Overview:
Money, the most sought ingredient ever for the humankind. Our life starts with a race towards earning money. In the schools and colleges, they teach us if you get good grades, you will end up in good jobs that make you more money. No one ever tells kids to do whatever that satisfies them. Parents, teachers, and all the elder people focus on preaching the child towards the orthodox path of choosing a profession and save money. I am not against this approach; it would be stimulating if we assist children to earn from the career they choose.
People often confuse money with wealth. Money is used both as an exchange medium for goods and services and also storage of wealth.
Now, the whole world has one common enemy and an inescapable challenge, Coronavirus. All of us know the damage the Covid-19 pandemic has caused so far since January. Almost all countries imposed lockdowns and shutdown of industrial, travel, recreation, hospitality, and other sectors. Only food, medicine, and other essential services have been allowed for the last two months since the fourth week of March.
Slowly and steadily, all the nations are coming out of lockdowns. Now, everyone has one question in their minds. Is it possible to earn that money lost due to lockdowns? Do my business run as I did in the past? Is my job secure in the future?
In some advanced nations, people are more worried about their financial future than their lives. Do most of us know how this whole concept of money started? I have tried to explain about the evolution of the money.
History:
Earlier, thousands of years ago, people used to follow the Barter system. People exchange products and services for one another. For example, a cobbler makes some footwear, and farmer exchanges rice for that footwear.
But using commodities such as rice, wheat, and other food grains proved to be very difficult for the transaction and storing. The administrative systems had to come up with a medium of exchange for goods and services. Here starts the journey of the most mystical thing ever invented by mankind.
I have taken reference from the writings of Ray Dalio, a billionaire and founder of the World’s largest Hedge Fund firm, Bridge Water Associates.
There are three types of money, a medium used for the exchange of goods and services and storage of wealth.
Hard Money:
Hard Money came into existence around 3000 BC. It is a physical form of money. Precious metals like Gold, Silver, and other commodities like copper, bronze, etc. were used to purchases goods or services.
Everything worked out well since the value of hard money depended on the availability of these precious metals. Almost all the kingdoms in the world ranging from China, India to the Western World printed the gold, silver , and bronze coins as their currencies.
Notes or Bills:
Although the precious metals coins of gold and silver were an excellent idea as money, the main problems arise when people found it difficult to store the money. Burglars threatened and injured the people and robbed them. Even stashing hard money in their houses was also not safe.
In the olden days, some institutions like temples were used as storehouses for storing the money of the people. There collected charges for doing so.
Banks came into existence for storing the money. People store their gold and other money in the banks. Banks would provide them with a bill or note. Each note is like a claim on gold, equal to a gold coin or whatever it represents. People could use these bills or notes for purchasing goods and services. So, again, everything went very well for a few hundred years.
Bank’s balance sheet was equal to the total value of gold and other precious metals deposited in it. Instead of giving back all the bills, banks made an agreement with the customers to hold some of the bills with them. In return, they would pay some interest on the deposits. It is similar to what banks and customers of modern banks do nowadays.
The people also took loans from the banks for some interest. So the business was very good for banks. This continued for some decades. It was not long before banks got an unscrupulous idea.
They started printing more bills or receipts than the gold reserves. By the end of the First World War, in the US, there was thrice the number of bills than the gold reserves. Then, the US had 50% of all gold reserves in the World. In Bretton Woods Agreement 1944, the US dollar was declared as the Global Currency.
Fiat Currency:
As the number of bills was three times the gold reserves. The value of the bills in circulation and bank deposits continued to decline further and further. There was chaos along with the people in the US and the western world regarding the devaluation of the currency.
Then came the most shocking decision ever taken; it came as an announcement from President Nixon in 1971. He canceled the gold backing of the dollar printing from then onwards.
The dollars were printed and circulated only based on the confidence of the US economic growth. It marked the era of this fiat currency, what we use now.
As of now, there is no need to print the money. It can be created and transferred through the computers as 0s and 1s.
There is a lot to be discussed as credit creation and debt obligation, dot com bubble, US sub-prime mortgage crisis, and 250 trillion World debt compared to 5 trillion dollars worth currency in circulation. All these are the direct result of printing more money.
This completes my brief explanation about the history of money. I have purposefully excluded a lot of technical data. It would be impossible to discuss all that in a 1000 word article. But, this is the main theme of how it all started. Do excuse me for not being definite on the chronological order of the events.
Note:
I provide the information and my views on the website only to educate new investors, stock market enthusiasts, and the common public on equity or stock market investments. Please consult your financial adviser before making any investments in the stock market. In case of any queries, you can contact me via email ID: shivakumar.lachapeta@valueinvesting.online.
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