The history of money: understanding, change and challenges

Today, when you think about what money actually means and what role it plays in each individual’s life, it is noticeable that it is far more than just coins or bills. It is the invisible bond that combines business, politics and society. Controls our actions, influences markets at global level, divides nations, leads to wars and conflicts and hasprofound impact on daily life. In this context, it is indispensable to understand the origins and development of money in order to be able to better classify today’s financial systems. Because only those who know what money really is can also see through the mechanisms behind current trends and crises. This endeavor is not an easy walk, but a real oneAdventure that takes us through the millennia and traces the evolution of a concept that has a significant impact on our world.

The beginning: commodity money in the early days

Let’s imagine a trip back to ancient Mesopotamia, about 3000 years before our era, in one of the cradles of civilization. Here, in the fertile Zweistromland, people began to live in labor-sharing societies that were increasingly dependent on trade and exchange. The basic idea was simple: people wanted to exchange their goods for others, but exchanged thatIn itself was anything but comfortable. A simple example makes this clear: a grain farmer, let’s call him Gunar, is returning from the market. His wife Atnae asks him: “Did you buy the fish for dinner?” Gunar replies: “Unfortunately not. The fisherman didn’t want grains, he wanted to.” Atnae further asks: “And the wool dealer?” Gunar says: “He came later.” Atnae sighs: “ThenCould you have told the fisherman that he could buy wool with your grain!” Gunar explains: “He was already gone.” Atnae closes: “Tz. You should have given him a voucher.”

The birth of the commodity money

This small scene shows the first attempts to use goods as a means of payment – i.e. the so-called commodity money. Everything that was scarce, valuable and easily replaceable became a medium of exchange: mussels, salt, grain, cattle. Over time, people discovered that certain goods were particularly well suited in their scarcity and value to use as a general means of paymentserve. Soon silver became popular in the region because it was available everywhere and was easy to shape. The commodity money was the first form of money to simplify trading because it provided a common basis for exchange. This development marked a crucial step in human history because it was the foundation for more complex economic systemslaid. The transition from pure barter to a form where certain goods were accepted as standard was a milestone on the way to our monetary system today.

The Great Progress: Coin Money as a GameChanger

But the commodity money was not ideal. It was hard, impractical and not always easy to transport. Imagine you want to buy a house. Would you actually carry cows or big sacks of grain with you? That would hardly be practical. In the 7th century BC, a groundbreaking idea came up: King Kroisos of Lydia, the famous ‘Reiche’, invented standardized coinsPrecious metal, with his seal. This made trading enormously easier because people could now use coins that had a fixed value and were recognized everywhere. A fictional dialogue could look like this: Kroisos asks his treasurer: “How do we make my gold money?” The treasurer answers: “People weigh it, but you don’t make a profit.” Kroisos thinks: “Thenwe have to take the weighing from them!” The Treasurer suggests: “Stamp coins, standardized, with your seal. Request a fee for comfort. Then you can count instead of weighing – and you earn money.”

The origin of state coins and trust

This idea was a real breakthrough. It was the first form of standardized money issued by the state or a central authority and with a seal of trust. However, this also began the hierarchization of the monetary system: there were the donors, i.e. the rulers or states, and the users, i.e. the citizens, traders and farmers. It was essential for usersTrusting this money because without this trust it would have no value. This principle is still fundamental today: Trust is the basis for the value of money. But if trust is always there is a risk of abuse, and if trust is shaken, the system can collapse. Then as now, this is a big challenge. The coin was paid within lessCenturies to the dominant means of payment that replaced the old commodity money. It was a milestone that simplified trade and accelerated economic development. It reminds of digitalization in today’s world: New technologies are changing the basics of money quickly, and perhaps we are experiencing a similar revolution through digital money that is onBlockchain technology based.

The paper money: Innovation and Chaos

In the 11th century, the clever Chinese brought another innovation to the market: paper money. They had already invented the printing press, about four centuries before Europe, and were able to make money in the form of paper notes. Initially, the paper money was mainly used by dealers to bridge short-term bottlenecks in the event of a lack of metal. Later, the states took it over to theirmanage finances. The emperor promised the value of the bills, but at some point people began to print too much, probably to finance wars. The result was hyperinflation: The value of a Kuan, once worth 1000 copper coins, fell to just 0.28. The devaluation was 357,000 percent – a total collapse of the system. There were similar problems in Europe. 1716Scottish financial expert John Law tried to introduce paper money in France. The economy flourished at first – but then the bubble burst. This was followed by a massive crash, in which the stock exchanges collapsed by billions and many people lost their assets. Law itself had to just barely save itself from a lynch-like mob. These crises show how vulnerable the system is when itis not well controlled and how quickly trust in money can be shaken.

The age of book money

Let’s start into modern times: In the 17th century, the so-called book money was created. This is money that only exists as a digital number in the banks’ accounts. It is a form of financial management where no physical coins or bills need to be moved. This was a revolution that greatly simplified money transactions. In a fictional scene in a bankIn Amsterdam in 1619, a bank manager could say: “The city of The Hague needs a loan of 4,200 guilders.” The cashier replies: “We only have 3600 guilders in the cash register.” The bank manager asks: “How much is taken on average per year?” The cashier explains: “Never more than 20 percent.” You can then see that the bank with only a fraction of its deposits has multiple loanscan forgive. The so-called partial reserve system was born. Today, the reserve rate is only 1 to 3 percent, which means that banks with comparatively little equity can create enormous loan amounts. This is the basis for the modern monetary system, which is based on trust and digital bookings. In 1971, the American government lifted the dollar’s gold bond.Since then we have lived in the age of fiat money, i.e. money that only retains its value through trust in the spending institutions. This step opened up the possibility of creating unlimited new money. This has advantages and disadvantages. On the one hand, states and central banks can react flexibly to economic challenges, on the other hand, if the handling is wrong, there is a risk ofInflation, over-indebtedness and even a financial crisis.

The risks of fiat money: hyperinflation and financial crises

A look at history shows that the fiat money system repeatedly reaches its limits. An example is the Weimar Republic in 1923, the mother of all inflation. After the First World War, Germany was forced to pay enormous reparations in gold. But the economic situation was desolate, and the government began to print en masse paper money to get the debtspay. This led to hyperinflation, which surpassed everything that had been seen before. In January 1923, a loaf of bread cost 250 marks, in November of the same year it was 200 billion marks – a trillion fold. The people who were paid their savings daily saw their assets sink to zero. The money was worthless, and many petty bourgeoisie lost everything. in return forIt was inflation not only an economic catastrophe, but a personal disaster. This hyperinflation also paved the way for political radicalization and the rise of extremist movements.

Financial crisis of 2008

Another extreme example is the 2008 financial crisis, triggered by greed, speculation and confidence in a fragile system. Banks had given en masse loans to people who could hardly afford them, so-called subprime loans. Many of these loans were so called because they were given to people without income, without jobs and without collateral. theBanks are counting on constantly rising real estate prices to justify their business. But the real estate boom came to a standstill, interest rates rose – and many borrowers could no longer pay their installments. There were foreclosures and the bladder burst. The banks had to write off billions of debts, the stock exchanges collapsed and the world economy fell into a seriouscrisis. The central bank in the USA, the Federal Reserve, should have intervened, but she was on vacation. Trust in the financial system broke, and it took years for the markets to recover. This example shows how vulnerable a system is based on unlimited trust and what damage can cause false incentives and greed.