What is money?
Money is basically a piece of value that is given in return for a good or service. This piece of value is determined by man in essence to the problem that is sought to be solved by the concept of money.
Money is something which has the confidence of the people in the society, it should be considered to be of value by not a bunch of individuals but by the whole of the society.
Hence, tomorrow if a person comes up and says that a piece of cotton is money and its worth is set according to some monetary system, others are not obliged to abide by it and treat it like money. Until and unless an authority gives it legal recognition it will not be considered to be worth what the person says it to be.
Over the generations, the authoritative recognition given to money has grown in sophistication. During times when the world was not so interconnected, people in different parts of the world had different concepts of money.. As times evolved and as the world became more global, there came unified systems of establishing money and its value.
The definition of money has evolved with time but the main function of money that has more or less been constant is that it served as a medium of exchange, as a unit of account, and a store of value.
Humans are social animals living in a society that functions on the integrated contributions of the people living in it. These people will look up to one another for help. This help can be for any service or for any goods. Money seeks to facilitate this exchange of goods or services in exchange for something of value.
Different people have different possessions that they consider to be of value. For one individual it will be worth more while for another it will not be worth that much. The system of money curbs this discrepancy of the value of things by giving it a specific value in monetary terms.
The other function of money is that of a store of value. Whenever a thing, tangible or intangible has some value assigned to it according to a monetary system. It will continue to have that value unless some factors cause it to lose or gain value or if there is a new system that alters the value placed on it.
Change is the only constant in life that has brought everything under its wrath. The system of money has evolved through history to something that we know today.
The evolution of the concept of money
Let’s look into how different generations had their concepts of money and what led to its evolution.
1. The barter system
Since humans have always been a part of a society, there was always the need of acquiring and exchange goods or services. Long before a proper system of money was established, the barter system was followed as a means of acquiring and exchange.
Barter is basically a direct exchange of goods or services. In the barter system, people would exchange a good or service in return for another good or service. The barter system is said to have begun back in 6000 BC. This system was in action for quite some time as it allowed people to facilitate exchange and trade in order to meet their needs.
People would barter their excess goods in order to acquire that they didn’t possess and required. Economies developed as merchants traded outside their community.
Right from the ancient people bartering food, fodder, etc to soldiers bartering services for their empire to merchants bartering goods with other communities, the barter system became the pioneer of the monetary system.
Even though the barter system was an easy method of trade, it had several shortcomings. It wasn’t always that people found one another requiring the same products they had. The barter system was hugely dependent on the double coincidence of wants.
Since the system was of a simple exchange of goods for goods, there was no actual metric to determine the value and this was one problem that dented the barter system.
Even the lack of divisibility was a problem as some goods could not be divided and exchanged. Goods are always problematic due to their transportation and storage and this made barter a difficult task at times.
Just as shortcomings piled up and made the barter system a not so accommodating system for the trade activities of the individuals, the emergence of a new system of money for exchange purposes for inevitable.
2. Coinage or the system of coins
Coins are considered to be in use since 1000 BC. It was a unique system of money that was brought in place to do away with the barter system. The system of barter did solve problems but only at the cost of giving rise to other inherent ones.
Initially, coins were limited to shells being used as money. It was basically done in order to set some value on a thing, which here is a shell, and was to be used as money. All exchange of goods or services was done with coins given in return.
As this system of coinage was in use, certain problems were being faced due to the flaw in the system. One flaw was that shells were very common to procure and it wasn’t a rare article.
Hence people went on to gather shells from places and then used them as money to buy goods. This practice led to the shells or the coins losing value and becoming just a normal piece of shell.
In order to tackle this issue and to have a better coinage system, coins were to be carved from metals. These metals could be iron, silver, gold, copper, and each had its own value assigned to it. Different regions had different coins in circulation.
Gold was considered to be widely used as coins due to its limited supply and complications in procuring. People also viewed gold as a precious thing, hence gold as a system of money received quite the reception.
