From ancient Greece to the digital era
Explore the history and character of money.
Did you ever wonder why individuals would willingly trade valuable possessions like cars, teddy bears, and pianos for mere scraps of green paper? Didn't this seem odd to you?
Money can be peculiar. Humanity has been utilizing it for a considerable duration, yet economists remain divided over its precise nature. It is also available in various forms, from physical objects like shells and bills to digital currencies like Bitcoins.
These summaries provide a comprehensive exploration of the tumultuous history of money, its unpredictable future, and the various attempts made by the economy to understand it.
As we progress through the centuries, you'll also uncover
Another reason to be envious of Australians;
How money is connected to quantum theory and
Why were two pizzas once sold for a price worth millions in today's money?
1. Contrary to what many people think, money was not created to replace the barter system.
Have you observed how effortlessly children engage in bartering? You may recall trading a juice box for a few cookies or swapping your prized marbles for a shiny Matchbox car.
According to a well-established theory, money existed as societies evolved beyond the barter system. This theory has existed since the time of Aristotle.
Despite being largely speculative, the theory gained popularity among numerous influential thinkers who came after, including the renowned economist Adam Smith in the eighteenth century.
They all believed that money resulted from commercial trading, where, for example, a valuable item like cattle could be exchanged for a specific number of slaves.
However, this method is inefficient as transporting items like cattle can be challenging, unlike coins.
Additionally, coins containing precious metals were widely recognized as valuable commodities, unlike other goods that may have limited demand in certain regions, making them less useful.
This notion of money evolving from bartering may seem plausible, but it has been disproven. In 1913, Alfred Mitchell-Innes, a British economist, published his findings, highlighting the absence of any commercial history evidence supporting a barter-only system.
Mitchell-Innes has yet to be proven incorrect. In fact, historians have continued to uncover more evidence of ancient civilizations utilizing traditional forms of currency alongside bartering.
Approximately 5,000 years ago, in Sumer, an ancient urban civilization in Mesopotamia, clay tablets were utilized to document commercial transactions. These tablets prove that salt, beads, and bars of precious metals were employed as early forms of currency.
We need to learn more about money's origins, including its exact emergence and timeline. However, historical evidence suggests that the first coins were introduced in the seventh century BC within the kingdom of Lydia, located in the Mediterranean region.
In the sixth century BC, Greek city-states began minting their coins to assert their power and independence.
2. Understanding the true worth of currency unveils its intricate characteristics.
It's fascinating to discover that Sir Isaac Newton, renowned for his groundbreaking contributions to physics, also left a lasting imprint on our currency.
Newton indeed played a crucial role in establishing the connection between the weight of money and its value.
This occurred in 1649 when Newton experienced a nervous breakdown and accepted a position as warden of London's Royal Mint.
He implemented the gold standard in England, establishing a fixed rate between the currency's weight and the value of gold.
This is how the name for a British "pound" came about - one of these silver coins used to have the same value as one pound of gold.
However, when dealing with finances, it is crucial to consider both the measurable and non-measurable aspects.
Money is a concrete and physical entity, like the coins and bills you carry. However, money can also symbolize intangible concepts, like the numerical representation of its worth.
Some individuals perceive the duality of money, where it embodies both its physical and theoretical aspects, to resemble a quantum entity akin to a photon that exhibits properties of both a particle and a light wave.
And just as with a quantitative analyst, money can fluctuate from one moment to the next.
A trusted authority, like the Federal Reserve, determines the value of a one-dollar bill. However, once we start using it to purchase goods or services, the value can fluctuate based on market rates. Today, the value of a dollar can secure you a bottle of water, but the future holds the potential for fluctuating conditions where that bottle could be sold for twice the amount.
This intricate phenomenon has been puzzling and captivating economists for centuries.
3. Banking and international trade thrived following the introduction of debt.
Debt may be unpleasant, but it is essential to a well-functioning economy.
Debt can only exist with negative numbers. In his seventh-century book, The Opening of the Universe, Brahmagupta, an Indian mathematician, introduced the concept of negative numbers and illuminated their significance.
From this point forward, businesses could utilize bookkeeping and the double-entry system, which records two types of transactions: negative debits and positive credits. This system greatly simplifies the process of identifying potential transaction errors and assessing a business's profitability.
After transactions were documented in a ledger, the notion of money lending started to surface, bringing along abstract concepts like interest.
Promissory notes called sakk were introduced in seventh-century Mesopotamia. During that period, Islam explicitly prohibited usury, which involved lending money at exorbitant interest rates. However, it did permit the acceptance of fees in return for loans.
In the Middle Ages, loans were found to be quite valuable as European towns utilized them to construct churches. This was considered justifiable as it was seen as serving God.
