Everybody uses money, we’re surrounded by money every day. Nearly every event in my life has revolved around money, either a dream holiday or the purchase of a house, eating out or eating in, nights out with friends or treating yourself to something nice. Nine times out of ten the first questions will be “How much?” and “Can I afford it?” This is the way of the world, but what is money?
The Beginnings of money
The use of money can be traced back over 100,000 years ago, although no hard forms of currency were used people would barter goods for goods or goods for services.
Obviously it’s hard to quantify how many sheep were worth one wooden hut but it did introduce a key concept that would appear time and time again, the balance of supply and demand.
Let’s standardise this
Eventually we moved on to a more standardised form of money referred to as commodity money. This was still a far cry from todays definition of money but it’s a little closer.
Typically these commodities’ were precious metals, salt, tea, silks etc. This type of money was all based on the intrinsic value of the commodity itself, so if I only had silk to offer and you were not looking for any silk then no deal could be made.
In certain areas certain commodities were more valued than others, for example in Canada fur traders discovered that the Indigenous population there had no use for gold or silver so they introduced a the beaver pelt as a standard currency: 5 pounds of sugar cost 1 beaver pelt and 1 pair of shoes cost 1 beaver pelt.
This type of standard currency system allowed people to trust they were getting fair value for their trade.
Money don’t jiggle jiggle
Commodity money eventually moved on to stamped coins, these were a far more practical way of transferring wealth, they were small and standard and each coin had it’s own intrinsic value as they were made of precious metals such as gold, silver or copper.
Although the coins used were a lot closer to the way we think about money today they were different in one key aspect, coins still had an intrinsic value. What I mean by that is if the coin was made of gold then that coin was still worth its weight in gold it was a 1:1 price fix.
Todays money does not have an intrinsic value it is printed on paper or is just a digit in your online bank there is no intrinsic value other than what we perceive of it. I’ll touch on this more later.
IOU Money
This first move from intrinsic money to what is referred to as representative money happened because gold and silver merchants would issue receipts to the depositors which could be redeemed for gold or silver at a later date.
For example, you deposit 10 gold coins with me and I issue you with a a receipt stating you had deposited 10 gold coins and that should you trade the receipt back to me you will receive 10 gold coins.
The receipt had no actual value but because it could always be traded for 10 gold coins it is now worth 10 gold coins, and people could use this as money. If a ship cost 10 gold coins I could just hand you the receipt and you could cash in for your coins.
This is the first use of representative money, where the money itself actually was not worth anything without the commodity that backed it.
This is gold Mr. Bond
After a while the world moved on to the Gold standard monetary system which was where we saw the Dollars and Pounds of the world.
This type of money would seem very familiar to you as it was bank notes and bank coins thatÂ
could be used for payments and transactions exactly like todays money.
All the money issued was backed by gold deposits so if you want
ed to take this currency to the bank and exchange it for it’s worth in gold you could. At this point most of the worlds monetary systems worked this way.
War costs money
During the first world war many countries suspended the gold standard to allow them to print more money and pay for the war efforts.
During the second world war the USA had been supplying weapons and other goods to the Allied countries and receiving payment in gold which meant come the end of the war the USA owned most of the worlds gold.
Great news for USA but it meant the rest of the world could not revert to a the gold standard anymore as they did not have the gold to back the money up.
This is where it gets crazy.
Who needs gold when you can have money?
Following this there was something known as the Bretton Woods Agreement that would allow countries to go back to a pegged currency without the need for gold.
As the US dollar was still backed by gold due to their huge gold deposits it was agreed that the majority of the world would then peg its currency to the US dollar. Meaning that at any time it could be traded for its equivalent value in Dollars which in turn could be traded for gold.
This put the USA right at the heart of every financial system in the world.
Works until it doesn’t
This arrangement was largely successful and had worked as intended. Countries would stockpile US dollars rather than gold so the citizens had confidence in the money and allowed them to rebuild following the war.
During the Vietnam war however, the USA began spending more money than it brought in through taxes. They were funding social progammes and a costly war so they began to print more money which caused the value of the dollar to go down (this is basically inflation in it’s simplest form). For more information see our post what is inflation.
Other countries saw this and began exchanging their stockpiled US dollars for the gold that backed it. Due to this demand Richard Nixon was forced to do something many people didn’t think possible he removed the gold standard for the US dollar.
So, what is money?
This is the same monetary system we have today. Where previously our money was backed by gold, it was then backed by another currency that was at least backed by gold itself.
Following on from the removal of the gold standard for the dollar we are left with money backed by nothing.
There is no intrinsic value left in money. We put faith in the currencies we use and we understand a pint of beer costs a certain amount fixed amount and we understand that if you work a certain amount of hours you will receive a certain amount in return. This is only because this is the system we have built for ourselves.
Ultimately that is what money is, it is a form of exchange that used to be backed by intrinsic goods and now is essentially worthless pieces of paper.
Worthless, but due to the systems we have created we put faith and apply value to it. This is an important concept to get your head around when it comes to money, this concept frees you to think outside the normal realm of everyone else and see money for what it is. It is a tool to be used to acquire what you want and need in life.
Maybe money can’t make you happy but it will certainly allow you to live your life on your terms and it will open more doors for you than it closes.
If you liked this post then maybe you’ll like the post “What is the stock market?”
