Quick Class 8: A brief history of money and currency – B1/B2

Why did people create money? How did banking start? What is Fiat money?

Hello! My name is Leonard Willem and I am Historian who has dedicated many years of study to the history of one of the most central entities guiding the lives of nearly all people in civilizations throughout the course of time until today and into the future. I’m talking about money. Just think about it. Can you imagine your life without money? And how did this dependency start in the first place? Let’s see.

Everything started about 9 thousand years BC when people in the middle east had a defining turning point in the life styles. They developed agriculture. The technologies and techniques which made that possible led to people permanently residing in the same places, forming larger settlements and towns, all the while accumulating large quantities of the products they produced.

Farmers were accumulating different products, of course, and then barter, which had always existed, became far more complex. You can imagine how difficult it must have been to keep tabs on who has what and the different amounts and corresponding values among products they traded, such as how much wheat corresponds to, say, a cow or a certain quantity of peas. And in order to organize all this growing complexity, early traders started to look for objects that could serve as intermediary tools for the acquisition of products. Things from animal teeth to sea shells were used until gold was finally established as real money. Gold was scarce, meaning you couldn’t just get some on a beach like sea shells. This meant that prices wouldn’t vary so much because there was a limited amount of gold available. Gold is also easy to carry, it has infinite durability, and it can be divided into smaller fractions, allowing for more complex transactions to take place. And because it’s also easy to store gold, rulers soon began doing just that, which was decisive for the formation of great kingdoms and civilizations.

We then have the first embryos of modern banking about a century BC as response to a problem that we still have today, namely that of debasing the value of money, leading to inflation. The problem at the time was that the coins, usually printed with rulers’ faces on them, started presenting different amounts of silver and gold in their mix, in relation to other metals such as nickel. Simply put, money wouldn’t have an exact value anymore, which would affect prices. Banking itself then starts when paper money is first introduced as a sort of IOU, meaning a signed document from an institution saying it was worth X quantity in gold or silver that was then trusted as such by traders, who in turn moved to storing their own gold and silver in those institutions and getting these papers in return as insurance for when they needed to get their gold back. It’s certainly not difficult to imagine that these documents also served as modern-day currencies.

We can safely assume that banking and currency emerged as a means to protect the value of what was considered to be real money, mostly gold and silver.

And these rare minerals remained as the ideal reference for how much currency should be printed over the course of centuries. The American dollar was no exception. But all that changed in 1971 when a political decision changed the reference for how much currency should be printed from gold to government policies exclusively. This is what is called Fiat money, or, in other words, money which has value solely because a government maintains its value in agreement with all parties dealing with that money in a global scale.

And because the dollar has become the basis for calculating the value of other currencies around the globe, we now live in a truly globalized financial era when the health of the world’s finance is founded almost exclusively on the belief that this system is going to continue working for generations to come. In a nutshell, trust is the fundamental principle defining how much of something you can buy with what’s in your wallet right now.

ACTIVITIES

Match the words and their correct definitions:

A -6; B -8; C -1; D -7; E -2; F -3; G -4; H -5