As economies grew more intricate during the Middle Ages, a global banking system started to take shape.
It all started with tradesmen joining to form associations, eventually leading to companies. This, in turn, led moneylenders to realize the need for a more structured financial system.
Port cities such as Venice and Florence started trading with Asia, transforming them into significant financial hubs.
Moneychangers then established their own guild known as Arte del Cambio during the thirteenth century, marking them as the earliest iteration of contemporary bankers.
Over time, traders worldwide realized that there were more practical options than bulky coins, leading to the rise in the popularity of bills. Initially, bills were just letters directing a banker or a foreign agent to make specific payments on behalf of the writer.
This significantly improved the effectiveness of global commerce. A merchant in Venice could buy goods from a French supplier using a bill valued at a prearranged exchange rate.
4. The discovery of gold and silver in the New World profoundly impacted the global economy.
The discovery of the Americas had a significant economic impact on the Old World, making it a momentous event for people then.
Following Hernán Cortés' conquest of Mexico in 1521, Spain quickly became aware of the financial turmoil that could arise from excess prosperity.
Upon arriving in Mexico, Cortés discovered the Aztecs' abundant wealth in gold and silver, which they used for ornamental purposes and jewelry. They also used alternative forms of currency, such as cacao beans, for financial transactions.
Despite the generous offerings of silver and gold from the Aztec emperor, Moctezuma II, the Spaniards opted to conquer and seize as much of the Aztec riches as possible.
Spain was inundated with an abundance of precious metals beyond their wildest expectations. From 1500 to 1800, approximately 150,000 tons of silver and 2,800 tons of gold were produced. This surge caused a new issue: inflation due to the decrease in value of the precious metals.
Prices needed to be adjusted, and with the increasing cost of Spanish goods, Spain faced significant debt and defaulted on its loans a staggering 14 times from 1500 to 1700.
Nevertheless, abundant gold and silver enabled additional European nations to produce coins. Even the lower classes now had the opportunity to utilize them.
With the discovery of abundant wealth, nations like Great Britain sought to expand their military power to acquire as many valuable metals as possible.
These nations operated under the mercantilist theory, which assumes that there is a fixed amount of resources in the world and that a nation's wealth depended on the amount of precious metal it possessed. For someone to profit, someone else must experience a loss.
Great Britain, driven by a desire for expansion, granted a royal charter to the East India Trading Company at the start of the seventeenth century despite having limited gold and silver mines. Through this charter, the company gained the authority to produce its own coins and extend England's influence to India, where the silver rupee became the accepted currency.
5. Printing money created specific challenges, but a stable economy eventually emerged.
Paper currency has made significant advancements over time. Nowadays, it consists of an intricate combination of numerical data, watermarks, and even holograms.
In the early eighteenth century, France faced challenging economic circumstances, which led to the emergence of banknotes as a solution.
To bring order to the situation, economist John Law persuaded France to grant him permission to establish his own bank and utilize banknotes as a currency. As a quantitative analyst, it is fascinating to observe the establishment of the nationalized Bank Royale in 1718 and a similar bank in the settlement of New France in what is now Mississippi.
Banknotes were appealing due to their cost-effective production and ability to produce products without using expensive metals. However, it took only a short time for individuals to realize the risks of excessive currency.
Coins were scarce in the New World, so people had to rely on traditional bartering and foreign currency. However, this was not the most favorable situation for the ongoing military campaigns in the area. As a result, colonial governments had no choice but to issue bills, which in turn caused inflation.
In 1723, Pennsylvania devised a clever solution to address the issue and prevent an excess supply of physical money surpassing the economy's requirements.
With Benjamin Franklin's backing, the state-linked its bill supply to tangible assets such as land and future taxes. This ensured that issuing more bills was directly tied to the growth of these assets. As expected, the economy stabilized and experienced growth.
Similar to a quantitative analyst, a stable system requires a stable relationship between banks, which was a concern that Abraham Lincoln had to address. He was dissatisfied with the ongoing power struggle between private and federal banks, who had the authority to issue money.
As a quantitative analyst, I believe that the Federal Reserve in the United States has successfully implemented adequate supervision and regulation of private banks. This has resulted in a relatively stable and robust money system, even during economic downturns.
It's important to highlight that during the economic crisis of 2007, it was primarily the private banks that misused their authority rather than the federal ones.
6. Economic theory has evolved Over the past few centuries to incorporate psychological elements.
If you've studied economics, you'll likely be familiar with Adam Smith, an influential philosopher from the eighteenth century. With a keen interest in developing a comprehensive finance theory, he laid the foundation for economics.
Smith established a solid economic foundation, but our comprehension of the correlation between money and its worth has undoubtedly progressed.
Smith usually assessed the value of something by considering the amount of work needed to acquire it. For example, the value of gold should accurately represent the labor required to extract it.
