The Evolution of Money – Bane Or Boon?

Today, almost everything in our lives is related to money. No matter how we try to avoid the subject, it still remains as pertinent as ever before. To understand money, I believe we need to look into its history for lessons to learn. Only with that can we translate these lessons into personal meaning for application and prepare for the future.

As many of you know, money began as bartering where people exchanged items they had for things they wanted. For example, a dairy farmer exchanging milk for clothes. As time progressed, people found out that it was hard to measure relative values of an item. For example, how much milk can be traded for a quantity of clothes? Also, it was slow, hard and time-consuming because for personal gain, people would bargain for the best possible trade. This created the need for a more efficient way of transaction, commodity money.

One of the first few forms of commodity money were gold and silver coins. They were used as these were tangible items representing value. As people found this way to measure values of items, trading became much faster. However, another problem arose because carrying too much of them was inconvenient and could attract attention of thieves. This led to the establishment of banking.

To keep these valuables safe, wealthy people began to appoint individuals with the role of safekeeping them. In return, these individuals issued receipts to these wealthy people as a representation that they owned the valuables. Here, money has evolved from something that held value into a derivative of value. With money becoming compact, people just had to trade with paper receipts instead of bulky items like gold and silver. People could also trade in different places as bankers in these places only had to balance the trading accounts between the buyer and seller with debits and credits against the receipts. This greatly facilitated the movement of money from point A to B where it is needed. This was the start of prosperity in many areas as speed of business was significantly improved.

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However, as the bankers held more commodity money like gold and silver in their vaults, they discovered that their clients had little use for them. Here, brilliant individuals brought banking to the next level, from storing wealth to lending wealth and charging interest on the loan subsequently. Now, bankers could earn money from money they did not own.

Naturally, as greed came into the equation, bankers began making loans for money more than what they stored, giving rise to fractional reserve receipt money. For example, lending $2000 in receipts when you only have $1000 worth of commodity money, creating a fractional reserve ratio of 2:1. They then collected interest on this expanded money supply and this greatly increased their profits.

With an increased money supply, people had more money to spend and consumption rose, leading to economic growth according to Keynesian theory. However, this also created economic volatility because some greedy banks loaned out too much money that they were unable to meet the withdrawal requests. This led to the establishment of Central Banks, where there was only a centralized and standardized form of receipt money known as the national currency.

The purpose of Central Banks was to regulate the fractional reserve system. However, these Central Banks were profit-driven private banking cartels, not owned by the government. Solutions implemented to solve problems actually caused them to escalate as these big financial institutions now controlled the money supply of nations.

This fiat monetary system was spread throughout the world by the Bretton Woods Agreement in 1944 which gave birth to the International Monetary Fund (IMF) and World Bank. Fiat money means that only the national currency is accepted as money paid for government bills like taxes. The creation of IMF forced countries to adopt this system to become its member. Naturally, many countries had to adopt this system to gain protection and help from financial superpowers of that era.

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However, the last straw was placed to worsen the delicate and fragile situation brought by the fractional reserve system. That was the severing of the US dollar from gold in 1971. This caused the transition of money being a derivative from something of value like gold into a derivative of debt. The next paragraph will explain this.

Today, when there are bailouts, Central Banks like Federal Reserve purchase bonds issued by the US Treasury and print the money the government needs. Subsequently, they just have to leech the government like a zombie by charging interest on this printed money, money they created out of thin air.

This printed money is the debt of the government and can be printed in unlimited numbers by these Central Banks. This is because printing money no longer depended on the amount of gold reserves the government had after 1971 when the US dollar was severed from gold. All of these means that the government can also engage in unlimited debt which has to be repaid by raising taxes, robbing the poor to pay the rich.

Now, in a world that grows today with increasing debt (caused by increasing money supply), do you think the evolution of money is a bane or boon to us? For this, you could look at the prices of gold and silver (commodity money) and compare it with that of national currencies like the US dollar or Euro. I leave it for you to find out.