The concept of money is something that most of us don’t give much thought to until our adult years, and even then we don’t tend to give much thought to what gives money its value. To understand why alternative financial systems such as Bitcoin are gathering popularity however we need to look back at the history of money to see how it has changed over time to the point where we need an alternative at all.
From Barter to Coins
The concept of money dates back some 5,000 years, and even further back if you consider the bartering culture. The idea of exchanging goods or services based on their perceived value to the individual was the first example of a bartering culture, but this method of exchange can only take a civilization so far. After all, what if you’re a shepherd but no one wants your sheep any more?
Historians think that the first regulated coins appeared in the kingdom of Lydia (in present-day Turkey) in the 7th century BCE. They were made of electrum (which is the name of one of the earliest Bitcoin wallets), a natural mixture of gold and silver, and were shaped like beans. The benefit of this system was that the coins could act as a middle man, meaning there was no longer a need to swap goods directly - the coins would do in their place and would always be accepted for any other good or service.
These coins were reimagined in silver and gold centuries later, and, thanks to the explosion in international trade, the concept of a central currency was expanded to all corners of the trading world. Ancient Romans took the idea of a currency and, in the 6th century, began to fashion the coins out of leather and animal hide, a practice that expanded to Carthage (now France) and Russia.
The Birth of Banking
Paper money is thought to have originated in China, which is fitting given that China invented paper itself, during the reign of Emperor Zhenzong (997–1022). Coins of various compositions grew alongside paper money over the next few hundred years, although the bulk of the paper money that existed in the world was in fact promissory notes (promises to pay specified amounts of gold or silver) which were key in the development of banks.
The 17th and 18th centuries saw the advent of modern banking, a practice that started in London when wealthy merchants began to store their gold with the goldsmiths of London, who owned private vaults and charged a fee for their service. Of course, such a practice still exists in banks and safety deposit providers all over the world today. This emergence in such practices brought the Bank of England into existence, and in 1695 it became the first recognised bank to issue banknotes. These started as handwritten promissory notes but by 1855 the bank was issuing non-named standardised printed notes of denominations as low as £20 and as high as £1,000.
The Gold Standard
The Bank of England was able to issue these notes because of another key development - the gold standard. 100 years after it first got into the banknote printing game, the bank realised that printing limitless amounts of currency was damaging its inherent value. To curb this, its directors decided it needed its new currency to be backed by something. In 1821 it chose gold, and the ‘gold standard’ was born.
In the gold standard (which of course can be interchanged with any asset a country desires), the value of the pound would be kept at the value of a fixed quantity of gold owned by the bank. This had the effect of increasing confidence in international trade by preventing governments from excessively issuing currency while also reinforcing the perceived value of currencies that adopted such a standard.
The idea of the gold standard grew, and by the early 1900s other countries including Germany, France, and the United States had adopted the gold standard too. However, the system had its drawbacks, which were soon exposed.
The Great Depression (1929–c. 1939) was the start of the end for the gold standard, as governments realised that their efforts to expand (and pay for wars) were hampered by their currency being tied to a solid asset. They needed to free themselves from these shackles if they were going to compete on the world stage, and the concept of fiat currency was born. No longer would governments need to have their currency backed by a physical asset - their word and reputation was good enough, and they soon took on debt in order to issue more money and expand. As of August 31, 2020, the total national debt of the U.S. was a staggering $26.70 trillion.
Fiat Money Takes Over
The UK ditched the gold standard in 1931 while the U.S. began the process of removing themselves from it in 1946, coming off completely in 1971 in a move still known as the Nixon Shock. Spoiler, there were more shocks to come as far as that particular president was concerned.
Nowadays, fiat currencies are based on nothing but the faith in the government using it and the central bank issuing it. The U.S. dollar is still the world’s reserve currency, although the value of the currency itself has been devalued since it first solidified into a single sovereign unit in the early 1900s. The Nixon Shock exacerbated this devolution as did the amount of printing done to cope with the impact of the coronavirus - almost a fifth of all U.S. dollars ever created were created in 2020 alone, with the resultant dilution of its value.
When money printing goes unchecked, hyperinflation can sometimes be the result. Such instances have occurred numerous times in the past 100 years, from the German Weimar Republic in 1923 to Zimbabwe in the late 2000s when the country began issuing notes as high as 100 trillion Zimbabwe dollars, which could buy you a loaf of bread.
Bitcoin Leads the Digital Revolution
Around the time when Zimbabwe was issuing these remarkable bills, something else remarkable was taking place. The blueprint for a digital currency, the first of its kind, was being dreamed up by a person or group of people going by the name Satoshi Nakamoto. The currency, of course, was Bitcoin, and it was designed to be the antidote to fiat currency. Where governments and central banks controlled fiat currency, no single entity would control Bitcoin; where fiat currency had no maximum limit, Bitcoin would have a strict limit of 21 million; where central banks could ratchet up their money printers when they wanted to stimulate an economy, Bitcoin’s supply mechanism was strictly controlled and the issuance rate would halve every four years.
There is a reason why Bitcoin is hailed by its supporters as the future of money. It has been specifically designed to be trusted, rare and deflationary while still acting as a method of payment, which is the perfect way for a currency to retain its value. If the value of a fiat currency comes from faith in its issuing body then Bitcoin has a very good chance of surviving longer than some fiat currencies out there.
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