The origins of money
Money acts as the foundation for all trade and savings, so the adoption of a superior form of money has tremendous multiplicative benefits to wealth creation for all members of a society. — Vijay Boyapati.
Money is the tool that transports economic value through time and space.
Historically, those goods endowed with the best properties to facilitate such functions have spontaneously emerged as money.
Humans enjoy collecting, displaying, storing and trading rare items because of genetically evolved instincts. 40,000 years ago the Homo Sapiens took pleasure in collecting shells and animal teeth, making jewellery out of them, showing them off and trading them; Neanderthals did not.
Thanks to his hobby, the Homo Sapiens unconsciously created a proto-money that provided him the ability to store and transfer wealth, which meant a social coordination advantage that helped him to prevail against Neanderthals, despite being physically weaker.
Beads from 45,000 years ago made of ostrich eggshells. They were discovered in Denisova Cave, which is located in the Altai Mountain in Siberia, where ostriches did not habited. The closest ostriches lived in warmer areas thousands of kilometers away.
The verifiability of scarcity enables the representation of value.
The cost of collectibles could be finely calculated at a glance; some of them simply consisted of mnemonics that represented privileges. They were used to store value through generations and only transferred in "life events".
Those luxuries were durable, easy to hide and wearable. They provided the ability to protect value from theft or loss and the ability to move that value over different locations.
The adoption of those storable and portable whimsys implied a first step towards civilization as it enabled to mitigate aggression, since tribute was a more lucrative form of exploitation for the victor of a battle than further violence against the defeated. It also facilitated the reciprocity of favours over time, which increased food sharing.
During the Neolithic era (10,000 BC - 1,200 BC), money still consisted in collectibles but mostly made out more of precious metals without a uniform value.
The jewellery items that ended up working best as Medium of Exchange were those that had a sufficiently distributed supply to be fungible.
The assessment of metal was so costly that only large merchants could do it; nevertheless, around 700 BC, the Lydians, inhabitants of a what was a trade hub in the current Turkey, invented coinage, which provided great fungibility and divisibility to money and made it possible to entrust the authenticity of the metal to the issuers of coins.
Monetary metals thus gained saleability, which led to the development of markets and the standardization of prices. By then gold and silver were effectively working as Unit of Account.
Historically speaking gold seems to have served, firstly, as a commodity valuable for ornamental purposes; secondly, as stored wealth; thirdly, as a medium of exchange; and, lastly, as a measure of value. — William Stanley Jevons.
As the monetary history of a good is established, the uncertainty about its future valuation tends to be reduced, which tends to stabilize its value, thus facilitating its function as a Unit of Account.
In other areas around the world many non-coinage forms of money persisted.
In China during the 7th century, some merchants began to issue paper receipts for the coins entrusted to them.
The system became progressively more centralized. During the 10th century the Chinese government established that the service could only be provided by authorized establishment, and two centuries later the Song dynasty took direct control of the system and issued claims over inexistent coins. By the 13th century the paper claims could not be exchanged by any precious metal.
Fiat money from 14th century
The abuse of printing caused hyperinflation of prices and ended up collapsing the system, so in the 15th century monetary metals became again the main form of money in China.
Towards the 16th century, in the West, paper receipts consisting of bills of exchange and promissory notes began to play monetary functions, enabling trade across hostile lands.
From the 17th century, the most common monetary receipts were bank notes that represented a certain amount of precious metals stored in vaults.
During the 18th century, the technological advances of the industrial revolution facilitated the widespread of counterfeited coins, which could not even be prevented with the death penalty.
Bank notes authenticity instead was easily verifiable, so its adoption grew. Also, the ability of banks to make transfers improved greatly thanks to the advances in communication and transportation such as the telegraph and the train, so most monetary metals ended up in the private vaults of a few large banks.
Governments established restrictions and ended up monopolizing and controlling the issuance of paper notes that were supposedly backed by precious metals.
As paper receipts provided divisibility the high value dense material of gold, silver lost its competitive advantage as medium of exchange.
British officials, advised by Isaac Newton, introduced the "gold standard" in 1717; and by 1900 around 50 other countries adopted the same standard.
At the beginning of World War I, in 1914, the major European powers decided to fund their operations by printing notes, so their convertibility for gold was suspended. By the end of the war in 1918, most currencies had lost most of their pre-war value.
The value of the US dollar was pegged to gold at $20 an ounce, but the continued issuance of unbacked dollars prevented the Federal Reserve from fulfilling the promise of such an exchange. So in 1933, US President Franklin Roosevelt by the Executive Order 6102 confiscated private gold by forcing people to hand over their gold coins, bullion bars and certificates. The dollar was then depreciated to a new exchange rate of $35 per ounce of gold.
During World War II (1939-1945), the United States was considered the most secure location for the custody of gold, so most of the world's gold reserves ended up there.
Near the World War II end, in 1944, the victors designed the Bretton Woods system as the new monetary order, establishing that the currencies of participating countries would be pegged to the US dollar, which in turn would be pegged to gold. However, printing presses were abused, so many currencies devalued against the US dollar, and in 1971, President Nixon announced that the US dollar would no longer be convertible into gold.
Since then, Central Banks print pure fiat money.
The monetary properties, ordered according to their relevance are:
Those monies that had these attributes to a higher degree have historically evolved through the stages of Store of Value, Medium of Exchange and Unit of Account.
Gold lacks verifiability, storability and transferability due to its physical nature. It also lacks divisibility due to its higher density of value. All these monetary deficiencies led to its centralization, which in turn gave rise to fiat money.