This is Part: one – The evolution of money, of our deep dive series into:
Where we answer questions like:
Does Time=Money? Is money the root of all evil? Who controls money? Why does money hold so much power over us? Is money modern-day slavery? and more!
These questions all need to be answered
So strap yourselves in for the journey, because this is not going to be just a fact-based article on what money is. We will be exploring its origins and evolution, while also addressing common misconceptions, and looking at some of its ugly truths and harsh realities as we explore the evolution of money and its influence over the course of six articles.
This is one of those topics that you wish had been taught in school and will change the way you look at and manage money.
Let’s start with:
The evolution of money
What is the definition of money?
Money is a medium of exchange that is accepted by sellers in payment for goods and services. It is a way to facilitate trade and bartering and represents economic transactions by actings as a medium of exchange of value that is standardized and widely accepted.
In addition to being a medium of exchange, money also serves as a store of value, a unit of account, and a standard of deferred payment. Money is an essential part of most modern economies and plays a crucial role in facilitating trade and enabling economic growth.
But where does it come from?
and
Why do we call it money?
As with a lot of good, and bad things
It all started with the Romans and the goddess
Moneta
The term “money” that we know so well today comes from the Latin word “Moneta,” which was the name of the Roman goddess of warning, this alone should start waving a few red flags.
Moneta was often depicted holding a cornucopia, or a horn of plenty, which was a symbol of abundance and prosperity.
The association of Moneta with money likely stems from the fact that money was seen as a source of wealth and abundance in ancient Rome. Over time, the term “Moneta” came to be used to refer specifically to the coins that were minted by the Roman government, and eventually evolved into the word “money” that we use today.
Now we know why we use the word “money”, but it still doesn’t answer where the idea of money comes from.
This means we need to ask:
Who created money?
The concept of money has been around for thousands of years, and it has evolved over time. It is difficult to say exactly who created money, as it has developed and changed throughout history. In early human societies, people likely used various forms of barter and trade to exchange goods and services, but this was often inconvenient and inefficient.
Eventually, people began to use objects with intrinsic value, such as shells or beads, and eventually copper, silver & gold as a means of exchange. These objects were sometimes referred to as “commodity money” because they had inherent value in and of themselves.
Over time, principalities evolved into what we view as modern-day governments, and along the way, they began to mint coins. The Mesopotamian shekel is known as the first known “modern currency” it emerged nearly 5,000 years ago, and the Chinese started using paper money around 1000 years ago.
The principle of value exchange, however, is estimated to have been around for almost 40000 years!
It’s incredibly interesting to observe how something like the concept of money started from personal necessity and evolved due to matters of convenience and eventually developed into our modern understanding of money through the growth of trade and commerce amongst our species over the years.
Today, the concept of money has become incredibly efficient and has continued to facilitate the growth of economies, shaking and shaping every one of the pillars we use to interact with each other and changing the way our societies and values operate on the most fundamental of levels!
What is a reserve currency?
In the modern world, a reserve currency is a type of currency or commodity that is held in significant quantities by governments and institutions as a basis. These reserves can then be used to finance international trade, as well as to stabilize their own currency.
However, as we are busy exploring the evolution of money, it merits delving into the origin of reserve currencies and the values that they were based on. This concept didn’t start with governments but was instead born out of its convenience to facilitate trade among people.
Just as with the original concept of money, if you could trade your goods or services for something more convenient to handle, that would retain its value, and could be retraded at a later stage. Then if that “something” became popular enough that a large number of people adopted enough belief in its ability to retain its worth, well there you have a rudimentary form of reserve currency.
Our modern-day global financial markets and the government and institutions that manage them are all just making use of this principle of interchangeable value in the form of currencies that represent the collection of valuable goods and services they have to offer the rest of the world.
Historical reserve currencies were based on 5 factors:
- Convenience of use
- Value retention
- Adoption
- Practical use
- Scarcity
They were used precisely because of their ability to represent value as well as a high rate of adoption by others. Ideally, they would also have scarcity and scalability. These currencies have typically emerged as a result of a combination of the above factors over time and were eventually replaced by representations of wealth managed by governments and institutions in the form of little tokens with symbols on them.
Powerful symbols backed by the authority, trustworthiness, and power of the institution that backed them.
Examples of traditional reserve currencies
As time progressed and our domestic trading communities grew into global ones, we had the need to replace the reserve currencies used with ones that had a better ability to store value. When you look at the evolution of money over the years it is easy to go back and observe the changes as they grew along with our needs.
10 examples of historical reserve currencies used over the years:
- Gold: Gold has been used as a form of money and as a reserve currency for thousands of years, and it was a key component of the gold standard.
- Silver: Silver has also been used for thousands of years, and it was a key component of many different monetary systems.
- Copper: Copper was used in many parts of the world, and it was often used to produce coins and other forms of currency.
- Salt: Salt was used in Africa, India, Asia, and Europe.
- Cowry shells: Cowry shells were used in Africa, Asia, and the Pacific Islands.
- Beads: Beads were used in Africa, Asia, and the Americas.
- Feathers: Feathers were used as a form of money in Africa, Asia, and the Americas.
- Tobacco: Tobacco was used in Europe and the Americas.
- Tea: Tea was used in Asia and Europe.
- Furs: Furs were used in Russia, Europe, and North America.
