The 3 Phases of Money Throughout History
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What Is Money?
What we learn in school about money is what it does. However, a lot of us don’t know what money actually is. This is very unfortunate because in today’s society money is linked to everything in our lives; thus having a powerful effect on us. Don’t you think something of this importance would be taught with more clarity and depth in our schools? Let us explore this mysterious phenomenon.
Here’s a quote from monetary theorist and co-architect of the Euro, Bernard Lietaer:
“Money is an agreement by a community of people to accept a medium of exchange.”
Let’s break down that definition…
Money is an agreement…
“Agreement – an arrangement that is accepted by all parties to a transaction.”
…by a community of people…
“Community – a group of people sharing common interests.”
…to accept a medium of exchange.
“Medium of Exchange – anything generally accepted as representing a standard of value and exchangeable for goods or services.”
Here’s another quote by Anthropologist and Author, David Graeber:
“Money is a yardstick that measures debt.”
Let’s break down that quote as well.
“Money – an agreement”
….is a yardstick
“Yardstick – a measuring tool”
…that measures debt.
“Debt – an exchange that has not been brought to completion”
So by using both of these definitions, we can also say that…
Money is an agreement by a community of people that acts as a measuring tool for what they owe each other.
It is very important for you to understand that money, at its truest form, is not a thing we can hold or touch, but that it only exists in our minds, just like numbers. These numbers represent human labor and the natural resources human labor develops. We can use currency ( bits of information, paper, or any other portable item) to represent money, but we must not forget that it’s a human creation. This means it can be designed in different ways. Let’s explore how this human creation evolved throughout history.
Many people believe that the formation of money happened in this order: Barter, Money, and then Credit. Additionally, the belief is that money was created due to the inefficiency of barter, which Graeber suggests there’s no supportive evidence backing that idea. For example, if you had pigs and I had chickens, and I wanted your pigs but you didn’t want my chickens, then I have to find something you want in order to make the exchange happen. This is called “The Double Coincidence of Wants.”
However, according to Graeber, evidence suggests that money started out as an instrument of credit, or virtual money issued by a community of people in small villages in Mesopotamia as a medium of exchange.2 People didn’t carry around little pieces of silver, they put things on their tabs. Merchants and temples used expense accounts and kept record of who owed what on clay tablets. This type of currency was based on trust, and can also be called mutual credit.
Graeber also suggests that coined money, in the form of precious metals such as gold and silver (commodity money), were created as a way for the king to pay his military so they could buy things they needed, such as food, from the local residents in conquered countries 2. The local residents would then pay a tax in the form of the coined money they got from the soldiers, to the king. Essentially, when the king did this, he employed everyone in the newly conquered town to get the soldiers the things they needed. Coined money and taxes were used as ways to create markets. Markets were created as side effects of military operations. Basically, when a king issued currency to the newly conquered areas, the people essentially pledged their labor to him.
Besides coins, people have used items such as sea shells, salt, tobacco, seeds and cattle as money. Back in ancient Egypt, warehouse receipts had also been known to be used as money. For example, if I harvested a certain amount of wheat and brought it to a warehouse, they’d give me a receipt that represented how much wheat I stored. I could then trade that receipt instead of barrels of wheat for the goods or service I needed.
Some of the first known creations of paper money were found in China around 960 A.D.2 Fast forward to 19th and 20th centuries, people had paper money backed by gold and silver. People then had the ability to redeem their money for those precious metals. From Money 2.0, we transitioned into Money 3.0, fiat money.
The main form of money today is fiat money. Fiat is a latin word that means “let it be done; it shall be.” Fiat money gets its value from government regulation or law. There is nothing backing the currency such as gold or silver anymore, just our faith in government and the ability to pay taxes and public debts with it. So, if by chance people lost faith in their government, the fiat currency would then become worthless. Ultimately, that means this form of currency is based on trust and confidence. Fiat money isn’t good or bad per say, it just depends on how it is managed. This type of money is elastic like a rubberband, and can expand in supply when the right conditions call for it. However, by having this elastic feature, the currency can also “pop” like a rubber band as well, if abused.