This system of coinage had its own share of problems. Since coins were made of gold and were physical in nature people faced problems of storage and theft. There were instances of counterfeit where people would carve coins out of less valuable metals and used them as legitimate coins.
The next stage in the money concept was that of banknotes. Just as the coinage system was a step above the barter system, the banknotes were also brought into action to replace the coins due to their shortcomings.
Banknotes are legal tenders or certificates that have some value backed by the law. Paper currency was first used in the 7th century where people would deposit their coins with the authority and they were issued a note of that much value, which they can redeem in the future.
Unlike the coins, banknotes were hassle-free and would not lose their value. As and when banks were emerging in countries all over the world, banknotes were being used rampantly.
The banknotes that we know today are legal certificates that are issued by the federal bank of each country. This certificate is a promise made by the federal bank to the owner of the note to pay the sum mentioned on the note.
Countries realized that this system of banknotes has lots of economic advantages and governments ramped up this system and sought it as a means to control the circulation of money in the economy.
Since the bank notes are to be printed by the government authority solely they can choose to circulate more money by printing more or even reduce circulation by printing less.
4. Digital money
The 20th century saw the boom of the internet that brought the world closer. The internet had a major effect on the banking and monetary system all over the world. It allowed people to transfer money virtually without physically withdrawing or depositing money.
Recognizing the advantages of the internet, banks began providing digital banking services to the public. Credit cards were issued which allowed people to withdraw cash through ATMs set up at various spots around the country. Online payments intermediaries like PayPal emerged which made transactions simpler, quicker, and efficient.
Even though internet money had its advantages, it still had a middleman involved. Individuals that wanted to transfer money online had to have complete trust in the middlemen. This even saw the rise in fraud cases where the middlemen would dupe their users.
It was the year 2008 when the giant bank Lehman Brothers crippled due to the financial crisis which exposed the flaws in the banking and financial system. After the perils of this financial meltdown, there was the emergence of Bitcoin. A man named Satoshi Nakamoto is said to have introduced the world to the concept of cryptocurrencies.
Bitcoin is a type of cryptocurrency which is a peer-to-peer transaction system. Users of cryptocurrencies can transfer money directly to the receiver without any involvement of a middleman. The process of cryptocurrencies seems very convenient but it actually runs on a complex technology known as blockchain technology.
Cryptocurrencies are virtual currencies and have no physical presence. Transactions of cryptocurrencies are not held at authority but rather the blockchain technological system.
The blockchain is basically a ledger that stores the records of transactions. No third person can access this ledger unless they have the exclusive transaction codes that are available to the sender and the receiver only.
Bitcoin cannot be controlled by any authority and there are only a limited amount of these currencies. The blockchain system is an open-source system that runs on a vast computational network over the globe. Bitcoins are created as and when they are mined. Mining is basically the process of facilitating a transaction between two users.
Bringing everything together
The concept of money has evolved largely over the generations with each generation introducing its distinct system of money. Each system was introduced in order to overcome the shortcomings of the previous systems of money and to have better ways to facilitate exchange and transactions.
During its inception, no system is created with ill motives as such, but as the civilizations progress and grow, it requires better monetary systems to accommodate the growth. Newer systems certainly have their own advantages and disadvantages but there is always a lookout for the next big step.
At the moment, cryptocurrency is the system in focus. It has solved the problems of the traditional transactions system. The blockchain technology that the cryptocurrencies run on has wide uses in other sectors too in order to achieve decentralization.
Do cryptocurrencies intrigue you?
The world of cryptocurrencies is still more like an alien one for many individuals and through these blog posts, I intend to make cryptocurrencies easy to understand.
Do you see the value in cryptocurrencies? Does this space excite you and are you eager to watch out for what the future holds? Do let me know.
I personally am bullish for this asset class and have even invested a lot in this space as I see a lot of potential value in this.
Feel free to reach out through the comments section for any questions, doubts, or even if you want to have a chat on cryptocurrencies and blockchain as such.