Overall, these are just a few examples of the many different forms of money and reserve currencies that were used during the rich history of humanity before the evolution of money grew to what we know as our current modern global reserve system that uses FIAT and digital currencies to make up for the traditional shortcomings of the historical reserves.
Whether this was the best decision we could make, is debatable. Inevitably we needed something that better addresses the representation of value and facilitates exchange, however, since leaving the gold standard as our main form of reserve currency, humanity has been exposed to a whole new world of modern-day problems.
What was the gold standard?
The gold standard was previously the most commonly used global reserve currency and was widely adopted as the core of our global monetary system until the early 20th century. However, during World War I, many countries abandoned the gold standard in order to finance the war effort, and after the war, they did not return to it.
In the years following World War II, the Bretton Woods system was established, which pegged the value of currencies to the US dollar, which in turn was pegged to the price of gold.
The Bretton Woods system broke down for several reasons. One of the main reasons was that the fixed exchange rate system created imbalances in the global economy. For example, the United States, which was the dominant economic power at the time, ran persistent trade deficits, while other countries, such as Germany and Japan, ran surpluses. These imbalances put pressure on the fixed exchange rate system and made it unsustainable.
In case you’re wondering
A persistent trade deficit is a situation in which a country imports more goods and services than it exports over a prolonged period of time.
This can lead to a negative balance of trade, where the value of a country’s imports exceeds the value of its exports. A persistent trade deficit can have negative consequences for a country’s economy, such as a loss of domestic manufacturing, a decline in the value of its currency, and an increased dependence on foreign goods and services. It can also lead to a buildup of foreign debt, as the country must borrow from other countries to finance its trade deficit.
Another reason for the breakdown of the Bretton Woods system was the increasing cost of the Vietnam War and other government spending. In order to finance these expenses, the US government began printing more money, which led to inflation and a loss of confidence in the dollar. As a result, other countries began to demand more gold in exchange for their dollars, which put further strain on the system.
Ultimately, the Bretton Woods system broke down because it was unable to adapt to changing economic conditions and the increasing complexity of the global economy. This led to the abandonment of the gold standard and the adoption of floating exchange rate systems.
As to why the “world economy” was and is so strongly bound by the decisions of the United States, which only represents around 4.25% of the total global population of 7.9 billion people…
We get more into that in Part: Three of this series – Who controls our money?
For now, let’s lay a good foundation and explore:
Why did we use gold as a reserve currency?
- It is a widely recognized and accepted form of money.
- A scarce resource with inherent value.
- Gold is also durable and can be easily stored.
- It has relatively stable in value.
- It has a limited supply and cannot be duplicated
- Gold is historically established with a long history of being used as money
- It is a physical, tangible asset, which some people find appealing.
- As an asset, it is stable and not subject to as many fluctuations as other assets
- It’s in high demand as many governments use it as reserves
- This allows it to act as a hedge against inflation and other economic risks.
Honestly, when you look at the evolution of money and you get to gold and its history as a reserve currency, it’s hard not to ask why we ever left it. The primary reasons cited are because of its scarcity and inflexibility, making it impractical to use.
If you dig a little deeper, however, you will find that it also severely limited a lot of the questionable monetary policies in play today and that the change was motivated more by politics and national ambitions than practicality.
So what do we currently use as a global reserve currency?
Currently, the US dollar, also known as the Petrodollar is the most widely used global reserve currency. As we know now, this means that instead of gold or other assets, most countries hold large amounts of US dollars in their foreign exchange reserves and use them to finance international trade and as a means of payment in international transactions.
As of 2021, the dollar accounts for 58.81% of all reserves held by countries across the world. What might be more shocking is that as of April 2022, it was on one side of 88% of all trades made.
We will explore the Petrodollar more in Part: Three of this series – Who controls our money? but as the last point for the evolution of money, we will briefly consider:
Why do we use the dollar instead of gold?
Here are the most commonly listed reasons you will find on Google, why we currently use the Petrodollar instead of gold:
The 7 reasons we use the dollar and not gold as a reserve currency:
- The US dollar is more easily divisible, and portable than gold.
- The use of gold as a reserve currency is limited by its availability.
- It’s a fiat currency, which allows for easier management of the money supply.
- The dollar is widely accepted as a means of payment in international transactions.
- The United States has a strong and stable economy, which supports the demand for its currency.
- It also has a large and liquid financial market, which makes the US dollar easy to buy and sell.
- The US has a stable political system, which helps to ensure the long-term stability of its currency.
There is a lot to take in here. If you’re anything like me, you will wonder if having your global reserve currency linked solely to the political and economic stability of a single country is a wise decision to have in the long run, especially considering the power it grants that country. While it is not quite as simple as it sounds, there are definitely some warning bells ringing, which we will be exploring in Part 2 & Part 3 of this series.
As a closing thought, and a bit of foreboding:
There are probably some very good reasons why Moneta was known as the goddess of warnings!
Next up we explore Modern Monetary Systems in Part: Two of our series!
Also be sure to also check out our section on growing your wealth and building your business for more great, practical, and informative finance-related content like our beginner’s article on diversifying your portfolio, or how not to lose all your money trading crypto!
TLAT is reader-supported, when you buy through the links on our site, we may earn an affiliate Commission. Learn More
