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The Price of Progress - A Closer Look at Our Financial System

An Examination of How We Got Here

Introduction to Bitcoin & Stablecoin

An Examination of How We Got Here

  • Barter
  • Commodities
  • Coined Money
  • Metal-Backed Paper Currency
  • Fiat Currency
  • Cryptocurrencies
  • Are we headed in the right direction?
From the days of bartering goods to the modern era of digital currencies, money has undergone a fascinating evolution. Our forefathers used shells, beads, and even livestock as a medium of exchange. Today, we have virtual wallets and contactless payments. It's a remarkable journey that has seen countless iterations, trade-offs, and adaptations to meet the ever-changing needs of society.
But how has the money we use evolved to become the indispensable part of our lives that it is today? In this section, we will explore the evolution of money, from its earliest forms to the modern digital currencies we use today. We will delve into each major iteration of money, looking at how they have helped shape our modern society.
A quick note: It’s important to highlight that this section is not necessarily a chronological account of the evolution of money. Instead, it is more of an educational journey on the rise and fall of different forms of money. Many of these mediums of exchange have existed simultaneously, and some still exist today in some way, shape or form.
After reading this introduction, you might wonder: Why does money need to evolve and change over time?
The answer is simple: our needs and wants change as society and technology advance. And as our needs and wants change, how we use and value money changes, too. For example, in ancient times, people relied on bartering to exchange goods and services, but as societies became more complex, it became clear that a standardised and portable form of currency was needed. This led to the development of coins, which were eventually replaced by paper money and, more recently, digital currencies. Each iteration of money has its pros and cons, and as technology and society continue to evolve, we will most likely see even more changes in how we use and value money.
Understanding this concept of monetary evolution is important because it helps us see how money has changed over time and how it might continue to change in the future.
With this in mind, let's take a look at the primary forms of exchange that are either in use today or have been used at some point in the past.
  1. Bartering: The exchange of goods or services directly without the use of money.
  2. Commodity Money: The exchange of an agreed-upon commodity that is deemed to be of value, such as salt or sea shells.
  3. Coined Money: The use of precious metals, such as gold or silver, in the form of coins as a medium of exchange.
  4. Metal-Backed Paper Money: Paper money backed by a physical commodity, such as gold or silver.
  5. Fiat Money: Currency that is not backed by a physical commodity but rather has value because a government declares it to be legal tender.
  6. Cryptocurrencies: Digital or virtual tokens that use cryptography to secure transactions and control the creation of new units.
With these in mind, let's examine each one to gain a more holistic understanding of how we ended up where we are today.

Barter

Bartering! It's a simple concept: you trade something you have for something you want or need.
But is it practical?
The problem with bartering is that finding someone who wants what you have and has what you want can be challenging. For example, imagine you're a wheat farmer in need of a new shirt. You might have to search far and wide to find a shirtmaker willing to trade a shirt for your wheat. But what if the shirtmaker doesn't want your wheat? This problem is known as the double coincidence of wants. A successful transaction requires a double coincidence of wants, meaning that both parties must have something the other wants to trade.
Another problem with bartering is that it can be impractical for certain items. How would you split a live cow to trade for a pair of shoes? And without a standardised unit of account, comparing the value of goods and services is tough. Is a cow worth more or less than ten sacks of wheat or two rolls of cloth?
On top of all that, many goods and services are perishable and lose value over time. So if you're relying on bartering as a means of exchange, you must continuously trade and consume your goods and services to avoid a loss of value.
Despite these challenges, bartering is still used in certain situations. You'll often see barter used during online marketplace transactions, or in countries where the currency has failed to offer a store of value, people seek to store value in goods. That said, it is not widely accepted.
All in all, barter may have been an effective and widely used method to trade goods in ancient times, but it had one major flaw: the "coincidence of wants." In other words, for a successful barter exchange to occur, two parties must have something the other wants. This can be a real headache and lead to many fruitless negotiations. Thankfully, we have moved beyond barter and have developed better ways to exchange goods and services.

Commodities

As barter started to show its weakness in trade, individuals and economies alike desperately needed an alternative. Fortunately, with the emergence of commodities as a medium of exchange, our needs were satiated... temporarily. By pre-defining a commodity everyone recognised as valuable, we had our first form of money that acted as an intermediary to reduce trade friction.
The great thing about selecting a pre-defined medium of exchange was that communities could select something that offered scarcity and didn't spoil, making it a more durable store of value. Things like glass beads, salt, and seashells quickly became sought after as they were counted, fairly durable, and portable in sacks. Salt, in particular, was popular because it had utility - curing meats, among other things.
However, as travel became easier, the world started to open up, and people recognised that scarce resources in one area were abundant in others. This led to exploitation, dilution of supply, and triggered events like the slave trade. For example, European settlers exploring Africa saw that the local communities were using glass beads as a form of money. Baffled, due to the ease of glass production in Europe, settlers would bring large amounts of these beads to Africa, diluting their value. Some would even argue that this dilution was one of the triggers that ignited the slave trade, which contributed to the collapse of the African economy.
Overall, commodity money played an essential role in the development of trade and commerce, as it provided a standardised means of exchange that was widely accepted. However, as societies became more advanced, other forms of money that were more convenient and divisible began to emerge.
To solve these problems, people began searching for commodities that had globally recognised scarcity, which gave rise to the use of precious metals as a medium of exchange.

