The barter system was the first evolution of money where humans initiated to monetize their assets (cattle, grains, vegetables, etc.) to trade with other humans in society. However, the first stage of monetary evolution encountered the challenge of finding the counterparty who desired to exchange. Also, the counterparty should value the goods or assets in the same way at the right time. Clearly, these constraints in the barter system raised the need for the next stage of economic evolution, which is Commodity money.
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Commodity money Evolution
Post barter system, humans accepted various commodities (seashells, glass beads, stones) as money within a society to exchange goods over different periods. The common criteria for these commodities were following:
- Difficult to produce or imitate the commodity
- Ease of transferring the commodity
It was a significant achievement over the barter system, but most of these commodities as money hampered by technological innovation. The technology guided humans to produce goods and products faster and with less energy. As a result, people could collect or produce commodities quickly, which later inflated the supply of things (i.e., money) and resulted in value erosion.
Gold in money Evolution
The only commodity that fulfilled the purpose of money for a good period of human history was gold because of its scarcity in nature and chemical properties (corrosion-proof). Because of these properties, gold retained its value over space and time.
Undoubtedly, gold has witnessed the rise and fall of kingdoms throughout the centuries. The kingdoms which had been prudent with their spending achieved the status of the most prosperous empires in history. Consequently, those who misused their power to meet their leisure by consuming more resources or fighting a battle went to ashes.
Notorious kingdoms stole the purchasing power by a method called Coin Clipping. As a result, the supply of coins in the market inflated, resulting in a slow and steady economic collapse.
Representative Money or Business Money
An old saying, “Need is the mother of discovery.” Because of coin clipping by kings, merchants/businesses decided to issue their currencies in papers. Over time, business performance in the market supported these receipts.
The prominent businesses in small to mid-sized markets issued these paper receipts. And other companies started using these receipts to trade goods and services. The strength of these paper receipts is based on both the commodity and the credibility of the promise to redeem it. The primary risks with this system were:
1. Counterparty risk with the issuing merchant or
2. Counterfeiting of receipts
These risks posed a threat to all businesses holding these receipts.
Fiat Money or Money of the Government
The government couldn’t hold itself to issue their FIAT currency which enabled them to control the money supply. But over time, the form of money has changed, but human behavior stayed the same. The overspending by governments to maintain their power forced them to inflate the supply of currencies. It is similar to coin clipping during kingdom rule. “History never repeats itself, but it certainly does rhymes.” With the rise in inflation, the currency started losing its purchasing power. This monetary inflation is stealing the spending power of a common person. This brings us to the last step of the money cycle, where we need a Newer form of money: Harder, Stronger, Faster, and Smarter, which can promote good behavior and punish the bad actors.
Have you noticed any cyclic trend over the Evolution of money?
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