DeutschThe history of the financial system as we know it today goes back many millennia. The roots of money lie in the barter economy. Person A owns something that Person B wants. Person B, in turn, has goods and merchandise that are useful to Person A – the same applies, of course, to services that can be exchanged for goods or other services. How does Bitcoin fit into the history of money?
History of Money: it all Began with the Barter Economy
Over time, this exchange-based system or the different systems that established themselves worldwide over time (interestingly, often independently but in parallel with each other) developed into the money system. The history of money, in turn, is characterized by many stages of development, because, as always, people were and are striving to achieve perfection. And so our early monetary and payment systems undoubtedly had some weaknesses. These weaknesses were the focus of constant development. One problem was always the determination of value, because, for example, natural products such as shells or stones as means of payment had.
The Established Financial System is also Susceptible to Manipulation
At the latest, when it came to trade between countries or empires with different systems, there was regularly a lack of necessary standards. Today, everything has its fixed defined value, but central and central banks in their role as state currency guardians have opportunities to influence. A good example in recent years has been the repeated interventions by China to positively influence the value of the national currency Renminbi in favor of the domestic economy. The US has repeatedly criticized the practice surrounding the Chinese currency. The US government was concerned that the People’s Bank of China was distorting competition in the global economy. This should only be a brief excursion into the present time at this point.
Systems around the World Had to Mature more and More
Let’s get back to the history of money. Until the commonly used means of payment such as bills, coins or even digital payment models such as credit cards and payment service providers emerged, there were almost endless attempts to develop functioning systems. Difficulties within the barter economy were mainly caused by one fact. In order to find someone who is looking for exactly what a provider is offering, it often took a lot of time. It was sometimes also necessary to cover long distances so that a hoped-for trade could come about at all. Because it was by no means certain that there was a suitable interested party in the immediate vicinity for the desired business. It was therefore obvious to invent means of exchange that we know today as money. In addition to the shells and stones mentioned, numerous means were commonly used around the globe as exchange instruments.
History of Money: many Materials Were Used for Barter
Some of this seems strange in the modern digital world. Whale teeth, for example, or the shells of snails should be mentioned here. Grain as a means of exchange sounds much more familiar and comprehensible to us. The times in which people paid with teeth or other means of animal origin are historically far less far back than some readers may think. For example, in several regions of the African continent, payments in the form of so-called “cowrie money” were common until a few thousand years ago. This refers to the shells of the snail species of the same name.
Precious Metals Were the Next Step in the Development of Money
It took a whole (long) while before humans made the value of precious metals the basis of the monetary system. In addition to some European countries, states in the Middle East were responsible for this development. Gold and silver were at the forefront of all metals. Gold still plays a major role in the monetary system today, even if the term “gold standard” is now less well-known than it was a few years ago. Precious metals were ideal because they were available in a wide variety of sizes and, above all, in limited quantities – although this was not as well known in the past as it is today. Due to the different sized parts, precious metals allowed the acquisition of more or less expensive goods.
The Success Story of Gold Began in What is Now Turkey
According to historians, the first people to use lumps of gold as a means of payment were based in Lydia. This development dates back to around 700 BC. Lydia, by the way, is located in the western region of Turkey as we know it today. What was important was that the means of payment bore the likeness of the respective king. In trade, this emblem also served as an indication of the authenticity of the coins. The switch to precious metals was, in a sense, a milestone. However, it took several more centuries for coins to emerge as an instrument for payments. For global trade, the trend represented a dramatic relief.
China Laid the Foundation of Today’s Monetary System
A next significant step towards what we know today as paper money occurred, as with many civilizational developments, in China. Long before there was an alternative to the emerging coin money in the Alpine Republic of Switzerland or the land of poets and thinkers, i.e. Germany, for example, Chinese traders recognized the disadvantages of heavy coins as a means of payment. The local approach. Chinese traders handed over their reserves in gold and other precious metals to the state/government – around the beginning of the tenth millennium of our current era.
In return, they received something that can best be understood in trade as a kind of credit note, receipt or proof for future commercial transactions. Ultimately, this laid the foundation for the system of banknotes that has been in place for centuries.
History of Money: Europe Needed more Time for Progress
For comparison: It took significantly more than 500 years before the European continent also discovered money in paper form for itself. Paper money had the main advantage of being lightweight. Thus, the path of this money variant quickly prevailed. The essential basis for this is undoubtedly that people were able to agree on the concept worldwide over time. And it is precisely this acceptance that is important then as it is today so that our monetary system can function at all. The reason is quickly given. In the actual sense, paper naturally has no high value of its own. The fact that all participants believe in the equivalent value of banknotes is the basic condition for them to be used at all. Without acceptance, no system can prevail.
Once again, a lot of time passed before paper money took the form of banknotes. But it was foreseeable that there would be further development. Born out of necessity. Because one of the sticking points with cash is, among other things, the high wear and tear. On the other hand, there are the relatively low costs in the context of production.
Money Users Must Believe in and Trust the Systems
And the high importance of the belief in the established system and how fragile it still is today was also demonstrated several times in the 20th century. In the years after the First World War, for example, the German central bank reacted to high required reparations payments by having those responsible turn on the money presses on a large scale – the result was extreme inflation, in the course of which massive devaluation of money occurred. Large parts of the population lost their assets at that time, precisely because money ultimately has almost no value anymore.