Coined Money

While still technically commodity money, as humans continued their quest for superior money, they stumbled upon an unexpected hero: precious metals. Not only were these metals beautiful and coveted for their use in jewellery, but they also ticked many of the boxes for what makes an excellent monetary asset. Their globalised scarcity in nature and the significant investment required to mine, refine, and store these metals gave them a premium above other previous forms of money.
Moreover, metals such as gold were one of the most inert elements in the periodic table, making them extremely durable and corrosion-resistant.
As technology progressed, gold and silver underwent a transformative process, being melted, shaped, and stamped into coins, increasing the ease of exchange. The standardised value and markings on these coins notably decreased the costs associated with verifying the weight and purity of precious metals. But, as with most good things, someone always finds a way to take advantage. Coin clipping became rampant, with both individuals and governments clipping portions of the coins to reduce their weight of precious metal while attempting to retain their original face value. This led to the first form of currency devaluation, leading to inflation.
To make matters worse, as the world became more global, gold and silver became increasingly cumbersome to transport and transact with, especially for seafarers.

Metal-Backed Paper Currency

Enter metal-backed paper, a solution to the considerable costs of transportation and risks of loss associated with precious metals. But, as we will see, this solution had its own challenges to overcome.
We've come a long way from the days of bartering and trading goods. With the advent of monetary metals, we finally had a stable store of value that could be used universally. But it was the introduction of metal-backed paper currency that really revolutionised the way we transact.
Think about it: no more lugging around heavy bags of gold or worrying about theft. Instead, individuals could deposit their gold at a warehouse and receive a receipt they could trade just like physical gold. This enhanced the fungibility, divisibility and portability of money, making global trade significantly easier. These receipts could then be easily transported over long distances, making it possible to conduct international trade without incurring significant transportation costs. Although it took a little while for metal-backed paper as a form of money to take off, with the expansion of the British Empire, it quickly became the norm.
But as with any new technology, issues began to emerge.
First, gold warehouses, recognising that their customers rarely came back to withdraw the gold that the receipts laid claim to, started issuing paper receipts with no gold backing, leading to the covert creation of the first fractional reserve banking system (issuers only hold a fraction of customers' deposits as reserves and lend out the rest). And even when countries tried to back their currencies with gold, they often abused the system, leading to economic turmoil.
Second, metal-backed paper money was not immune to counterfeiting. Even with security features, counterfeiters could still create fake notes that could be difficult to detect.
Although metal-backed paper currency had its fair share of problems, its enhanced fungibility, divisibility, and portability paved the way for the convenience of fiat currencies we use today, where practicality often trumps scarcity.

Fiat Currency

Fiat currencies have been the foundation of our monetary system for decades. The term "fiat" is Latin for "let it be done" and refers to the state's authority to declare a currency as legal tender. Unlike currencies once backed by gold or other valuables, fiat value comes from the government's promise that someone will accept it in exchange for goods and services.
Fiat currencies emerged as countries faced frustration around metal-backed paper currency– governments would have to obtain more gold to print more paper money. This was a hindrance, so whenever a country needed capital, it would temporarily abandon this peg and expand its monetary supply. This new currency was backed by nothing but faith in the government owing to the fact that it was legal tender. Not only that, this new currency devalued the remaining currency in circulation by inflating the supply of money, and with more dollars chasing the same amount of goods, prices rose.
The demise of metal-backed paper currency started at the tail end of World War II. With much faith in the US, global leaders met in Bretton Woods, New Hampshire, and determined that the US would peg their dollar to gold and the rest of the world would peg their currency to the dollar. This meant that most of the world's gold poured into the US for safekeeping, depleting many countries of their domestic gold reserves.
Fast forward to the late '60s and early '70s, the US, feeling restricted by its backing to gold, started to expand their money supply to fund the war in Vietnam. France was not happy about this and demanded their gold back. This caused a rush for gold, and as the US had printed significantly more dollars than the gold it had available, it quickly dropped this peg altogether. This event, known as the Nixon Shock, meant that individuals and countries could no longer redeem their dollars for gold. From this day on, we saw the proliferation of fiat currencies– a currency that is backed by nothing but debt and our faith in the government.
However, monetary evolution didn't stop there. With advancements in technology, fiat currency has continued to evolve. Today, digital transactions have become increasingly common, with internet banking and digital payment systems like Visa, Mastercard, Paypal, Square, and Venmo becoming the norm.
And in more recent years, we have witnessed increased discussion around central bank digital currencies (CBDCs), the newest iteration of fiat currency, offering a wholly centralised and programmable version of our traditional fiat currencies.
CBDCs differ from the fiat currencies we are used to because they give the issuer total visibility into all transactions and the ability to decide who can and can't use the currency. Governments and central banks have been vocal about their ambitions of introducing CBDCs, citing benefits such as centralised control, improved transaction efficiency, and the ability to deposit stimulus checks quickly.
While CBDCs offer many advantages, they also come with some serious potential drawbacks. For example, governments may be able to freeze bank accounts arbitrarily, put time limits on our cash to promote consumption and restrict who we can and can't transact with.
Moreover, the potential for a transition towards digital identities is becoming more prevalent, as seen in China with their CBDC and the introduction of social credit scores, which have impacted freedom throughout the country by preventing access to housing, financial institutions, and basic mobility rights.
As CBDCs are largely untested, we cannot say for sure what the pros and cons will be. However, we can be sure that CBDCs give governments and banks immense control over our monetary system.
Fiat currencies have certainly undergone significant changes in recent times, largely driven by the rise of the digital economy. To meet the evolving needs of consumers, fiat currencies have adapted accordingly. However, with the emergence of CBDCs, we must remain cautious of their potential drawbacks despite their benefits in terms of speed and efficiency.
With this in mind, individuals who have witnessed the erosion of purchasing power and rising government control alongside the proliferation of fiat currencies have started exploring alternative options.

