3 November 2011 WHAT IS THE HISTORY OF MONEY?
My daughter came home from school this week with a project entitled “What is the history of money?” I proposed she email Ben Bernanke or Barack Obama because they would clearly know, but she gave me a blank look. Once we had researched the issue it was clear to her that money has taken many forms over the thousands of years. Fiat money is a particularly peculiar version. As it is often noted, if gold has no value then how can thousands of trees be cut down, turned into paper and then covered in green ink, be worth billions of dollars?
Wikipedia states: “Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills these functions can serve as money.
Money originated as commodity money, but nearly all contemporary money systems are based on fiat money. Fiat money is without intrinsic use value as a physical commodity, and derives its value by being declared by a government to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for "all debts, public and private". The money supply of a country consists of currency (banknotes and coins) and bank money (the balance held in checking accounts and savings accounts). Bank money usually forms by far the largest part of the money supply.”
The use of barter-like methods may date back to at least 100,000 years ago, though there is no evidence of a society or economy that relied primarily on barter. Instead, non-monetary societies operated largely along the principles of gift economics. When barter did occur, it was usually between either complete strangers or potential enemies. By the beginning of the 20th century almost all countries had adopted the gold standard, backing their legal tender notes with fixed amounts of gold. At the Bretton Woods Conference in July 1944, most countries adopted fiat currencies that were fixed to the US dollar. The US dollar was in turn fixed to gold. In 1971 the US government suspended the convertibility of the US dollar to gold. After this many countries de-pegged their currencies from the US dollar, and most of the world's currencies became backed by nothing more than the governments' fiat of legal tender and the ability to convert the money into goods via payment.
This fiat system is fine until people begin to distrust the Governments and their central banks. The US Fed solution to the current crisis is to print more money and increase liquidity or money supply to offset the negative impact of the bursting of the bubble in the US housing market. It seems the ECB will now follow course. Ultimately lack of a gold standard allows them to do so. The aim is to keep everyone in the life they have become accustomed, but the sustainability of this goal in the longer term is very doubtful. Inflation is an inevitable consequence to the printing of money.
It has to be said that Scott is looking down the track ahead right now. The inability of governments to force the increased money supply to circulate is highly deflationary in the short term but ultimately (and that means when US and European banks have plugged the $ 3-4 trillion and $ 5-6 trillion holes in their respective balance sheets) any small pick-up in the velocity of a money will end up having a huge impact because of the increased money supply unless you believe that central banks can suddenly and painlessly take away all that they have created!!