Finance: The History of Money (combined)

Summary

This script offers a concise history of money, from its early forms like whale's teeth to modern digital currencies. It explores the evolution of money through metal coins, paper money, and the concept of debt. It discusses the significance of trust in currency value, the impact of money supply on inflation, and the role of money in international relations and banking. The script also touches on the power dynamics of money and speculates on the future of currency in a digital age.

Takeaways

• 🏔️ Early Money: Before money was invented, people bartered goods and services and used tally systems to keep track of exchanges.
• 🐳 Whale's Teeth IOU: As communities grew, people used objects like whale's teeth as a form of IOU to facilitate trade and store value.
• 🏺 Metal Money: Metals like gold and silver were used for coins due to their portability, durability, divisibility, and intrinsic value.
• 📉 Debased Currency: Rulers often devalued their currency by reducing the metal content or mixing cheaper metals to create more money.
• 📜 Paper Money: The Chinese invented paper money as a lighter alternative to metal coins for long-distance trade.
• 🔗 Gold Standard: Paper money's value was linked to gold to create a standard for exchange rates, but this was eventually abandoned for flexible rates.
• 🏝️ Yap Stone Money: The Yap islanders used large stones as money, which led to a form of banking when promissory notes were issued against the stones' value.
• 📈 Money and Inflation: The influx of gold from Spanish colonies led to inflation, illustrating the relationship between money supply and prices.
• 🌐 International Money: The British forced American colonies to use pounds, leading to the American Revolution and the creation of the US dollar.
• 🏦 Fractional Reserve Banking: Banks can lend more money than they hold in deposits, a practice known as fractional reserve banking.
• 💵 Money Creation: Banks create money through loans, while governments can create it by issuing bonds, affecting the economy differently.
• 💸 Power of Money: The US dollar retains its value through trust and the widespread holding of dollar assets, despite not being backed by a physical commodity.
• 💳 Future Money: Digital currencies like Bitcoin are emerging, potentially challenging traditional government-backed money.

Q & A

What was the primary method of exchange before money was invented?

Before money was invented, people exchanged goods and services in small communities, relying on memory and tallies to keep track of who owed what.

Why did people start using objects like whale's teeth as a form of money?

As communities grew and exchanges became more complex, people used objects like whale's teeth as IOU tokens to facilitate trade and store purchasing power for future use.

What were some of the drawbacks of early forms of money like barley, shells, or feathers?

Barley was heavy and not portable, whale's teeth weren't divisible, shells were not scarce, and feathers had little intrinsic value, making them impractical for trade outside of local communities.

How did metal coins become a standard form of money?

Metal coins were introduced by rulers who minted them with an emblem that guaranteed their weight and value, making them durable, portable, divisible, and useful for trade beyond local communities.

Why did early Chinese rulers introduce paper money?

Chinese rulers introduced paper money as a more convenient alternative to carrying large quantities of heavy metal coins, particularly for long-distance trade.

What role did trust play in the use of paper money?

People trusted that paper money was worth what it claimed to be, as it could be exchanged for the gold, silver, or coins it represented, even though the paper itself had no intrinsic value.

How did fractional reserve banking change the banking industry?

Fractional reserve banking allowed banks to lend out more money than they had in deposits, as long as all depositors didn't ask for their money at once, significantly increasing the money supply.

What led to inflation in 16th century Spain after acquiring precious metals from the colonies?

Inflation occurred in Spain because the influx of new precious metals increased purchasing power, but traders raised prices, meaning the additional wealth did not result in better economic conditions.

What is the significance of the US dollar as a reserve currency?

The US dollar became the most widely used reserve currency due to America's vast trade network and stable tax base, with many countries, including Britain, holding large reserves of dollars.

What could signal the importance of new digital currencies like Bitcoin in the future?

A sign that digital currencies like Bitcoin have become important would be if governments started accepting them for taxes or if banks began lending in them, indicating broader financial integration.

Outlines

00:00

💸 The Evolution of Money

This paragraph traces the history of money from its early forms to the invention of metal money. Initially, small communities could manage exchanges through personal memory and IOU notes. However, as communities grew, a more reliable system was needed. People began using objects like whale's teeth as a form of IOU. The introduction of metal money solved issues of portability, divisibility, and durability. Kings minted coins with emblems to guarantee their value, but this led to debasement of currency for profit. The paragraph also discusses the transition to paper money, which was easier to carry and trade, and the concept of linking paper money's value to gold to establish a standard for exchange.