Cryptocurrencies

Imagine a world where your money could be stored and exchanged digitally without any need for intermediaries or trusted third parties. A world where the supply of money was tamperproof, scarce and in the hands of the community rather than governments or banks. This is the world that the leading cryptocurrency, Bitcoin, has created since its inception in 2009.
Bitcoin was born out of a cryptographer's quest to create a new and improved version of our beloved monetary metals. They were looking for digital gold, a monetary asset that could store value, offer durability, and be used for digital transactions. And thus, Bitcoin emerged as the first successful, digitally native, and scarce monetary asset.
What makes Bitcoin truly unique is that it is a digital bearer instrument, meaning there is no need for intermediaries or trusted third parties. The monetary policy is controlled by those participating in the ecosystem, making it impossible to dilute or tamper with in the same ways that were endemic in previous forms of money. And as Bitcoin exists outside the control of governments and central banks, it is quickly becoming widely adopted as an alternative monetary system because it cannot be manipulated.
Since its inception, Bitcoin has continued to grow in its acceptance and adoption as a monetary good. In fact, it is currently growing at a rate of 137% per year, compared to 76% for the growth of the internet at the same age. And while other cryptocurrencies have been introduced in recent years, none have challenged Bitcoin's status as a superior monetary good.
Some naysayers claim that Bitcoin is slow, expensive to transact with, and wastes energy, but let's not be so quick to judge. What if we told you that Bitcoin represents a paradigm shift in the way we think about money and value?
In the coming modules, we will explore Bitcoin through an alternate lens, one of objectivity and intrigue. So bear with us.
In the meantime, while central bank digital currencies may be viewed as Bitcoin's direct competition, many argue that they are no different from any other digital fiat currency except for frightening political and social implications.
As we continue to move towards a world of programmable money, Bitcoin remains in a league of its own. Its supply cannot be diluted or expanded, it has the largest network effects and user base, and its value proposition and security will continue to strengthen as the network grows. And while it may not be the newest digital currency, it offers something far more valuable: true sovereignty over one's own money.
That said, although digital currencies represent a new frontier in the evolution of money, offering a high degree of security, privacy, and convenience, they also come with their own risks and challenges, which must be carefully considered before adopting them as a form of money.
After examining the different forms of money throughout history, this brings up a pertinent question:

Are we headed in the right direction?

Throughout this journey, we have explored the fascinating evolution of money, tracing its evolution from bartering to our current digital age. We have seen various currencies rise and fall, from shells and beads to precious metals and fiat money.
However, as we have seen, the path of monetary evolution has not been without its challenges. The rise of coin clipping and currency manipulation, the move towards centralisation and away from a generally accepted medium of exchange are just a few examples of the obstacles we have faced along the way.
As we move forward into the future, we must ask ourselves, how will currency manipulation continue to affect our financial well-being?
And, although it is clear we have prioritised ease of use as we have transitioned from barter to commodities to digitalised currencies, should we rethink what characteristics we value most in the perfect form of money?
These are complex questions that require careful consideration and reflection. However, one thing is clear - the future of money is in our hands. We have the power to shape our money, ensuring that it serves the needs of society rather than simply the issuer or our governments.
As we continue our exploration of the world of money, it's important to acknowledge the significant changes that have taken place since the rise of fiat currencies. While these currencies have brought a level of convenience and stability, they have also presented new challenges, such as inflation, rising debt levels, and wealth inequality. In the next section, we will delve deeper into these issues, and in the following modules, we'll explore potential solutions to these tricky problems.