Money as a concept has been the cornerstone of human civilization and economic development. Money is a method of storing value and also acts as a medium of exchange that allows people to exchange goods and services.
Money is basically a unit of account and can take many forms such as coins, paper currency, virtual currency or digital assets.
In fact, money has evolved from simple barter goods to digital currencies.
Today, money is issued in the form of fiat currency by central banks, after which individuals, businesses and other institutions use this money for various purposes.
Today’s money is largely digital, highlighting the notion that money is ultimately the fabric of society. This means that money is a shared story created by humans to facilitate trade and create value.
Undoubtedly, the exchange of goods, services, etc. can be facilitated only if the parties trust each other.
Money may work with direct or indirect trust. In the latter case, transactions today are enabled through an entity type that is neutral yet value-laden.
If a currency does not have the necessary credibility and cannot be trusted, it has no intrinsic value. It is the recognition of people that alone determines its value.
This belief empowers money and makes it an almost ideal medium of exchange. One of the early examples is the monetary system of the island of Yap, known as “Rai stones”, an example of commodity money that is the largest and heaviest money in the world.
The value of this stone was determined according to its history and characteristics. The unique feature of this monetary system is that stones were not physically exchanged during transactions. Instead, ownership was passed down through a system of oral tradition and memory until the community acknowledged the transfer.
It can be said that money is a product of political institutions, where the government and central banks respectively have the power to regulate and create money. Central banks control the amount of money in circulation and may mint new money. While the government’s ability to control money is crucial to its power and authority, human trust in money ultimately helps facilitate this process.
Apart from the value of money created by trust in the government and the economy, its value also comes from its need and demand. Finally, the perception is that money is scarce and available to us in a limited supply.
However, phenomena such as inflation, deflation, stagflation, and hyperinflation directly undermine the idea that the value of money is fixed.
Together we will check out:
- How did money evolve?
- What was the gold standard?
- What is the difference between the barter system and the monetary system?
- How does monetary policy affect inflation?
- How to determine if a digital currency is inflationary or not?
- What is the future of money?
How did money evolve?
Money has turned from simple barter goods into digital currencies. Money emerged as a means of facilitating trade and cooperation between strangers. With the expansion and complexity of human societies, the need for a common means of exchange became more important.
From a political realist perspective, concepts such as value and property have played a role in human interactions since their earliest days. The first forms of money were barter items such as stones and livestock. These objects were used to facilitate trade and were valued based on utility, scarcity, demand and supply.
With the increase of human settlements and the specialization of the human environment after the agricultural revolution, concepts such as economy, trade and finally money emerged.
The use of commodity money can be traced back to ancient civilizations, where commodities were used as currency. However, it was the emergence of metallic currency as a new medium of exchange that had a significant impact on the evolution of money.
Metal money was an essential tool in the development of centralized political structures and the emergence of modern states. Metal money allowed rulers to build the bureaucracies and armies necessary to maintain control over large territories.
The use of money also facilitated trade and commerce, leading to greater wealth and growth. This allowed for the development of uniform exchange rates, which led to greater economic growth and trade.
In the early days of banking, goldsmiths stored money in gold and other metals in their vaults and issued receipts that could be used as a form of payment. These receipts soon turned into money. People used paper certificates to represent the value of goods, which eventually led to the development of paper money that is still in use today.
Until about 50 years ago, money was only physical. In the modern era, fiat money has become the dominant form of value exchange in the form of digital money using electronic records of bank transactions. Fiat money is supported by the government and the central bank and is valued based on people’s trust in said institutions.
In fact, the government has the power to control the money supply. The government can increase or decrease the value of fiat money through monetary policy, such as printing more money or raising interest rates.
Today’s fiat money is usually not backed by a commodity like gold or tied to a reserve of other physical reserves. Basically, fiat currency is non-convertible and cannot be redeemed for a commodity because it has no intrinsic value.
Money in the digital age has taken new forms such as credit cards, digital assets, central bank digital currencies (CBDC) and cryptocurrencies. Mobile payments and online banking have also become increasingly popular.
Furthermore, since the invention of Bitcoin (BTC) in 2008, cryptocurrencies have challenged the fiat currency system.
