Money. Money is what we all want. Money is what we all need. Money decides how we live. Money decides what food we eat.
But, in our busy lives, have we ever thought about what money is actually?
The 10 dollar bill that you have in your pocket, the gold ring that you’re wearing in your hand, or the plastic card in your wallet?
“All money is a matter of belief” — Adam Smith
While money seems so common today, humanity did not start with money. As we all know, we started with barter. People used to take what they want by giving what the other person wants. In basic economic theory, we call this “double-coincidence of wants.“
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Double Coincidence of wants
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But soon, people figured out that the system is flawed. They would not always find someone who has what they want and is also willing to take what they have. Plus, there were other problems like portability and divisibility — a cow is not very portable and cannot be divided into smaller pieces to buy anything.
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Barter System
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So people started thinking,
“What is that everyone wants, is portable and divisible?”
Seeds! Dried Corn! And various other commodities.
This seemed like a good option, but the problem is that seeds get perished over time. If the value that your possessions have become zero in some time, why would you want to store your wealth in them?
So what is something that everyone wants, is portable, divisible and can be stored for a long time?
Metal. These commodities acted as currencies for a long period of time. Metals like gold, silver, and bronze had all the above properties and were scarce, which gave them their value.
When people had problems storing the metal coins, they deposited it with temples who then gave them a receipt which was a proof of ownership.
The receipts soon changed into paper currency and the temples were replaced by governments. Paper currency was easier to store and carry for most people. But who was keeping this gold? The government, of course.
Till this point, the paper currency held its value because it is backed by something scarce like gold. This is called the “Gold-Standard.”
So why don’t we see the gold standard today?
Nations started getting richer and wealthier day by day. If this rise in wealth was not complemented by an increase in the money supply (by printing more money of course), the nations would enter a deflationary situation. However, to print more money they had to ensure that all their currency was backed by gold.
Source: Shivendra Misra
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