History of Money

Money has been part of human history for at least the past 5,000 years in some form or another. Before that time, historians generally agree that a system of bartering was used. Bartering is a direct trade of goods and services. After bartering was phased out, the different forms of money evolved like cowrie shells, metals, coins, paper money etc.

The first standardized metal coin was created in China sometime around 640 BCE. Hundreds of years later coins were replaced by paper money, The Chinese moved from coins to paper money around 1260 CE. Parts of Europe still used metal coins as their sole form of currency until the 16th century. Paper money(fiat) is referred to as currency issued by the central bank of a country.

The Gold Standard

The Gold standard was a period where the world used the amount of gold stored in your reserves to determine the value of currencies.

The Gold standard was established in the 1800s. Under this rule, currency printing was permitted based on the amount of gold a country had in its reserves. The gold standard is a monetary system in which the value of a country's currency is directly linked to its gold reserves. This monetary system lasted until it was modified after World War II in 1944. The Bretton Woods Agreement established a system under which gold was the basis for the US Dollar and other currencies were pegged to the US Dollar value. The agreement involved representatives from 44 nations and brought about the creation of the International Monetary Fund (IMF) and the World Bank.

This system was abruptly suspended on August 15, 1971 by US president Nixon with a reintroduction of the fiat standard. This action was known as the Nixon shock and marked the period where Nixon took the US and essentially the world off the gold standard and back to the fiat system.

What is Fiat Money?

Fiat money (or fiat currency) is government-issued currency which is not backed by traditional forms of value or commodities like gold or silver. It is backed by the strength of the economy of the issuing Government. This makes fiat money inflationary by design since it is not backed by any commodity and created at will.

Fiat currency could be viewed as “monetary colonization” as one country's money and monetary policies, the United States, is the main influencer of all other countries globally. You may have noticed this when you observe that global currencies are often compared to the US Dollar, GDP value quoted in USD etc.

The history of money is still being written. The system of exchange has moved from swapping animal skins to minting coins to printing paper money, and today, we appear to be on the cusp of a massive shift to electronic transactions with central bank digital currencies and decentralised money like Bitcoin.

In the below infographic created by Killer Infographics and Mint.com, it gives a well-detailed breakdown of the evolution of money.