What Is This Thing Called Money?

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By definition, money is “any article or substance used as a medium of exchange, measure of wealth, or means of payment.”

Money makes complete sense to us today but it has taken us around 3,000 years to get here.

Prior to money, bartering was the means by which people exchanged goods or services. Bartering involved a direct trade and required finding another person or community who wanted or needed the goods or services being offered.  It worked but not always very efficiently.

For example, a man has an extra stone axe he’s willing to trade for help with killing a mammoth. In order to barter successfully, he has to find someone who thinks an axe in exchange for facing a six-ton beast is a fair trade. If not, then the axe man has to find something else to barter with or find someone who is willing to face a dangerous creature in exchange for a stone axe.

As human societies became more complex, the efficiency of bartering needed to improve. And it did with the development of commodity currency — items that just about everyone used and wanted, such as livestock, seeds, salt and weapons.  Moving to commodity currency allowed for increased trade opportunities.

For example, in the Middle Ages, European merchants traveled around the world to barter their crafts and furs for exotic silks and perfumes. And, of course, there is the story of one of the most famous commodity exchanges of all time: the island of Manhattan in exchange for goods worth 60 Dutch guilders.

But there was also a downside to commodity currency. Certain commodity items were perishable, such as seeds and grains. If transporting them or storing them took too long, they could perish. Transporting these items could also be difficult. And the value of these items was still negotiable.

Bartering and trading did work and both methods still exist today.

So where does money come in?

In around 600 BCE, the king of Lydia (part of present-day Turkey) was the first to mint official currency. The coins were made of electrum, a mixture of naturally occurring gold and silver, and stamped with pictures that denoted denominations. The advantage of minted coins was that the seal assured the weight and authenticity of the coin, and the weight of the metal determined the coin’s value.

However, coins and precious metals could be stolen. The solution was to store precious metals in temples. It was reasoned that a temple is where the gods lived and no one would steal from a god.

When someone deposited precious metals or coins with the temple, the priest would give the depositor a paper receipt for the amount deposited.  Obviously, these paper receipts were easier to carry and store than the actual gold or precious metals, and these receipts entered our society as “money.”

Eventually, banks and governments replaced the temples and currencies were based on the promise of gold and silver in exchange for the paper receipt. Under this system, governments could not increase the money in circulation without also increasing the gold reserves. The system lasted up until the 20th century.

While a number of countries still hold gold reserves, no country currently backs its currency with gold. In the U.S., the gold standard was abandoned in 1933, and the link to gold in exchange for paper money was completely severed in 1971, moving the U.S. currency onto a fiat money system (the dollar’s value is not tied to any specific asset).

That’s a brief evolution of how money came to be an accepted method of exchange that we all recognize. The next obvious question, though, is where is it headed in the future?

We are already seeing some of the changes in money with the advances in digital technology. Credit and debit cards have begun to effectively replace cash and checks. Cryptocurrencies and blockchains now exist and mobile apps are beginning to disrupt payment cards. As societies change, so will our money. But what won’t change is our need to understand and manage it.

At LegacyShield, we believe part of a person’s legacy is creating, preserving and passing along knowledge and life lessons, including financial responsibility and sensible money management. LegacyShield has been designed to help individuals protect and secure their legacies for future generations to benefit from this wisdom.

 

 

 

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