05:00

🌐 International and Digital Money

The second paragraph delves into international money, starting with the British Empire's imposition of the pound on its American colonies, which contributed to the American War of Independence. It then discusses how the American dollar became a global reserve currency. The paragraph also covers the development of banking, from basic lending to the concept of fractional reserve banking, where banks lend out more money than they hold in deposits. The 2007 financial crisis is mentioned as an example of the consequences of this system. The paragraph concludes with a discussion on the two types of money: that created by banks and that created by governments, and how governments used 'outside money' to prevent a global financial meltdown post-2008.

10:03

💡 The Future of Money

The final paragraph speculates on the future of money, noting the decline of physical currency in favor of digital transactions. It introduces cryptocurrencies like Bitcoin and Linden dollars, which possess the traditional characteristics of money but are not yet widely accepted by governments or banks. The paragraph suggests that the acceptance of these digital currencies by authorities would be a sign of their importance. It also raises questions about the power dynamics of money control and the potential uses of that power.

Keywords

💡Early Money

Early money refers to the initial forms of currency used in human societies before the invention of formal monetary systems. It often consisted of items like shells, whale's teeth, or barley, which served as a medium of exchange. In the video, it is mentioned that these items were used in small communities to keep track of debts and credits. Early money was crucial in facilitating trade and recording transactions, but it was limited in its portability and divisibility.

💡Debt

Debt is an obligation or liability that arises when one party receives services or goods from another in exchange for future payment or repayment. The video explains that debt was invented alongside money, as IOU notes represented a promise to pay back a certain amount at a later date. Debt is intrinsically linked to the concept of money as it allows for the extension of credit and the facilitation of trade.

💡Metal Money

Metal money refers to coins made from precious metals like gold or silver that were used as currency. The video highlights that metal money had several advantages over other forms of early money, such as being portable, durable, and divisible. Kings would mint coins with an emblem to guarantee their weight and value, which helped standardize the currency and facilitate trade across communities.

💡Debasement

Debasement is the act of reducing the precious metal content in a coin while keeping its face value the same, thus making money by circulating coins worth less than their face value. The video mentions that sovereigns would debase their currency by using cheaper metals or reducing the size of the coins, which led to inflation and a loss of trust in the currency.

💡Paper Money

Paper money is a type of currency consisting of banknotes that are issued by a country's government and circulated as a medium of exchange. The video explains that paper money was introduced to reduce the burden of carrying heavy metal coins. It was initially backed by gold or silver, but over time, the link to precious metals was severed, and today, the value of paper money relies on trust in the issuing authority.

💡Gold Standard

The gold standard is a monetary system where a country's currency is directly linked to a fixed amount of gold, meaning that the government would exchange paper money for gold at a set rate. The video discusses how attempts to peg currencies to the gold standard continued for centuries, but the need for flexible exchange rates led to its abandonment in the early 1970s.

💡Controlling Money

Controlling money refers to the management of the money supply by a central authority, typically a government or a central bank. The video describes how on the Pacific island of Yap, the chiefs controlled the currency by accepting a certain type of stone as tax, effectively controlling the money supply. Controlling money is crucial for economic stability, but it can be challenging when private lenders are involved in creating money.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. The video illustrates this concept with the example of Spain in the 16th century, where an influx of gold and silver from the colonies led to higher prices, demonstrating the relationship between an increase in the money supply and inflation.

💡International Money

International money refers to currencies that are widely accepted for use in international transactions. The video discusses how the British pound was forced on American colonies, leading to trade imbalances and contributing to the American War of Independence. The establishment of the US dollar as a global currency is highlighted, showing how it became the most widely used currency and led to other countries holding reserves in dollars.

💡Fractional Reserve Banking

Fractional reserve banking is a banking system where only a fraction of customer deposits are kept as reserves, and the rest are used for lending. The video explains that banks realized they could lend out more money than they had on deposit, as long as not all depositors requested their money at once. This practice allows banks to earn interest on loans while paying lower interest on deposits.

