9000 B.C. people in Egypt used Bartering in lieu of money to conduct trades. Bartering is the process of exchanging goods/services for other goods/services directly without using a medium of exchange and a unit of account such as money. A farmer can exchange milk and wheat with the baker for bread, the baker then uses the milk and wheat to bake bread and exchange them for other goods and services and so on.

While this is a pretty straight forward system, it actually has many limitations, for example what if the baker wanted to fix his broken oven, then he would need to find a worker who can accept bread in exchange for his services. What if the worker does not need bread? What if no other worker wants bread at that time? the trade cycle stops, you see the problem.

Money Transformation

Humans later started adopting different mediums as a form of money, in China, people used replicas of goods made of bronze to get around the limitations of bartering. 600 B.C. the first currency system was created by king Alyattes of Lydia, modern day Turkey. The currency was made from electrum a mixture of gold and silver. The introduction of the new currency and monetary concept made Lydia one of the richest empires in Asia and its trade flourished internally and externally.

Many communities around the world later started to catch up on this development and realised the potential of the currency system hence started minting their own currencies using different types of precious metals. This allowed communities to exchange goods and services with other communities around the world without all the limitations of bartering.

Throughout history the concept of money has not been exclusive to one thing, humans treated different things as currency. Some people used sea shells as a form of currency in China, prisoners use cigarette as a currency/money inside prison.

The only reason different things could work as money is because people believe they are money, and also because they fulfilled the properties of being a store of value and a medium of exchange. Another important property that makes money more valuable is the supply, when the supply of money increases its value decreases but when it stays the same it will hold its value better.

Why The Change Of Money Supply Is Dangerous

The best form of money has historically and according to the technology of the time been the money that is hard to create and not whether the money has intrinsic value. This is because if people put their money in things that are hard to produce such as gold it will hold its value better than things that are easier to produce.

e.g. people in Western Africa used glass beads as a form of money for trade as they put a lot of emphasis on jewellery and decorative items. Beads production was pretty limited in the African continent, so the beads with unique qualities were valued higher. On the other hands, beads production was ripe in Europe due to technological advancements so it was economical to make glass beads over there. When European travellers and explorers came to the African continent, they noticed that people use glass beads as money. What happened next is Europeans started buying glass beads from Europe and shipping it to Africa, which made the supply of beads increase. The Europeans managed to exploit all the resources of Western Africa such as lands and properties, it even got to the point where people started trading other humans and enslaving them that’s why it was called the Slave Beads.

The important point to note here is that the increase in the supply of beads made beads useless as a form of currency as it lost its value due to simple economics of supply and demand. Naturally, people then stopped treating beads as a form of money and started using precious metals such as gold.

3 Types Of Money

Money has gone through multiple transformation/eras throughout history, but some of the main types of money that existed and still in use today include:

1. Precious metals like gold, silver etc.. replaced bartering, because they were a better medium of exchange, a scarce resource therefore people saw them as a valuable resource. Gold has certain qualities which makes it a good form of money, it has limited supply, it has been on earth since the beginning of existence, no one can create more gold, and it doesn’t corrode. Gold has a higher stock to flow ratio than other metals such as Copper or Iron, e.g. it’s easier to produce large amounts of copper and flood the market to change the supply to your advantage, while Gold is hard to find and mining it doesn’t change the price of gold in the free market, this is because the gold in circulation is always higher than the mined gold that comes in from the mine. Some of the disadvantages of precious metals as a form of money is that they are heavy to carry around and not suitable for the digital age as you cannot transfer it cross border easily. Saying this Gold is still considered a good store of value until today and people use it as a way to hedge against falling national currencies.

2. FIAT currency (money printed and circulated by banks and regulated by governments) replaced precious metals as a form of currency. Initially, FIAT money was printed conservatively by many central banks around the world as it was backed by precious metals to achieve the property of scarcity. This was called the Gold Standard which means that if you had a $100 note in your pocket, then the bank would have $100 worth of gold in reserve for you. However, the gold standard was later abolished and banks around the world are now able to print money at will anytime without any backing of a scarce asset. This is a disadvantage because bank notes are easy to create, it costs only pennies to create a $100 note. Usually, the FIAT money which grows slower is considered a more valuable currency than those that grow faster. The growth rate of the USD and the EUR is usually slower than that of other countries which indicates that generally the economies of those countries is doing better but still follows the same economical model.

3. I believe we are now in the third era of this transformation which is community generated money. This is mainly characterised by the advent of Bitcoin and cryptocurrency. The only difference between this era and all other eras is that it’s a global phenomena. You have people buying Bitcoin in Venezuela, Zimbabwe, Argentina, Iran, Turkey, India, South America, China, Russia, USA, the Middle East and every part of the world. It’s a global movement that cannot be stopped, in fact attempting to stop it would be as hard as trying to stop people from using the internet. It’s impossible, governments cannot stop Bitcoin, they can only try to regulate it or else they need to shut down the whole internet. One particular feature of Bitcoin is that it is hard to create, having more demand (hashing power) doesn’t change the supply of Bitcoin due to the Difficulty Adjustment algorithm developed by Satoshi Nakamoto. The Difficulty Adjustment algorithm is the holly grail of Bitcoin economics as it ensures that the supply of Bitcoin does not increase by the increase in demand, the supply always increases steadily and no one can control it, there can only ever be 21 million Bitcoins as the total supply. This is very different to FIAT as what we have seen with FIAT money is that the increase in demand to a currency usually corresponds to an increase in the supply of a currency, which eventually debases the total value of the currency and favours one segment of the population over others.

The famous economist Robert Kiyosaki in his book “Rich Dad Poor Dad” talks about the 3 types of money mentioned above, and he refers to them as God’s money (Gold), governments’ money (FIAT currencies), and people’s money (Bitcoin and cryptocurrency).

Why Money Is Not Real

Having looked at all the different types of money we can quickly tell that money has not been exclusively “FIAT”. Money is anything that people consider to be a good store of value, more importantly it has to be hard to create. Whether that is cash, gold, silver, real estate, stocks, cigarette, sea shells or Bitcoin, people have different preferences as to what they deem as money, it’s what they trust as the store of value for their personal wealth.

Therefore, we can establish that money is not a real thing, it’s just a concept that can be changed anytime depending on what a group of people or a community deem to be as money. It has nothing to do with its use in other things such as jewellery, the value of money comes from how hard it is to create it and how convenient it is to be used as a medium of exchange.

“ Money is not real, it is a conscious agreement on measuring value ”

John Ralston Saul

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