The widespread adoption of mobile payment technologies and the futuristic nature of digital currencies have changed the way we interact with money, reflecting the evolving nature of money and its role in society.
What was the gold standard?
The gold standard was used in many countries until 1971. It was a monetary system in which the value of a country’s currency was pegged to gold, meaning that paper money could be redeemed for gold at a fixed rate.
Some believe that abandoning the gold standard caused economic instability and weakened the power of the government. Others, on the other hand, see this shift as necessary for a more dynamic global economy.
The gold standard was abandoned due to its limited monetary policy flexibility. Central banks failed to adjust the money supply to respond to economic conditions. The US dollar was removed from the gold standard in 1971, effectively turning money into a form of debt. Compared to gold, the value of the US dollar has fallen by more than 95% since 1971.
Most importantly, the value of gold reached $35 per ounce in 1971, while its value rose to nearly $2,100 per ounce 50 years later. This difference shows a significant decrease in the purchasing power of the dollar.
This conflict is reflected in many consequences that the government, individuals and society have suffered since then. The cancellation led to greater currency volatility and a lack of fiscal discipline among governments, causing economic instability and inflationary pressures around the world.
In fact, the loss of the gold standard has led to a shift in economic power from the government to the market, further reducing government sovereignty and influence over monetary policy.
In addition, the abolition of the gold standard has hurt the middle and lower classes. Inflationary pressures from a lack of fiscal discipline have disproportionately affected those with less financial means, leading to greater economic inequality.
Others see the abolition of the gold standard as a necessary step towards a more flexible and adaptable world economy, in which state power was not weakened but simply changed due to new tools in the monetary policy toolkit.
In this context, the abolition of the gold standard has allowed for a flexible financial system that enables governments to respond more effectively to economic crises and pursue policies to promote economic growth.
It may also be argued that this change opened up new opportunities for economic mobility and wealth creation through the expansion of credit and the growth of financial markets.
What is the difference between the barter system and the monetary system?
A barter system is a system in which goods and services are exchanged for other goods and services. The exchange system had limitations, such as the lack of a standard measure of value and the difficulty of making exchanges. A monetary system is a system in which money is used as a medium of exchange. Money provides a standard measure of value and facilitates trade.
A barter system was the first (decentralized) form of trade, while a monetary system is a centralized system where money is used as a medium of exchange. Basically, exchange and money systems are common stories created by humans to facilitate trade. Both approaches require the trust and acknowledgment of all parties involved in the transaction.
In the barter system, goods and services were exchanged directly without the use of money or centralized intermediaries. People exchanged the items they had in excess for the items they needed or wanted. This system was common in early civilizations before the invention of money.
Today’s monetary system provides standardized measures of value that make it easier to facilitate trade. In contrast, the barter system lacked a standard estimate of value, which led to difficulty in making proportionate exchanges and transactions.
While the exchange system was largely the product of man, today’s monetary system is also the result of centralized political institutions. For example, states and governments decided to abandon the gold standard and replace it with modern monetary policy frameworks.
Its centralizing feature makes the monetary system vulnerable from different perspectives. In fact, it requires a central ledger that is sensitive to censorship and does not allow for anonymous transactions (unless cash is used).
As the next step in the evolution of money, digital currencies have several advantages over exchange and monetary systems. Cryptocurrency enables very efficient and convenient transactions. Similarly, with today’s monetary system, confidence in the value of money remains an essential element despite high inflation rates and declining confidence in governments and central banks.
Finally, they control access and use of the system.
Unlike both systems, digital currency is open to anyone, offers fast and trustless peer-to-peer transactions, and offers better security and privacy.
How does monetary policy affect inflation?
Monetary policy is the central bank’s process of managing the money supply and interest rates to achieve specific economic goals. If central banks set low interest rates, they make too much money available for lending, which puts inflationary pressure on wages and consumer prices, or vice versa.
Central banks today have found new tools for monetary policy in the form of wholesale CBDCs and retail CBDCs.
One of the main goals of the central bank is to maintain price stability, which means controlling inflation. Central banks do this through their monetary policy, which involves manipulating interest rates to try to stimulate the economy.
Central banks use low interest rate policy to reduce the cost of borrowing money. Eventually, there will be more money in circulation, which means more money seeking the same amount of goods and services.
