New on FinoLib · Volume I: Global Economy
I have added a new article to FinoLib, my finance education website: History of Money: From Barter to Gold Standard to Fiat Currency, part of Volume I: Global Economy. This page gives you the core of the topic in expert but plain language; the full article goes much deeper.
0.1 The World Before Money — The Barter System
The idea in plain words
Barter is trading goods for goods, with no money in between. It works in a small village where everyone knows what everyone has, and it fails in a bigger economy, because you must find someone who has what you want and wants what you have at the same moment. That failure is why money exists.
Key points
■Barter needs a double coincidence of wants: you must find someone who has exactly what you want and wants exactly what you have, at the same moment.
■Some goods cannot be split (a cow worth twenty baskets of grain when you need only five), and with no standard of value every trade needs a fresh negotiation.
0.2 Commodity Money — When Things Became Currency
The idea in plain words
Commodity money is a useful physical good, such as shells, salt or silver, that a whole community agrees to accept in payment. It fixed barter’s biggest problem, because any trade could now go through the commodity, but the goods themselves could rot, be hard to split or be gathered in bulk.
Key points
■Cowrie shells were used across Africa, South Asia and East Asia for thousands of years, and silver and barley were the standards of value in Mesopotamia around 3000 BCE.
■Cattle could not be divided easily, grain could rot, and shells could be collected from beaches, inflating the supply and destroying their value.
0.3 Metal Coins — The First Standard Currency
The idea in plain words
Around 600 BCE the kingdom of Lydia stamped pieces of metal to guarantee their weight and purity, creating the first standard coins. Metal is durable, divisible, portable and scarce, and the stamp made the state the guarantor of money.
Key points
■Gold, silver and copper were durable, divisible, portable and naturally scarce, the properties commodity money lacked.
■Before standard coins, every metal trade meant weighing the metal and arguing about its purity; a government stamp ended that argument.
0.4 Paper Money — From China to the World
The idea in plain words
Paper money began as a receipt for coins left on deposit. People found the receipt easier to carry than the coins and began trading the receipts themselves. Later governments and banks issued notes directly, so paper money is a promise, only as good as the issuer behind it.
Key points
■China led: the Tang Dynasty’s “flying money” receipts appeared by the early 800s, and the government issued its first standard notes in 1024.
■In Europe, Stockholms Banco issued the first banknotes in 1661 as loans, over-issued them and failed; in 1668 the Riksbank, the world’s oldest central bank, was founded from its ruins.
0.5 The Gold Standard — Anchoring Paper to Metal
The idea in plain words
Under the gold standard a government promised to swap its paper money for a fixed weight of gold on demand. That promise limited how much money could be printed and kept exchange rates steady, but it left no room to respond to a crisis.
Key points
■If one British pound was defined as 7.32 grams of gold, any holder of a note could receive exactly that amount from the Bank of England.
■World War One broke the system when governments printed money far beyond their gold, and the Great Depression of the 1930s finished it by preventing countries from stimulating their economies.
0.6 Bretton Woods — The Dollar Becomes the World’s Anchor
The idea in plain words
In 1944, 44 Allied nations tied every currency to the US dollar, and only the dollar to gold, at $35 an ounce. The system ended in 1971 when the US stopped swapping dollars for gold, but the dollar stayed the world’s reserve currency.
0.7 Fiat Currency — Money Backed by Nothing But Trust
The idea in plain words
Fiat money has value because a government declares it legal tender and people trust it, not because a commodity backs it. Every major currency has worked this way since 1971. That makes money flexible, and it also makes abuse possible.
0.8 Why Currency Was Created — The Three Functions of Money
The idea in plain words
Money does three jobs at once: it is a medium of exchange, a store of value and a unit of account. Anything that does all three can work as money, which is why cigarettes became currency in prisoner-of-war camps.
What the full article covers
In the full article I take you through these sections:
■0.1 The World Before Money — The Barter System
■0.2 Commodity Money — When Things Became Currency
■0.3 Metal Coins — The First Standard Currency
■0.4 Paper Money — From China to the World
■0.5 The Gold Standard — Anchoring Paper to Metal
■0.6 Bretton Woods — The Dollar Becomes the World’s Anchor
■0.7 Fiat Currency — Money Backed by Nothing But Trust
■0.8 Why Currency Was Created — The Three Functions of Money
It includes a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume I: Global Economy
Read the full article on FinoLib
The complete article, History of Money: From Barter to Gold Standard to Fiat Currency, with every worked example, diagram, quiz and source, is free to read in Volume I, Global Economy on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance