We all believe we know about money. But do we comprehend the functions of money, what it is, and what it represents? How and when did the first money appear? Do we conceive of it as a means to assess value? Is it a dependable store of value? Who makes the money that we use? Is this a commodity that can be traded? How does this money connect to our standing, the value of the things we use in our daily lives, the work we expend to obtain them, and the actual economy of human settlements?
When you think about it, they are wonderfully deceptive issues that have deceived many throughout the millennia. Mainly because the answer is so clear: is it, not the penny in your pocket, the dollar bill in its clip, the credit card in your wallet, the cheque in the mail, or the electrical impulse in the computer? Money is all of these and none of them, as it is a means of organizing our lives. But in a specific, arbitrary way: an attempt to fit the often ambiguous features of our experience neatly into numbers that can be measured and compared to conventional units of account, in which everything is evaluated against a sum of money.
A Technique To Manage Trust
Unfortunately, when we think of money (a noun), we naturally think of coins and valuable metals rather than an institution that administers a trust process (verb). We should think about what money does rather than what it is. For the most critical aspect of its nature, money is a technique or procedure designed to manage trust and faith that a creditor will be paid back. One may argue that it serves as the operating system for our economies. To trust is to believe in someone, to credit him, and if s|he is obliged to you, s|he is in your debt (thus, credit and debt) – a fact proclaimed by the Knights of Malta when they imprinted this motto on their coins in 1565: Non Aes, but Fides – Not the Metal, but Trust.
But is it always safe to believe those who issue money? They can be defeated and their government disbanded; they can cheat by clipping the edges of coins to make them lighter and less valuable; they can withdraw the currency or allow it to devalue through inflation. Because they are only sometimes trustworthy, the precious metal in coins was frequently considered to be the actual thing of value and mistaken for the insubstantial process that money symbolizes.
The Concept of Money Is One Of The Most Fundamental Inventions Of Civilized Societies
The coins were never the currency. They merely represent money. They were always tokens. Tokens of trust indicate that a loan will be repaid. And tokens are just tokens, no matter how rare and expensive the metal they contain.
Despite its ambiguous characteristics, reliance on faith and trust, and simplicity with which it can be exploited to defraud, the concept of money is one of the most important inventions of settled societies, for it is one of the fundamental technologies that has enabled considerably larger groups to coexist than was previously conceivable. However, as with all technology, it has two sides, and it may be used to steal and pay.
The Invention of Accounting, Writing, And Numeracy
The answer was three revolutionary inventions: accounting, writing, and numeracy.
(1) Accounting, which could manage vast quantities of tokens, divide them into sections and relate them to their use over time.
(2) Writing, which established a permanent record of the accounting. Clay envelope with tokens. A globular envelope contains a cluster of accounting tokens. Clay, Uruk period (4000-3100 BCE). Louvre Museum.
(3) Numeracy introduced a new concept: number, which could convey quantity without the need to count actual tokens.
(4) Accounting began when several clay tokens were placed in a clay envelope. The envelope was sealed, and tally marks on the exterior indicated the type and quantity of tokens inside five sheep, ten baskets of grain, and seven jars of honey.
(5) The marks were used to record the movement of the tokens, which in turn recorded the movement of the sheep, grain, and honey jars. But something revolutionary had occurred. The abstract marks on the envelope tablets matched the tokens inside, which were no longer tallied but instead read from the envelope’s surface. The original envelope tablets featured impressions of the tokens created by pressing hard clay tokens into soft clay tablets.
Primitive Money Has Multiple Denominators of Value
However, there was still no physical money, no abstract concept symbolizing value, and no coins. There was simply accounting (and auditing, which involved hearing the accounts read out). Generally, there was no need for a unit of account because the actual goods were being accounted for: the baskets of grain, the sheep, and the jars of honey. There was little trade between individuals and no market. The authorities needed to keep track of what was where and when, and whether or not what was intended had been completed. (Much like the command economy of the Soviet Union later on).
However, trade existed, just as it did elsewhere. Timber, precious metals, enslaved people, and perfume from other countries were exchanged for locally produced fabric, pottery, and other items. When there is trade, a money of account is required based on measurement, metrication, and commonly agreed-upon weight units. For example, one weight of silver is worth a particular amount of lumber, while another is for a barley basket. Silver, copper, tin, lead, and barley weights were the most famous value denominators. These weights were even given names, such as Shekel, Mina, and Talent, with 60 Shekels equaling one Mina and 60 Minas equaling one Talent. However, these were not monetary units but rather the weight of silver.