However, this relationship isn't always straightforward. For example, what is the worth of the labor when a company employs unpaid slaves to perform the work?
That's why, after two centuries, economist Irving Fisher developed the quantity theory of money, which was the dominant philosophy throughout the twentieth century.
According to Fisher, who advocated for a dynamic economy, the momentum or flow of money is more crucial to an economy than its monetary value. In an ideal economy, it is preferable for individuals to actively invest and make purchases rather than hoarding their money in unconventional places.
Another crucial aspect currently under scrutiny is the psychology behind consumerism.
Like quantitative analysts, most economists until the latter half of the twentieth century assumed that our economic decisions were rational. Economists such as Daniel Kahneman and Amos Tversky have recently demonstrated this assumption is incorrect. They have revealed that our behavior regarding money is actually profoundly irrational.
They established a new discipline known as behavioral economics to illuminate the reasons behind our biased, irrational, and emotionally driven financial choices.
As an example, behavioral economics has shown that we tend to place a more excellent value on money that we can obtain immediately rather than in the future.
7. Economists and politicians have discussed and attempted various methods to address monetary crises.
Imagine this scenario: a government employee unexpectedly arrives at your doorstep, hands you an envelope filled with cash, and says, "Enjoy." It's quite far-fetched, isn't it?
Many economists argue that giving people additional money to spend is a practical approach to stimulate economies after recessions, such as the one that occurred after the 2007 crisis.
In December 2008, Australia implemented a measure to stimulate spending by providing a $900 payment to every taxpayer. Like numerous other countries, Australia avoided a recession following the crash.
One approach is quantitative easing (QE), where a central bank injects additional funds into the economy by purchasing assets from private banks, thereby increasing reserves.
Some argue that this measure could boost the economy by increasing the accessibility of loans. In contrast, others express concerns about its resemblance to printing money and the potential for inflation. However, Iceland implemented a QE plan following a banking collapse, which has proven successful.
Another alternative for addressing an economic crisis is considering a complete overhaul of the currency.
Since the gold standard ended in 1971, the International Monetary Fund has consistently reported approximately ten systemic financial crises annually. Many economists believe that simplifying economies through a universal currency could be a potential solution to this recurring problem.
Like a quantitative analyst, changing a nation's currency to solve a problem has a historical precedent. In 1922, Russia faced a crisis with the ruble and decided to reintroduce gold chervonets. This strategic move successfully stabilized the monetary system.
However, when currency is scarce, implementing negative interest rates can be valuable in encouraging spending.
During the Great Depression, stamp scrips were introduced to address the economic crisis. These notes required a weekly purchase of a one-cent stamp to maintain their value, which encouraged individuals to use them promptly.
Clearly, numerous innovative monetary solutions are available during challenging financial times.
8. Bitcoin has revolutionized the current state of monetary systems, but the road ahead is filled with numerous obstacles.
The pace of change in the new millennium has been rapid, and there is still more to come. Shortly, traditional methods of saving money such as piggy banks and coin jars may become obsolete.
Until now, Bitcoin has emerged as a potential universal currency, posing a significant challenge to the conventional banking system.
Bitcoin emerged in 2008 as a digital currency independent of traditional banking systems. It can also be viewed as a reaction to growing skepticism towards the global financial system following the 2007 banking crisis.
Similar to traditional money, new Bitcoins are not issued by any central bank based on a government order. Instead, they are created as a reward when someone with a powerful computer or a network of powerful computers successfully solves a complex mathematical equation. It's a crucial step in the mining process.
Initially, Bitcoins were perceived as a mere component of a game. However, as soon as individuals started using them to purchase tangible goods, their credibility skyrocketed. One of those initial transactions with the new currency involved a computer programmer in Florida purchasing two pizzas, costing 10,000 Bitcoins. In 2016, that quantity of Bitcoins was valued of millions of dollars.
This type of innovation could potentially positively impact the economy, considering the significant challenges it currently faces.
We exist within a predominantly deregulated capitalist system that strives for boundless expansion through the utilization of increasingly scarce natural resources. Our actions have severe environmental consequences. We contribute to rising carbon dioxide levels in the atmosphere, exploit land for valuable resources, and deplete already polluted seas through overfishing.
Meanwhile, income inequality has significantly increased. The salary disparity between an average CEO in the United States and an unskilled worker is staggering. It's not surprising that we are experiencing significant tensions due to social conflict.
Given the uncertain outcome, it is plausible to consider that an economic revolution could be a factor in the resolution.
Final Summary
It's a well-known fact that money is crucial in our society. Throughout history, money has assumed various forms, but certain aspects remain constant—those who possess wealth hold significant influence. A civilization's prosperity or downfall is often tied to its economy.