, it is essential to explore its origins.
Determining the value of money
What gives money its value can be determined by four criteria:
Exchangeability: How efficiently money is exchanged for goods and services.
Store of value: Whether its value will be stagnant or increase over time.
Unit of measurement: How easily it can be quantified by the everyday person.
Importance for people: How comprehensively it can be adopted. People need to believe in its intrinsic value for mass adoption.
Bartering to Bitcoin: a timeline
Having defined the characteristics of sound money, it’s important to understand how society has aspired to negotiate value historically.
Initially, bartering served the purpose of value transactions as a direct exchange of goods and services. While bartering had inherent value, the system lacked ease of exchangeability. Both parties involved in a barter were limited by what the other was offering. Furthermore, assets like livestock died with no offspring, and tools deteriorated, leaving later generations with no future store of value.
Between 1200 BCE and 1000 BCE societies began using rare shells, and later metal shapes to represent them. They became a quantifiable unit of measurement and medium of exchange, making transactions seamless. However, shells were too fragile and bulky and, while rare, their many variations became contested for retaining value.
In 600 BCE, smaller coins made out of precious metals (such as gold) were introduced. These were often decorated with the ruling empire’s insignia or what would later become known as currency symbols. Now money was determined by its markings and symbols, control by a central authority. People had a trusted and consistent medium of exchange. These coins linked empires together and still encouraged international trade.
However, these coins became debased (corrupted by lesser metals), and as wealth increased, people needed a lighter form of money.
By 1000 CE, paper money was introduced. Modern paper money, or fiat, is distinguished by its region’s currency markers, security features, and durable cotton and linen fibres.
Fiat is unique, controlled by central authorities, lightweight, and easily exchangeable.
Let’s examine how value is assigned to fiat.
The Gold Standard, Petrodollar Standard, and the evolution of banks
In 1400, the first banks were founded in Renaissance Italy. Six hundred year later, banks have evolved into institutions responsible for managing a majority of the world’s finances.
A central bank has authority over the banks within its jurisdiction and controls financial and exchange stipulations. As fiat became ubiquitous, precious metals became a way for banks to back paper money, thus assigning it value. Every note printed by a central bank had its equivalent held in Gold. This was known as The Gold Standard.
However, the gold standard was abandoned by the late 20th century due to a number of possible factors, such as international conflict, global recessions, and the volatility of gold.
As the world looked for its next solution, the US Dollar became the global reserve currency and is now the standard medium of exchange for the international oil trade. This constituted the emergence of the Petrodollar.
In the wake of the technological revolution, money has become digital. Consumers access their finances via mobile or online banking. Credit cards are tapped using secure contactless technology. As a result, banks have limited their physical branches.
Central financial institutions claim to back online transactions with physical fiat, but the inherent value of fiat remains questionable.
The birth of Bitcoin and the advent of The Bitcoin Standard
In 2009, an unknown person or group of people, known as Satoshi Nakamoto, created a new form of money. Ubiquitous today, Bitcoin was created to be a “Peer-to-Peer Electronic Cash System”.
Bitcoin’s purpose is to harmonise the four characteristics that determine the value of money:
A true medium of exchange - As is the case in El Salvador, which adopted Bitcoin as legal tender in September 2021.
A store of value - Through its Proof of Work blockchain mining algorithm.
Importance for people - As there will only ever be 21 million Bitcoin, people can be certain that the digital asset will never be diluted by additional supply.
A unit of measurement - Bitcoin is divisible by eight decimal places. These small units of bitcoin are known as Satoshis, or “sats”, and allow for far greater division than fiat.
Money is entering a new frontier. Cryptocurrency is only the beginning, and has already begun to revolutionise financial technology. If history has taught us anything, it is to look forward to inevitable change.