Money As A Universal Scale Of Economic Value—the First Coins
Money, as a universal and decentralized scale of economic worth, was invented long after accounting, and it most likely coincided with the introduction of standardized metal tokens – coins. They also brought markets with them.
The spread of money’s first two components, the concept of a universally applicable unit of value and the practice of keeping accounts in it aided the development of the third, decentralized negotiability—the emerging idea of universal economic value.
Now, money was opening up an even more radical horizon: old social duties might be valued universally and transferred from one person to another. The miracle of money had an equally remarkable twin: the wonder of markets. The creation of coinage enabled the recording and transfer of monetary responsibilities between individuals.
Markets require people to be able to negotiate a sale or agree on a wage on their own rather than entering their preferences into a central authority and receiving instructions on how to act. However, successful negotiation necessitates a common language – a shared understanding of what words imply. To function, markets require a shared sense of value and agreed units of measurement. Not a shared understanding of how much certain items or services are worth – that is where the bargaining comes in – but a shared unit of economic value that allows the haggling to occur. Negotiating market pricing is only possible with a shared understanding of the definition of a dollar, and we should correctly think of money’s value instead of its valuation.
Confusion was exacerbated by the development of coins in the seventh century BCE. Coins are constructed of precious metal for a good reason. Gold and silver are uncommon and so precious. They’re also stable and dense. Their density makes them tiny and portable, unlike Rai’s stone disks. They are also flexible and may be embossed with images, making them easily distinguishable.
So, when the concept of money as a measuring unit of value was transformed into something genuinely valuable, such as gold coins, they appeared to be the actual commodity rather than an intermediate measuring device.
The Development Of Currency
A significant turning point in the history of money was the shift from commodity money to currency. A centralized authority supported a standardized unit of value, represented by currency, usually in the form of coins or paper notes. The Greeks, Romans, and Chinese were among the ancient societies that introduced metallic coins as a means of exchange, promoting trade and economic expansion. Governments and monetary authorities eventually came to control currency issuing, enacting laws and protections to preserve stability and stop counterfeiting.
The Development Of Modern Banking
The emergence of banking organizations fundamentally altered how money was managed, moved, and stored. From the Middle Ages, European banking houses to the current central banks and financial institutions were essential in promoting capital formation and easing economic activity. With the advent of fractional reserve banking, banks were able to generate money and provide credit through loan issuance, which encouraged investment and fueled economic growth. Nonetheless, the risks of fractional reserve banking, such as systemic crises and financial instability, emphasized the necessity of robust regulatory frameworks and efficient risk management procedures.
The Rise Of Fiat Money
During the 20th century, fiat money—a currency backed only by the trust and confidence of the issuing government rather than a tangible asset—became widely accepted. Fiat money facilitated transactions in a more integrated global economy and gave governments more freedom in monetary policy. Fiat money is often in the form of paper money or electronic entries. However, the reliance on fiat money also led to calls for alternative forms of money, like cryptocurrencies, because of worries about inflation, currency devaluation, and the loss of purchasing power.
The Digital Revolution And Cryptocurrencies
Decentralized digital assets based on block chain technology came into being with the introduction of the Internet and other digital technologies. The earliest and best-known crypto currency, Bit coin, established a ground-breaking peer-to-peer electronic cash system that gave users more privacy and autonomy by eschewing traditional financial intermediaries. Since then, the number of crypto currencies has increased to hundreds, each with unique features and applications, ranging from programmable money to means of exchange and store of value.
The Future Of Money
The financial landscape will continue to change due to technological advancements. Therefore, the future of money needs to be more precise and complete of opportunities. With the distinction between physical and digital currencies becoming increasingly hazy, central bank digital currencies, or CBDCs, have the potential to completely change how money is created, transferred, and managed. With the emergence of decentralized finance (DeFi) platforms, financial services will become more accessible to the general public, allowing anybody to lend, borrow, and invest without intermediaries. Furthermore, developments in blockchain, quantum computing, and artificial intelligence have the potential to completely transform the creation, administration, and exchange of money.
In conclusion, money in all manifestations is essential to contemporary economies because it promotes international trade, investment, and innovation. From its modest beginnings as a means of exchange to its present-day incarnations in digital and virtual domains, money’s evolution reflects humanity’s pursuit of convenience, security, and efficiency in carrying out financial transactions. Understanding the dynamic nature of money and its significant influence on our lives, societies, and the global community is crucial as we negotiate the complexity of the modern financial landscape.
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