The History of Money
The representation of value is one of the earliest human concepts, with money dating back over 7000 years. However, money did not always exist as paper, coins or online banking. Here we will explore what value is, the history of money, how they evolved, problems with our current stores of value, as well as introducing blockchain technology.
Before money, there was bartering, which involved swapping any asset, for something that another person had. For example, if you had an extra apple and your neighbour had an extra pear, these could be exchanged.
However, not everyone liked apples or needed pears, which is why commodity money began to emerge. Commodity money was essentially an answer to the question ‘what does everyone want?’ Examples included seeds, salt and livestock, such as chickens or cows. Essentially this meant that as long as you were lucky enough to be holding things that were used and needed by everyone, you could swap them for practically anything, almost like money today.
Commodity money was not without its flaws, namely that it wasn’t very practical: transporting cows from city to city wasn’t easy, salt wasn’t waterproof and and seeds would perish with time. It was for these reasons that money as we know it began emerging in the form of metal coins. Metals were far more practical as they were easy to store and carry, as well as difficult to get a hold of, giving them their value. With time countries began minting their coins in different weights, guaranteeing the value of each coin with the country's seal. The most popular materials for this purpose were copper, silver and gold as they were rare and didn’t deteriorate easily.
Nonetheless, as was the case with commodity money, metal coinage gradually became impractical. Buying expensive things was not easy as it required carrying large bags of coins and people began shaving little bits of coins away to melt them down into new ones. As a result, paper money began to grow in popularity and usage.
The first “banks” were actually religious temples, where people would deposit their precious metals and receive a note, much like a bank note today, from the priest guaranteeing their return. This was popular due to the fact that no one would dare to steal something from a place of worship as it was considered stealing directly from God.
The adoption of notes as currency happened at different times across the world. China was one of the first to do it, developing a form of paper currency as early as the 7th century, which the explorer Marco Polo brought to Europe in the 13th century. The concept was then made more popular by Napoleon during the 19th century. Similarly, banks also began to take root and spread, with the origins of modern banking generally being traced to Renaissance Italy, around the 14th century.
These two ideas of paper money and banking went hand in hand as it was the banks creating the money and storing the precious metals that gave notes their value. This idea that all paper money was backed by precious metals stored in banks continued until the 20th century when there was a global shift to fiat currencies. A fiat currency is legal tender but not backed by any physical commodity, such as gold, whose value is determined by supply, demand and the stability of the government that issued the currency.
The Death of Paper Money
Continuing the trend of practicality into the 21st century, paper money has slowly been disappearing, being replaced by the more practical digital storage. However, the digitized banking we now use on a daily basis is still far from perfect. For a start, it is completely controlled by third parties. Nobody actually owns the digits that they see on the screen, but the control lies entirely with parties such as banks.
Furthermore, banks create money out of thin air, an example of this being a loan: more money isn’t printed when someone takes out an overdraft or mortgage, it is simply created out of nothing. What’s more is that these banks charge disproportionate fees for the services that they provide, services that are outdated and impractical in this day and age. For example, paying a premium to spend your money abroad or having to wait several days for a cheque to clear simply does not make any sense in the interconnected and instant world that we live in today.
So, as has been the case so far, when a money system is no longer practical it is replaced by a superior form of storing value, in this case a faster, more secure system that eliminates costly transactions and gives control back to the individual.
How Does Blockchain Work?
Blockchain is a complex concept, consisting of a blend of different technologies, each one a foundational pillar in making blockchain the revolutionary offering that it is. In this chapter of the Lisk Academy we will examine these aspects individually and detail why they are so important.