History of money: From fiat to crypto, explained

1.

What is money?

Money as a concept has been a cornerstone of human civilization and economic development. To start with the latter, money is a method of storing value and worth, and it also functions as a medium of exchange that allows individuals to exchange goods, services and proxies thereof. 

Money is fundamentally a unit of account, and it can take various forms, such as coins, paper currency, virtual currency or digital assets. Indeed, money has evolved from simple objects of barter to cryptocurrencies. Nowadays, money in the form of fiat currency is issued by central banks, after which individuals, businesses and other entities use this money for various purposes. 

Today’s money is mainly digital, highlighting the notion that money is ultimately a construct of society. This means that it is ultimately a shared fiction created by humans to facilitate trade and value creation. 

Undoubtedly, exchanging goods, services and proxies can arguably only be facilitated if parties have trust (the opposite of suspicion). It may be enabled by direct trust (if items are directly exchanged) or indirect trust. In that latter case, deals are nowadays enabled via a neutrally perceived yet value-loaded type of entity: money.

If money depends on trust, it has no inherent value. The acknowledgment of people merely determines its worth. This belief gives money its power and makes it an almost ideal medium of exchange. One very early example of this is Yap Island’s unique system of currency known as the “rai stones,” an example of commodity money.

The value of this stone was determined by its history and characteristics. The unique feature of this monetary system is that the rocks were not physically exchanged during transactions. Instead, ownership was transferred through a system of oral tradition and memory as long as the community acknowledged the transfer.

Arguably, money is a product of political institutions, where the state and the central banks have the power to regulate and create money, respectively. Central banks control the amount of money in circulation and may mint new money. While the state’s ability to control money is crucial to its power and authority, human faith in money ultimately helps facilitate this process. 

Apart from the value of money created by trust in the state and the economy, its value is also derived from its need and demand. Ultimately, the notion is that money is scarce and available to us in a limited supply. However, phenomena such as inflation, deflation, stagflation and hyperinflation directly counterbalance the idea that the value of money is constant.