A Brief History & current status of money & currency
There are few things in the world that elicit an emotional response as drastic as the perception of lacking the ability to secure resources. But this does not manifest itself in the minds of most folks as an unclear path to securing resources - 9 out of 10 people when asked, will say they lack money. But what they really lack is not money - after all, what good would a billion dollars do for you if you are stuck on a floating iceberg in the middle of the North Atlantic? What people usually lack is the ability to procure resources in a way that makes them feel comfortable in life. One thing I learned about people who have seemingly overcome this obstacle is they all have one thing in common. They understand not just how money and currency works - they understand how they can obtain a SUFFICIENT amount of money to make themselves feel comfortable with the amount of money capable of securing the amount of resources they think they need and want with the amount of currency or monetary equivalency they possess. This does not mean they are wealthy or would be deemed wealthy by the standards of another person. Plenty of people with assets totaling millions of dollars and more, are completely miserable and see themselves as lacking in their finances. Whereas many people who have their needs met with a comfortable living - as THEY define comfortable - are content, are happy and satisfied with their financial situation. The secret is knowing where that line is and being able to achieve that level of freedom. Money does not make one happy. Having the resources perceived to be adequate for a happy life does. And that level is different for every person out there.
Let's start with the basics - what is money?
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Money is a tool, used in facilitating an exchange, whose value we all agree on and accept in order to conduct an exchange of products or service for other items or services. In other words, instead of exchanging chickens for fish or rice or gold, we choose to select a monetary item that we agree has value, and whose value we all accept, that we then use to conduct trade so that we may get what we want to further our desires or goals. Money is not cash or banknotes or electronic signatures or zeros and ones on a computer. The concept of money, in its purest form, is simply a tool that is used to conduct an exchange. This distinction is important because the concept of money, versus the applications of the concept are two different things. One is the description of the item versus the second, is the physical embodiment of the concept. Throughout history, the concept of money has never changed. The physical embodiments employed to embody the concept, number in the thousands. Everything from sticks, to bird feathers, to rocks, to tree bark, to precious metals to today's paper banknotes have been used to embody the concept of money. As I dove deeper into what money is and how it works, I found these descriptors immensely important because the concept of money, to work smoothly, has some fundamental requirements and if the physical embodiment used in transactions does not meet these requirements, then the monetary value of the tool is either worthless or on its way to being so.
THE CHARACTERISTICS OF MONEY
Money is NOT Currency
Fungibility
The vast majority of people, when asked how much money they have in their checking accounts, will say a number - whatever that number might be. Say... $75.00 or $500.00 or $1500.00 or $100,000. Some people will say "nothing". The most ironic answer to me, after studying money for a few years now, is that the people who say "nothing" - although they say so because they have no currency in their account, are the only ones correct. Anyone who says they have xyz amount in their account if you ask "how much money you have in your checking account" - are all wrong. All those answers are wrong. Nobody has money in their checking account. Nobody. What we have are bank promissory notes, or currency, that we received from the bank where we deposited our currency, that we theoretically, should be able to exchange for real money. Here is the reason I say this. Real money has something called intrinsic value. No matter what happens, real money does not lose value or gain value over a period of time - it remains the same. Currency fluctuates based on the quantity of currency available in circulation. Here is a precise explanation of this concept:
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Money is a medium of exchange such as gold, silver and other items of intrinsic value that are fungible, portable, divisible and durable. For example, an ounce of gold today will purchase roughly about the same goods or services that it did 100 or 1000 years ago. Currency on the other hand, can be increased in quantity by decree - in other words, governments can by FIAT decree, declare that the amount of currency in circulation is not enough to cover the costs it deems necessary, so it chooses to print more of it. It can be created by decree with no reserves behind it and therefore be diluted and lose purchasing power. A dollar in 1913 purchased a lot more than it does today due to inflationary powers - about 90% in reality. So currency, due to its possibility of manipulation, since it is backed by nothing, can and does lose its purchasing power versus money, which retains its intrinsic value.
