A Brief History of Money

Now that you've had a sneak peek into the enormous body of knowledge that blockchain technology manifests, it is a good time to take a step back and go back to the basics. In this chapter, we'll look at the history of money. If you can grasp how the financial sector reached its current state, then you will better understand why blockchain technology is the natural next step in monetary evolution.

The following topics will be covered in this chapter:

• An introduction to money
• Money – an abstraction of value
• An introduction to fiat currencies
• What happens when fiat currency systems fail
• How blockchain comes into the picture

An introduction to money

A brief discussion of money will help to solidify your understanding of the mix of finance and technology that we have in the world today.

Basically, we should ask ourselves this question: what is money? Let's think about it for a second; we will find that it's not as easy to define as it might seem.

The textbook definition would claim that money has three main functions, as follows:

• A medium of exchange
• A unit of account
• A store of value

If you are still lost with these definitions, we'll be going into more detail about what they mean in the coming sections.

Money as a medium of exchange

Let's look at a simple example of a barter exchange. Suppose that you traded one of your...

Money – an abstraction of value

Now, let's consider the concept of money as an abstraction of value.

Money is as old as human civilization, and civilization itself is reliant on possessing ways through which they can exchange, account for, and transfer value. What once started as barter trade (trading goods for goods) was replaced with using standardized token money.

Gold and silver were the first universally accepted natural choices for money. Actually, they fit the bill so well that they were the primary form of money across the globe for centuries, and have been instilled in human culture. When we say gold, the first thing that comes to mind is value or wealth.

After this came paper money, a more user-friendly way to carry and move around value, as compared to precious metals. China was the first to adopt it, in the seventh century. However, the western world didn...

An introduction to fiat currencies

Welcome to the world of fiat currencies! How does paper hold any value if it's not backed by anything? Well, that's where concepts such as legal tender come in.

The fiat system, which we still use today, has governments assign value to a currency, declaring it a legal tender. This means that a government decides whether a medium of payment will be recognized for financial transactions, trade settlement, or commerce in a country or jurisdiction.

The legal tender concept is just another manifestation of the perception of value characteristic of money. The key difference here is that with commodity money, there is a tangible resource to which the money supply can be pegged. And with fiat money, the money (or the quantity of money in circulation) is a much more discretionary subject to central banks' policies. Therefore, the margin...

What happens when fiat currency systems fail

A fiat currency has value because a government uses its power to enforce that value, or because exchanging parties agree to its value. It's not hard to see how problems could occur in this scenario. Let's look at some examples of when the fiat currency system backfired under the control of irresponsible or corrupt governments, prone to economic and political mismanagement.

At the time of the independence of Zimbabwe from British colonial rule in 1980, the ZWD was worth about 1.25 US dollars. Soon after, inflation started to creep up, and it got completely out of control when President Robert Mugabe began confiscating land from the white farming community in 1998, resulting in a nearly total collapse in food production and the decline of foreign investment.

In order to help pay for the government's expenditures, the Reserve...

How blockchain comes into the picture

Now, it's time to ask ourselves this question—Is blockchain the next logical step in monetary evolution?

"There are 3 eras of currency—commodity based, politically based, and now, math based."

- Chris Dixon

The preceding quote shows how the concept of money has evolved over the years.

Throughout all of these stages, we have had an idea of value in our mind, but it has evolved hand in hand with our civilization and technology, from something that you can touch and actually use; to something that you can touch, but cannot use (except for trade); to just an abstract idea. As you can see, the form has changed, but the idea of value has always remained the same, and we represent and communicate the idea of value in terms of money.

This abstraction of value brings us to the next evolutionary step: digital cryptocurrencies...

Summary

In this chapter, you saw how the idea of money has evolved throughout history, from a more tangible to a more intangible concept, with each stage having its pros and cons. From barter trade, we moved to commodity money, through to commodity-backed paper money, and on to the fiat money that we use now. This was a historical journey, from real goods and commodities to numbers on a computer screen, representing value and money!

In the following chapter, we'll look at how the technologies underpinning Bitcoin emerged, and how they were put to work together. This mix of technology enables value, information transfers, and record-keeping in a decentralized way, without the need for any central agents or middlemen.