Inflation Concerns are not a Purely Problem of the Past
And even today, countries like Turkey or Argentina are examples of the consequences that an inflationary downward spiral can have. The precious metal gold, on the other hand, will continue to become more expensive in the coming years, because it is only available in limited quantities. Even in the current situation surrounding the pandemic, many economic experts warn of the dangers that the far-reaching rescue programs with additional amounts of money could have for the global economy.
Credit Cards – Triumphal Procession Took its Course from the USA
As far as the emergence of digital financial systems is concerned: It was not least the first credit card companies that ensured a shift towards the digitization of the traditional monetary system. The practical plastic cards were the first important step away from pure payment with cash. The concept emerged as early as the end of the 19th century – of course in the USA. Initially, it was primarily hotels that created a means of customer loyalty by issuing cards. Later, department stores and gas station operators also recognized the advantages of the cards. Refueling or shopping in the supermarket? More and more people are paying cashless and even contactless. For the EU, for example, there are studies that say that not even a tenth of all euros used are in circulation in the form of cash.
Number of Cash Transactions Declining for Years
More than 90 percent of all transactions are processed digitally or electronically. Here, by the way, there is a parallel to stock market trading. There, so-called floor trading has been in retreat since the beginning of digitization to a similar extent. In Europe, it is mainly consumers in Scandinavia who are emulating the USA’s example with regard to cashless payments.
Bitcoin – the Starting Signal for a Completely New Market
Thus, for many experts, it was only logical that digital payment systems would develop sooner or later in addition to the state-controlled systems. And here we are not talking about digital payment service providers that are linked to the traditional currency and banking system. The first digital currency in the world: Bitcoin. The concept was invented by the developer Satoshi Nakamoto, around whose identity many rumors and speculations still revolve today. Currencies based on a so-called blockchain and similar technologies usually function largely decentrally – i.e. without a clear controlling authority, as is the case with fiat money, for example, banks. The communities in the field of digital currencies mostly work self-regulating. Participants in the systems control each other. The fact that Bitcoin is the logical consequence as a further development in the digital age is also and especially due to the fact that many people are dissatisfied with the banking system and the high costs associated with it.
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Cryptocurrencies get by Completely without (Central) Banks
Most of the thousands of cryptocurrencies now allow cheap transactions – even across national borders. This is exactly the strength of modern financial systems. They start where the interbank sector reveals obvious weaknesses for users. Members of the crypto communities meet on an equal footing and are generally not dependent on third parties to make payments and receive money in this way. High account fees are also eliminated by the digital wallets (“wallets”). In addition, systems such as Ethereum even allow the conclusion of a wide variety of contracts, so that in the future it will probably no longer be a problem to (sell) buy real estate without notaries and banks, for example. A whole range of projects of this kind are already active. The possible applications are basically endless.
People without Access to Banking are Particularly Crypto-Friendly
The beneficiaries of the “next big step” towards Bitcoin and Co. were and are in particular people in regions of the world without comprehensive good banking systems. In many countries such as Nigeria, most people have a smartphone, but not necessarily their own bank account. Via mobile device and wallet, funds can be sent around the globe relatively cheaply in seconds using cryptocurrencies such as Bitcoin. And that is exactly what was overdue in many countries, because banks are still unable to offer adequate services to many groups of people or do not want to for reasons of lack of return hopes.
Bitcoin for many Investors a Safe Haven like Gold
Something else is also recognizable as a new approach to Bitcoin. From the outset, the system had been limited by its developer to an amount of around 21,000,000 units. There are similar approaches with many other cryptocurrencies. This limitation ensures that Bitcoin is not only a flexible means of payment, but is also becoming an increasingly popular speculation and investment object for more and more investors. Investors of the first hour who acquired Bitcoins or parts of coins in the early phase for little money and sold them during the high phases of the Bitcoin (BTC) price development often became millionaires. And even today, risk-loving Bitcoin fans are offered opportunities again and again. And the prospects for digital currencies are still rosy. Most recently, some renowned service providers such as PayPal announced their entry into the crypto market.
More and more Countries are Working on State Digital Currencies
States such as China (but above all a number of smaller states) are also reacting to developments in the private sector by investing in the blockchain themselves or developing their own state digital currencies. According to many forecasts, consumers will probably not only be able to use francs or euros to shop in stationary or virtual trade in just a few years. A number of industries are gradually jumping on the successful model of cryptocurrencies, which began in 2009 with Bitcoin. After all, more than a digital wallet and access to the various networks is not necessary to become part of one or more crypto communities. Bitcoin continues the history of money.
Only a Matter of Time until Bitcoin and Altcoins Arrive in Everyday Life
The fact that more and more central banks have to develop their own ideas is therefore only too obvious. An important step will be state regulations. Because many investors are still afraid to get involved because they are afraid of data misuse and losses. In a few years, there should not be much left of these concerns if the industry continues to grow so rapidly towards the mainstream. And the prospects are particularly favorable in the current crises – not only the Corona pandemic is meant here. The globalized world needs new systems that can meet the requirements for transnational payment and investment models. No wonder that many representatives of the banking world are increasingly urging that the classic financial industry should also break new ground – in line with the previous history of money.
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