The History of Money

Prior to trade, humans rose above each other through violence or stealing or both. Eventually a barter system was created that led to less death which was better for everyone. Quite simply, if I have 15 carrots and you have 3 chickens, we both want what the other has, we can trade them.

However, problems arise if I want turnips instead of chickens, and you have no turnips. What to do? The solution is to create a medium of exchange which we both agree is valuable. So you can still buy carrots from me and then I use the medium of exchange to buy turnips from someone else.

To be considered worthy of being a good medium of exchange, something had to be:

  • Rare: grains of sand wouldn’t work as everyone would just go to the beach
  • Hard to counterfeit: anything easy to counterfeit wouldn’t be rare anymore
  • Relatively easy to carry
  • Easily divisible
  • Doesn’t spoil: food doesn’t really work as it loses value over time
  • Fungible: freely replaceable for another of its kind. For example, $1 cash is still $1 when online. An original painting isn’t fungible as it’s unique.

This is where the concept of money came from.

Many things were tried including shells and wooden sticks with notches in them. On the island of Yap, stones were used.

Eventually gold and silver coins won, though it’s worth noting that many different things have been considered money throughout history.

The advent of gold and silver coins created a new problem: they are relatively heavy and hard to transport without being robbed. The solution was the banking system. After depositing money in a bank, someone could travel somewhere with a deposit slip and then redeem their gold from a second bank.

There was a time when dollar bills were actually redeemable silver certificates.

Then in 1971, Richard Nixon ended the gold standard. In the 5 decades since then, the dollar has consistently lost its purchasing power.

In the 90’s the tech bubble burst, leading to a short recession and then from 2007-2009 there was an even bigger recession. In the US, unemployment reached 10%, several banks collapsed and the GDP dropped over 10% across two sequential quarters.

The recession was caused by the failure of mortgage backed securities. The worst part was that the same banks that sold the lousy securities were the ones who received bail out funds from the government. These same bankers receive their yearly bonuses which were often greater than what most people make in 10 years. The bailout created inflation which negatively affected the general population which didn’t cause the recessions.

Then in 2009, Satoshi Nakamoto appeared out of nowhere and posted about a peer-to-peer form of electronic cash he was working on called bitcoin. 

He made it clear that the technology was a response to the banks receiving bailout funds. Bitcoin was a revolutionary way to move value around the world without the use of a financial institution. Nakamoto had finally solved the double spend problem.

Over the following years, despite a number of crashes in the value of bitcoin, the price rose an incredible amount.

Soon, others took notice. In 2011, litecoin was introduced. It uses the same codebase as bitcoin but there are 4 times more coins and the blocktime is 2.5 minutes rather than 10. 

Next in 2015 came Ethereum which moved more than digits on the blockchain. Now code could be executed, opening up a whole world of possibilities. Next came stable coins which are tied to the value of another currency, sometimes fiat, sometimes a commodity.

The reason cryptocurrency is taking over isn’t because it’s a vendetta against the banking system. It’s taking over because it’s simply more efficient. Wiring money around the world costs about $45 and can take days. It’s possible to send crypto for cents and in minutes. Someone once moved $99 worth of litecoin and it only cost them $0.40 cents!

As banks have a history of collapsing, many view crypto as a great diversification option.

Finally there’s the unbanked. About 30% of the world’s population are considered unbanked, meaning that they don’t have access to traditional banking services. As mobile technology spreads, the unbanked are gaining access to cryptocurrencies. 

Leave a Reply

Previous Post

Keys

Next Post

Blockchain 2.0

Related Posts