Barter — Before physical money was invented, people needed a way to conduct transactions. The barter system was the first form of money. A baker would trade his bread for a table, a wagon maker would trade his wagon for a goat, and so on.
The problems with this system were many: you had to find someone willing to accept your goods in exchange for theirs. Also, relative value wasn’t clearly defined. How many loaves of bread equal a table? Clearly, there needed to be a more efficient way.
The barter system still takes place in many parts of the world. One main advantage is that the government cannot tax barter transactions.
Commodities — In order to lubricate transactions, there needed to be a system in which tangible items represented value that everyone agreed upon. The earliest known commodities were things like seashells, stones, precious gems, silver and gold.
Today, silver and gold are still accepted commodities all around the world.
Receipt money — Even commodities have their limitations. People didn’t want to walk around with a bunch of gold and precious gems, nor did they want to store it at their house, especially if they were wealthy.
They needed a place to keep it safe. To solve this problem, a trustworthy person established the first banking system whereby individuals would drop off their commodities in exchange for a paper receipt that represented the value of their deposit.
Today we still use this system. Receipt money now takes the form of cheques, bank drafts, wire transfers and debit cards.
Fractional reserve receipt money — As more and more people adopted the receipt money system, bank vaults became filled with silver, gold and precious gems. Since receipts were lighter, safer and more efficient, customers had little use for their stored commodities. Bankers realized this and began to dole it out in the form of loans.
The borrower would put up some form of collateral, and in turn would be issued a receipt of debt to be paid back with interest. This way, the banker could make money on other people’s wealth.
This is where all the problems begin. First, bankers were greedy — they issued more loans than they had in reserve in their vault. They would get away with it provided that everybody didn’t take out all their gold at the same time.
The second problem is that it puts more money into the system, which causes inflation. In effect, the banks found a way to print money.
Fiat money — Fiat money is money that is not backed by gold. Prior to 1971, every dollar in circulation represented a percentage of actual gold in a government vault. This was a way to avoid inflation.
After President Nixon severed the ties between money and gold in 1971, the United States no longer needed anything of value in their vaults to print more money. Since then, the value of the dollar continues to plummet. Money is no longer a derivative of gold, it’s now a derivative of debt.
E-currency — We’ve already seen a reduced need for physical cash. Debit and credit cards offer a safer and more efficient way to do business. Coins like the penny are becoming obsolete since they cost more to produce than they’re worth.
Cash has other problems as well: it can be lost, destroyed, stolen, printed, exchanged discreetly, it requires resources to produce it, and you have to continually go to the bank to get more of it when you run out.
If cash becomes obsolete, then naturally e-currency would be the next evolution of money. If all transactions using e-currency are fully traceable, then you couldn’t print any more of it. Inflation would cease, markets would stabilize, the standard of living will improve for all, and the world will prosper.
In addition, if fully traceable, then black market transactions could not occur discreetly. If people no longer feel comfortable operating under the guise of anonymity, then crime and corruption may drop.
This is obviously a very idealistic interpretation. There will always be people who are tempted to hack into some database and add a few extra zeros to their account. If e-currency doesn’t work and the faith in the dollar completely erodes, then we may see a resurgence of the whole cycle starting back with the barter system.
Edward Mullen | Elite.
Edward Mullen is the author of “The Art of the Hustle” and “Destiny & Free Will.” Follow him on twitter @writermullen.