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Money history

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We all have our funny little ways. One of my idiosyncrasies is a desire to know the history of things. History is inescapable as the present will never be free of the influence of the past. Everywhere you look, you find examples of living history. From the inherited languages we speak, to the ancient traditions we follow, to the modern versions of bygone technology we use, history links the past to the present.

History is certainly not a “dead” subject. Indeed, it’s said that history is the narrative of humankind. History helps explain our beliefs, our values and our behaviours. It tells us who we were, so we know who we are. History tracks our growth and development as a society and provides answers to how people lived.

Until the seventh century BC, humankind lived without money. In the beginning, our ancestors bartered with each other, trading items like cattle and grain. But swapping items of practical value had limitations, so more useful commodities such as metals were introduced as a medium of exchange. Early coins were made from precious metals, but they too had limitations and gave way to paper currency.

As we all know, paper currencies are merely “tokens” in the form of colourful pieces of paper that represent value, but which have no intrinsic value in and of themselves. Nowadays, we understand that money is information (stored in computers and magnetic stripes) and that it can be created electronically with the click of a mouse.

This is exactly what the Australian Government did in 2008 during the height of the Global Financial Crisis (GFC). To stimulate the economy, $10.4 billion was pumped into the pockets of Australian consumers with a few mouse clicks. Other governments around the world created money out of thin air through Quantitative Easing. Central banks simply used a computer to electronically transfer funds to themselves.

Money has a long history and has developed over thousands of years. In The History of Money, anthropologist, Jack Weatherford, takes us on a journey back in time to when money was invented. In doing so, he provides an enlightening account of money’s role - from cows to computers - in shaping human affairs.

As Weatherford’s book is written through the eyes of an anthropologist, it provides a colourful socio-economic account of the evolution of money. We learn that primitive man exchanged cowrie shells, the Aztecs traded cocoa beans and the Anatolian kingdom of Lydia invented coins almost 3000 years ago.

Coins dispensed with the need to weigh gold for every transaction and gave rise to a new market system. This, in turn, sparked a monetary revolution that underpinned classical Greek and Roman civilizations. The Renaissance proved another turning point and brought with it banks and paper money which opened the way for capitalism, overtaking feudalism.

Weatherford identifies the introduction of metallic coins as the first revolution in money. The second revolution was the development of paper money. Not surprisingly, he cites the rise of electronic money as the third revolution. The history of money is the story of the gradual movement away from the immediately useful toward the symbolically valuable.

What Weatherford does not mention is credit creation - the most powerful mechanism used today to make money out of nothing. Today, printing money typically means creating credit and I explained how this works in a previous post. Banks and other financial institutions are the creators of credit money through their lending activities.

Some believe that the primary cause of the GFC was the deregulation of credit creation. This, it is argued, contributed to a dangerous fall in mortgage lending standards which led to a burgeoning growth in debt around the world and ultimately resulted in a global monetary meltdown.

Gold fundamentalists believe that we should turn back the clock to a system where money is based on precious metal. However, in a world of rapidly developing technologies and innovative payment systems using smartphone applications and electronic wallets, money’s destiny is to become digital and virtual.

But that does not mean that cryptocurrencies like Bitcoin will replace fiat currencies. Generating digital money using a computer has found some support among technophiles, but it has not been adopted into mainstream use. I firmly believe that fiat money will remain the currency of choice for the broader populace with Bitcoin as a bit player.

As I have previously opined in this blog, I view Bitcoin as modern-day fool’s gold and a Ponzi scheme. Despite predictions to the contrary, Bitcoin has not established a New World Order nor has it caused major disruption to the payments system. For my money, Bitcoin will remain a bit player in the financial system.

Paul J. Thomas, CEO


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CEO Paul Thomas