2.1.0. The Changing Forms of Money
The following are the various forms of money throughout human history:
2.1.1. Barter Money
Barter money was the dominant monetary system during the Agrarian Age. It started to wane off with the advent of First Industrial Revolution.
Trade by barter was a system of financial transaction in which goods or services were used to exchange for other goods or services. For instance, up until the early 19th century, yam was a staple food in most parts of West Africa such as the Niger Delta region of Nigeria, where farming and fishing where the main occupations.
A man who had fish but no yam could simply take his fish to the market arena and exchange the fish for yam. Thus, the yam and fish were the barter money in such a transaction.
Indeed, the same barter system has been recorded across many cultures around the world.
2.1.2. Metallic Money
As the First Industrial Revolution advanced, metallic money gradually became popular, replacing barter money. Examples of such metallic money were gold, silver, and copper.
Interestingly, throughout human history, one recurrent question about money has been: “Who has the legal right to issue money?”
Historical records from various cultures have shown that both government and private individuals could issue money. For instance, the Persians had minted gold coins that were utilized as money by the rich while bronze was used by the commoners. The same was true with the Greek and Roman civilizations.
However, with the rise of western civilization during the industrial revolutions, gradually governments started toying with the idea of having the sole legal right to issue money, mostly for the purpose of tax control. However, this idea was constantly meeting with oppositions from the general population.
For example, in August 1548, at the brink of first industrial revolution, there were violent revolts against the gabelle (or salt tax) in Bordeaux in which tax collectors were killed and their homes burnt. The French central government sent in thousands of troops to quell the opposition and impose martial law. However, in the long run, the rebellion did achieve its aim. Alarmed by the riots, King Henri II decided not to enforce the salt tax.
Also, the American colonists in the Thirteen Colonies used various methods of tax resistance to resist the British Parliament in the years leading up to the American Revolution of 1765 to 1783.
Notwithstanding, in 1789, the USA Constitution, after much outcry and rebellion from citizens, finally gave Congress the sole right to coin money and the power to regulate its value. This marked the modern government interference as the sole right in issuance of money.
2.1.3. Paper Money
Paper money was first reported in China in the 7th century AD, during the Tang Dynasty. European explorers like Marco Polo introduced the concept in Europe during the 13th century. However, such paper money was merely held as a “receipt” for goods.
Nevertheless, by the Second Industrial Revolution, paper money started gaining wide acceptance, mostly because of its ease of handling and transporting. For instance, Napoleon Bonaparte, the military leader and the first emperor of France, issued paper banknotes in the early 1800s.
Soon thereafter, paper money became the dominant monetary system in the world, and it has been issued along with metallic money (coins).
At the early stage, to give value to paper money, the value of each printed paper money was linked to the amount of metallic commodity in reserve. The common metallic commodity being used to determine the value of paper money was gold.
Thus, the value of paper money was measured by the amount of gold reserve in the coffers of the bank. That is, paper money did not have any intrinsic value of itself; its value was derived by a specific amount of gold that backed the paper money.
This system was known as the Gold Standard Monetary System, and it became the standard monetary system across the world.
But the Second World War brought new economic problems. The inflation rate rose sharply and there was not enough cash to pay for services of the post-Second World War era. To print more paper money would mean to acquire more gold reserves.
To solve this problem of cash limitation, the USA President, Richard Nixon, decided to separate the paper money from its backed metallic (gold) commodity in 1971. Legislation was enacted to this effect, thus, ending the Gold Standard Monetary System. This means the USA government could henceforth print and mint money unendingly without having to bother about the amount of gold reserve in its coffers.
This action of President Nixon generated shock waves in the global financial sector and changed the monetary system across the world, resulting in a cascade of events that is now popularly referred to as the Nixon Shock.
From thence, paper money stood alone as a transactional entity backed only by government legislation. This legislatively backed money is called Fiat Currency, which soon became the new money order across the world.
