Money was invented in order to facilitate trade.
Mankind developed from prehistoric times of roaming in small groups of hunters and gatherers. There was nothing to buy. If you wanted to eat, you had to find some food or hunt it down.
If you wanted shelter, you had to find a cave or build a hut.
As civilisation spread, we developed into larger societies. It made more sense to specialise. Some were good at growing corn, while others were better at raising cattle.
We needed a trading system.
The first method of trading was the barter system. Historians reckon the barter system was first recorded in Egypt in 9000 BC. If you had a cow and wanted some corn, you had to find a corn grower that needed a cow.
It worked for a while but there were obvious problems. How much corn is a cow worth? And what if you didn’t want a whole cow-worth of corn?
There’s also the problem of differing needs. The corn grower might want timber instead. So you’d look for a timber supplier who wanted a cow and enter into a tripartite agreement.
We solved the trading problem by inventing something with a value that everyone agreed upon.
Coastal regions around the Indian Ocean used cowrie shells for trade as early as 1200 BC. Roman soldiers were paid in salt. People were happy to accept payment in animal skins or weapons.
Around 1100 BC, the Chinese went a step further from using actual tools and weapons as a medium of exchange. They began using miniature replicas of the same tools cast in bronze.
Imagine reaching into your pocket and feeling the pain of pricking your hand on a sharp miniature dagger. For convenience, these tiny daggers and spades were abandoned for the shape of a circle. They became some of the first coins.
The first official currency was minted by King Alyattes of Lydia in 600 BC. The coins were made from a mixture of silver and gold. They were stamped with pictures that identified various denominations.
But why gold?
Other than looking pretty, especially when it’s used for jewellery, gold has no intrinsic value. Except for the value that humans have attached to it.
Our ancestors needed a medium of exchange that defeated the problems of the barter system. Coins became the logical and popular choice. They were portable and practical.
They needed to be made from metal as other substances were non-durable. Iron, lead and copper were ruled out as these were prone to corrosion over time. Aluminium feels too light and insubstantial to invoke a feeling of security and value.
So we chose gold. It has a unique and beautiful colour. It’s also abundant enough to make plenty of coins, but rare enough that not everyone can make them.
Europeans continued to use coins exclusively until 1600 AD. Banks then started using banknotes as a convenient form of carrying money around.
The notes could be taken to the bank at any time and exchanged for their face value in silver or gold.
But banks issued notes in excess of the gold and silver they held on deposit. A sudden loss of public confidence often saw a run on the bank that resulted in bankruptcy.
Governments decided to step in to bolster public confidence. The issue of banknotes is now authorised and controlled by national governments.
The Bank of England was granted sole rights to issue banknotes in England from 1694. The same powers were granted to the US Federal Reserve Board upon its establishment in 1913.
The public needs a medium of exchange it can trust. When we believe in the value of precious metals, gold and silver have value because of the importance we attach to them.
Faith and trust in fiat currency
When former US President Richard Nixon abandoned the gold standard in 1971, the public realigned its value system to believe in the value of fiat currencies. We’re happy to accept payment in fiat currencies because other people also believe in their value.
The importance of public trust is reinforced by the inscription of ‘In God We Trust’ on US banknotes. In early forms of Chinese paper money, the inscription warned, ‘All counterfeiters will be decapitated.’
Developments in communications and computer power led to huge growth in bank deposits. They soon dwarfed the supply of notes and coins.
If the bank statement says we have money on deposit, we’re happy to believe it has value. And we’re happy to transfer it electronically without converting it to cash. Some of us remember when cash was king, but most of us are prepared to accept the value in a bank statement.
So we’ve grown to accept the value of fiat currencies. We have recourse through laws and regulations when something goes wrong. In a crisis, we’re prepared to accept a government guarantee on our bank deposits.
Now we have relatively new types of money in the form of cryptocurrencies. Values soared dramatically and prices have become very volatile.
Setbacks include increasing regulatory threats from authorities around the world, particularly in India, South Korea, China and the US. Meanwhile, Facebook has placed a ban on cryptocurrency ads.
There was a record US$500 million heist by hackers at Japanese exchange Coincheck.
And what happens when an exchange closes down? Investors get concerned that they have nowhere to turn to when things go wrong.
Throughout history, people have trusted forms of money when those around them have trusted the same value. This trust is enhanced when people can rely on regulatory authorities to keep the system above board.
It’s ironic. Cryptocurrencies were invented as a medium of exchange outside the system. Bringing them back into the system with regulatory controls may be the very thing necessary to ensure public confidence.
At Cycles, Trends and Forecasts, we study history.
Phil Anderson has researched more than 200 years of US real estate history. It’s all in his book, The Secret Life of Real Estate and Banking, which you can find on Amazon.
But Phil doesn’t study history for the sake of it. He uses history in order to forecast the future with uncanny accuracy. Looking back to find the future’ is how he terms it.
Phil’s study discovered that history doesn’t repeat exactly. But it does rhyme with similar themes repeating at regular intervals.
It’s enabled him to forecast the timing of the GFC years in advance. And it also enabled him to forecast the tremendous recovery that came as a surprise to most experts.
Go here to learn more.
Lead Researcher, Cycles, Trends and Forecasts