What is fungibility? Fungibility implies that two things are identical in specification. Individual units can be mutually substituted. Money is a fungible asset and so is currency. What that means is each unit of currency is the same regardless of who holds it or where. A $100 today buys the same amount of goods and services regardless fi it is presented by a laborer, a banker, a politician, a teacher, a firefighter or even a common criminal if they choose to spend it legitimately. This concept is important because without it, we would not have a way to determine common costs and prices and you literally would have no idea what bread and milk would cost you as you set out to the store were it not for the concept of your currency being fungible.
Divisibility
Money has to be divisible into smaller units without its smaller components losing value due to divisibility. If you have 1 paper dollar or 4 US quarters, you have the same amount of currency in your possession. If you lend someone $100 in $10 denominations, and they return your asset as 2x$50 bills, you are still repaid the same amount because currency is divisible. 2 $50.00 bills equal in quantity the same as 1 $100 bill or 10 $10 bills or 5 $20 bills. The end result is the same. This allows for the pricing structure of goods and services to be scaled appropriately so you don't end up paying $100 for a new car or $10,000 for a quart of milk.
Durability
Portability
This one is fairly straight forward. You want to be able to carry your money or currency with you easily so it can be utilized without exerting an undue stress on you. If we were dealing with a monetary system that consisted of rocks and the value of the denominations were determined by weight, increasingly heavier signifying a higher value, not many people would consider grabbing a hundred-pound boulder just to buy groceries for a week. This has been a demonstrated issue with failed currencies such as the Weimar Republic's Deutschmarks - the value of currency became so abysmal that it made no logical sense for people to carry around sacks full of currency just to purchase milk for the day. Same issue with the Zimbabwe dollars where inflation has completely destroyed the value of the currency to the point that a million Zimbabwe dollars means nothing.
Money should be durable. If you pick up your paycheck on a Friday and take it home, you want those dollars to look relatively the same on Monday when you go spend it. The Federal Reserve has a program where they exchange worn out currency notes and this to some degree ensures the durability of US currency to a large degree. The introduction of electronic money eliminates this requirement because computer data does not suffer from degradation in the same way as paper currency would.
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However, there is only one form of money throughout history that truly meets all these requirements and that is gold. The same ounce of gold used by the Egyptians 4000 years ago can be used today because it is just as durable, portable, fungible and divisible as it was then and the only form of money that kept its value.
So, now that we know what money is and currency is not... lets see where money comes from. There are some precursors to paper currency that we can study to understand money better
Bartering
Commodity Currencies
Pieces of metal
Gold and silver
Fiat Currency
Bartering is just what it sounds like. You have fish, your neighbor has oranges or bread and you want it. Your neighbor wants your fishes that you catch every day and so you barter with them. 5 fish for 2 loafs of bread and an orange. Or you have corn and need a new roof on your house so you barter with someone. You promise them so many bushels of corn for a new thatched roof. The main issue with bartering is it is not easily conducted and cannot be used to transact anything over distances - it is confined to local markets and it is definitely not fungible. An orange in your pocket does not carry the same weight as a chicken and nobody places the same weight on a new hammer from the metal worker that can be acquired. Sometimes he wants beef, sometimes bread, sometimes pork. There are no set terms about values.
Commodity currencies are a step up from bartering. A commodity currency is basically an item or commodity, that has an established value that can be traded for other items but it carries a set value - therefore it meets the basic definition of fungibility. For example, this insert from Wikipedia offers a great example of commodity currency in practice: "In Canada, where the Hudson's Bay Company and other fur trading companies controlled most of the country, fur traders quickly realized that gold and silver were of no interest to the First Nations. They wanted goods such as metal knives and axes. Rather than use a barter system, the fur traders established the made beaver (representing a single beaver pelt) as the standard currency, and created a price list for goods:
5 pounds of sugar cost 1 beaver pelt
2 scissors cost 1 beaver pelt
20 fish hooks cost 1 beaver pelt
1 pair of shoes cost 1 beaver pelt
1 gun cost 12 beaver pelts"
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