2.1.4. Plastic Money
The main problem with paper money was the emergence of counterfeit notes and the huge cost of constantly reproducing new ones to replace the damaged notes. There had to be a better monetary type.
By the Third Industrial Revolution, the idea of alternative forms of money was being tested. The idea became a reality when finally, in 1988, the Reserved Bank of Australia developed and issued Plastic Money; this was the first of its kind in the world.
By 1999, Romania issued its own plastic money, and soon many countries recognized the ease of transferring money as plastic and started to issue them.
Plastic money are polymer banknotes made from a synthetic polymer such as biaxially oriented polypropylene. Such notes incorporate many security features not available in paper banknotes, including the use of metameric inks.
Polymer banknotes have longer significant durability than paper notes, causing a decrease in environmental impact and a reduced cost of production and replacement.
Today, plastic money is issued as credit cards, debit cards, ATM cards, etc. They have grown to become one of the most popular forms of payment. They provide a more convenient method of carrying money than paper money or metallic coins.
2.1.5. Electronic Money
Plastic money gained popularity around the world very quickly. However, the birth of the internet and the rise of personal computers in the Third Industrial Revolution saw the experimentation of some old ideas.
One such old idea was the ground-breaking innovation of 1871, when the Western Union (which was then called the Western Union Telegraph Company) launched wiring as a payment method for exchanging funds. However, this wiring was crude, clumsy, and not very secure, hence, it never became widely accepted.
With the birth of the internet and the rise of personal computers, this old wiring method was revamped and re-engineered to power smooth money transfer with enhanced security features. Thus, money could be conveyed speedily and securely via electronic media.
This became known as electronic funds transfer (EFT), hence, marking the emergence of electronic money. It quickly spread around the world towards the late 20th century.
However, just like metallic, paper, and plastic monies, electronic EFTs are fiat money; their values are determined only by government legislation. Thus, governments reserved the sole right to print, mint and issue them through their Central Banks, which are known as Reserved Banks in some countries.
2.1.6. Cryptocurrency
One major problem with fiat money is inflation. The more government prints fiat currencies, the more they decline in value. Therefore, it becomes increasingly difficult for an individual from a poor background to build wealth. The rich controls the government and they have privileged access to more of the fiat currencies.
Couldn’t there be money of the people by the people and for the people? Couldn’t there be a kind of money that allows equal access to everyone – the poor and the rich alike – without undue control or interference by a central authority?
Moreover, could such envisaged money be deflationary, in which its value appreciates with usage and popularity, rather than inflationary as seen with the fiat currencies?
Thankfully, such envisaged money was realized in the emerging 4th Industrial Revolution.
On the 31st October 2008, Satoshi Nakamoto released a white paper about a novel digital currency. The white paper detailed the formation of a decentralized public ledger that was given the name Blockchain. By 9th January 2009, the Blockchain released the first digital currency called Bitcoin through a process known as mining.
Bitcoin is open source, meaning its design is public. No one person owns or controls Bitcoin, and anyone can participate. In fact, by mid-2010, Satoshi gave control of the source code repository and network alert key to one Gavin Andresen, a Bitcoin enthusiast; Satoshi also transferred several related domains to various prominent members of the bitcoin community, and stopped his recognized involvement in the project. Till date, no one knows who Satoshi was or is.
Since the birth of Bitcoin, several similar digital currencies have been created. They are collectively known as cryptocurrencies, because their security is based on cryptography, which is a technique that utilizes codes to secure a system.
The term “crypto” is derived from the Greek word kryptos, which means “hidden.” In other words, cryptocurrencies are digital currencies that are secured by hidden codes.
Interestingly, note that both electronic EFTs and cryptocurrencies are digital money. That is, both are virtual; meaning, you can see them and use them but cannot handle them with your fingers. However, whereas electronic EFTs are fiat money, cryptocurrencies are non-fiat.