A brief history of money (1 steem bounty available)

Money is used by everyone, all the time. Yet when asked what money is almost nobody can explain how or why it works? Is it a service of the government, a technology, a protocol or a shared illusion? To some extend all of these are correct. In the following I will look a into the history of money to find out.

Barter

A few thousand years ago before the invention of money humans exchanged products that were useful for other useful items directly. A chicken for an axe or a working on building a house for a few meals. All of these items or service are valuable because of their direct properties and the exchange was value for value. Of course trading was difficult and no bigger economy can be build on barter. Humans provided most of their goods for themselves and mostly traded excesses. There was little specialisation.

The first types of money

At some point people decided to use special items as a way to communicate value. In the mountains sea-shells were rare and could be used as money. Close to the sea other items were used such as carefully engraved stones or rare minerals. These items were not valuable because of their physical use cases. If you were isolated and had a bunch of them you could as well have thrown them away. Their usefulness was based on a common agreement that these items represent value. When you trade a sheep for some seashells you know that later someone else will sell you a house for the same seashells. Here lies the real invention. Instead of trading raw value people are now able to trade virtual value. The money is an abstraction of value, a technology to communicate value without a physical exchange of goods.

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These types of money obtain their value from the agreement on a common protocol on how to communicate value. For this to work they need to have a few key properties

• The item needs to be durable
• The item needs to be rare or very hard to craft
• The item needs to be hard to forge and everyone needs to be able to individually verify their authenticity

As soon as an item fulfils all of those society can adopt is as a primitive type of money and that will happen due to the usefulness of having a money. Everyone that adopts this money will be better of, it is a social protocol where everyone participating wins.

Money allows specialisation. It was no longer required to produce for personal consumption, everything can be traded and value can be stored. This is a crucial pillar for the rise of civilisations.

Gold

Gold is very much in line with the older types of money but it has the perfect natural properties to be used as a money.
Gold is extremely durable and does not age. It is rare and can only be obtained in special locations at a huge effort. It is cannot be forged and everyone can individually verify that an item is gold.

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It is no surprise that everywhere in the word gold was adopted as money. Our trust in gold goes so far that we believe that gold is intrinsically valuable. But apart from the use as money there is not that much you can do with gold. The value of gold relies only on the common idea that gold is valuable. If that is broken it will be as valuable as the early type of sea shell moneys. Gold is an abstraction of value.

Coins

Coins add a new feature to raw gold. They come in standardised quantities. This is a huge advance for commerce; no longer needs gold to be weighed and individually judged on purity.

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However, now the value does not only rely on individual verification, part of that duty is outsourced to the mint. It becomes possible to forge coins, adding copper or removing little parts of the edges (thus the riffled edges of most coins, making it harder to shave of parts unnoticed).

Paper Money

Paper money is the next step of development. Instead of trading gold, paper is traded that represents gold. We now have gold that is an abstraction of value and paper that is an abstraction of gold. The advantage of this technology is that paper is very light and large amounts of value can be transported with no effort. The gold is kept securely in a bank that issues the paper money and promises to pay out if requested.

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While this is an advantage in everyday life, the property to individually verify money is almost completely lost. You need to trust that this paper is a valid certificate and that the issuer is actually holding enough gold.
It is no surprise that this was not always the case and banks often had only few percent of the gold that they issued in paper certificates.

Fiat money

Fiat, or 'let it be' money, removes the double abstraction of paper money. Instead of having paper that represents gold that represents value, we now have just paper that represents value. The term 'let is be' is a bit misleading as gold was already a fiat money.
The real criticism of fiat is not that it is fiat, but that paper is lacking all of the properties that once made gold a perfect money. It is not that durable, value cannot be individually verified and it is forgeable. And most importantly, it is not limited at all.

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Fiat money cannot work without a government behind it. That government needs to guarantee the authenticity of the issued money and make it illegal to print money as a private person, artificially creating scarcity. When you have a fiat bill, you now trust that this is a valid government bill and that they take good care of the monetary supply.
The obvious question is why should we do all of this effort, just to reproduce the properties gold always had without anyone needing to guarantee it?

The answer is that with gold there cannot be special rights. Gold is limited for everyone, but with fiat the government may create more money. This gives the government a lot of power that they can use to impact the entire economy.

Digital money

Because paper was never a crucial ingredient in fiat money, a natural idea is to replace paper bills with electronic information. Now we are able to pay people without having to meet them in person, allowing entirely new business models.

But is comes at a big price. The user can now no longer verify any part of their money. They use a bank to tell them how much the have and have to trust that bank with all of their savings. There is no option to remove the money from the banks, you can only shift it from one bank to another.
Furthermore, we can also no longer individually pay money. We always need an intermediary that can verify our money to make that payment. This allows massive controll over our financial freedoms. While we ourselves are now fully verifiable, we cannot verify the banks.

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In addition to already trusting the government with our fiat money we now add the banks. And these use their new power and are in fact officially allowed to create new digital money. Never before did private businesses hold so much power over money.

Since the early age of gold all technological developments have made it harder and harder to verify that what you use is actual money. Money has been made forgeable so that some people (governments and banks) can bypass the natural limitations that once made gold valuable.

Cryptocurrency

Cryptocurrency is a monetary revolution that reverts power over money back to the people. It is digital but much closer to gold than fiat money:

• It is limited
• It is permissionless
• It is unforgable
• It can be verified indivudally
• It is a unit of account
• It is digital
• It can be send over any medium of communication
• It can be stored in the brain
• It has no central special power or authority

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Cryptocurrency combines all the favourable properties of gold and digital money and adds a few additional ones. Just as gold has been adopted everywhere, we will see cryptocurrency becoming the major form of money due to its intrinsic properties.

Money finally is what it always should have been, not more and not less. It is not a material, it is not a form of oppression or controll. It is not a way to make a few special people rich and it is not the solution to all problems that exist in the world.
Money is finally a simple form of communication, an expression of value. Backed by nothing or nobody. And we only trust in ourselves and in mathematics to make this possible.