This causes prices to rise. The other side of the coin is that yesterday’s capital is worth less today. This is called inflation.
When a central bank prints money, for example, through quantitative easing, further inflation or even hyperinflation may occur. This indicates that prices will rise quickly and people will have to bring a lot of money to buy essential goods and services.
As another form of monetary policy, interest rates can also reduce the amount of money in circulation. This may increase economic growth over time. However, it can lead to lower inflation and lower economic growth because less money is available.
Today, wholesale and retail CBDCs can also be used to create monetary policy by setting interest rates on banks’ digital currency deposits at the central bank.
In fact, by controlling the supply of a wholesale CBDC, a central bank can use it as a direct tool for monetary policy. Additionally, a central bank can set interest rates for retail CBDC deposits or impose limits on the number of retail CBDCs held by individuals or companies, effectively affecting the supply and demand of a currency and thus its rate of inflation.
How to determine if a digital currency is inflationary or not?
Digital currencies are a relatively new form of money and depending on the native monetary policy and plan, they can be inflationary or deflationary.
For a digital currency to qualify, supply dynamics, demand incentives, their use, and maintaining its value and stability must be carefully considered.
The monetary mechanisms and supply dynamics of inflation and deflation tokens have important implications for their use and value. If a cryptocurrency has a fixed supply, it tends to be less inflationary because its value is likely to increase over time if demand increases.
Deflationary tokens are adept at incentivizing retention and lowering costs, ultimately leading to increased rarity and faster adoption of the token as a store of value.
This leads to a gradual increase in purchasing power over time. Finally, a reduction in token supply is a barrier against inflationary pressures caused by external factors such as government policies or economic events that lead to inflation, hyperinflation, or recession.
If digital currency has a variable supply, it can be inflationary or deflationary depending on the rate of creation of new tokens and other factors involved. Inflationary cues may provide an incentive for spending and prevent hoarding. These features facilitate the acceptance of such a token as a medium of exchange, along with enhancing its liquidity.
Interestingly, the flexibility of inflation tokens means that the token inflation rate can be adjusted to suit the company’s needs, such as issuing new tokens or for any other reason determined by the company’s tokennomics.
It is also important to mention that the classification of a digital currency as inflationary or deflationary can be subject to different views. For example, the classification of Bitcoin as inflationary or deflationary can depend on several factors.
Bitcoin is considered inflationary due to the constant mining of new tokens and their subsequent integration into the supply.
However, anti-inflationary measures, such as halving, reduce inflationary effects over time. This also applies to altcoins such as Ethereum (ETH).
What is the future of money?
Humanity lives in an era of technologies that make the money development curve a new turning point. With the rise of cryptocurrencies and crypto-wallets, money continues to evolve and become increasingly decentralized, digital and open.
Governments, on the other hand, are strongly entwining their fate with the future of money, which means that the future will make more efforts to establish centralized political governance and binding rules on the use of money.
Money has a long history, from barter to digital currencies. Many currencies around the world are no longer tied to a physical commodity or commodity store.
Instead, they are supported by the government’s ability to manage the economy and control inflation through fiat currencies. The value of fiat currencies today is no longer derived from their scarcity, but rather from people’s trust in the central authorities who mint the money.
Since the abolition of the gold standard, it has become clear that the value and stability of fiat money can suffer from inflation and other factors, including loose monetary and fiscal policies, bad management practices, and gross institutional deterioration.
Certainly, the future of money is closely related to the future of political institutions. Governments and central banks will continue to play a vital role in creating and regulating money.
Money will inevitably continue to evolve and become more digital as new payment methods emerge, including cryptocurrencies and digital wallets.
Admittedly, the use of cash continues to decline as many countries are already moving towards cashless societies, with or without a CBDC. Importantly, this ongoing shift toward digital money has important implications for privacy, security, and economic inequality.
To ensure the security of individuals, new forms of regulation and governance may emerge or a new monetary system may replace the existing system
Time will tell if digital currencies, along with Web3 technology and a new decentralized financial system (DeFi), will bring humanity a complete separation of money and institutional power.
Ultimately, such a separation may lead to an economy without the need for trust and transparency.