💡Cryptocurrencies

Cryptocurrencies are digital or virtual currencies that use cryptography for security. The video mentions cryptocurrencies like Bitcoin and Linden dollars, which exhibit characteristics of money such as being hard to forge, durable, portable, divisible, and limited in supply. Cryptocurrencies challenge traditional government-backed money and may represent the future of currency, although they are not yet widely accepted by governments or banks for transactions.

Highlights

Early money was based on IOU notes and objects like whale's teeth.

Invention of money coincided with the creation of debt.

Metal money emerged due to the need for portable, durable, and divisible currency.

Kings minted coins with emblems to guarantee weight and value.

Debased currency was created by reducing coin size or mixing cheaper metals.

Paper money was introduced by early Chinese rulers for long-distance trading.

The value of paper money was linked to gold to create a standard for exchange.

The world moved away from the gold standard in the early 1970s.

Control over money supply is crucial for economic performance.

The Yap island used giant stones as a form of currency.

Inflation can occur when there's too much money chasing too few goods.

The American War of Independence was partly caused by British currency control.

Fractional reserve banking allows banks to lend more than they have on deposit.

Governments can create money by selling bonds, adding to public debt.

The US dollar retains value due to global faith in its stability.

Digital technology enables new forms of currency like Bitcoin.

Government and bank control over money raises questions about its use.

Transcripts

The history of money in ten minutes

number one early money

Long before money was invented people were quite happy making doing and growing things from one another

in small communities they could largely

remember the payments and receipts of what was exchanged

keeping tabs or

tallies of these exchanges helped with a key requirement which was to record who

had been paid and who was still owed but as communities grew so the exchanges

became more and more numerous and as people created things for the common

good and rulers began to impose taxes so the accounting was increasingly hard to

keep track of

IOU notes might have been a neat solution but unless you knew the

individual issuer personally they were hard to enforce or verify

so instead people started to use objects such as whale's teeth as a kind of IOU

This intermediate step in the exchange process meant that people were free to

trade with anyone and they could even store up purchasing power for later use

with their REIT ratable IOU tokens so at the same time that humans invented money

they'd also invented debt

Number two

metal money

Once people start using

money to facilitate trade whether in the form of shells barley feathers or

whale's teeth some useful characteristics of money become apparel

barley for example is heavy to carry so not portable or even durable.

Whales teeth neither are to split into two so not easily divisible shells can be picked up

on any Beach so not exactly scarce and if the token standing as money doesn't

have much intrinsic value like feathers it's hard to trade outside your immediate community

Another noticeable feature of money was that having a lot

of it made you powerful and power could get you a lot of it so kings hit on the

idea of minting coins from precious metals sounding them with an emblem that

guaranteed their weight and value metal money ticked all the money boxes

and because it had intrinsic value that could be used to trade with other

communities but the success of metal money brought temptation and sovereign

soon realized that by slimming down the coins or slipping cheaper base metals

into the mix they could make money by circulating debased currency worth less than face value

Number three

Paper money

Carrying around large quantities of coins could be exhausting work and it was early Chinese rulers

that hit on the idea of keeping their heavy coins back in the palace of

issuing IOU certificates on paper for long distance trading.

Although the paper had no intrinsic value people trusted that it was worth what it said it was

worth and they could always exchange it for gold or silver or the coins it represented.

As global trade grew the idea of paper money caught on but

traders and lenders were concerned that it was a bit too easy just to print

money so they tried to link the value of money to the value of gold which had the

benefit of creating a standard for exchange between different currencies

attempts to peg currencies to a fixed gold standard continued for centuries

but the need for flexible exchange rates always prevailed and since the early

1970s the world has stopped trying to keep to a gold standard.

So today the only thing that distinguishes the value of a banknote from any other paper

is trust.

Number four

Controlling money

Years ago on the Pacific island of Yap the nearest

thing to gold was the race tone notable for its enormous size and weight from

the day the Chiefs decided to ask their taxes in race tones it meant that for

all taxpayers the currency became universal unavoidable and under the

control of the chief

The most valuable race tones were just so heavy that the

Yap population tended to leave their currency in one place and then trade

effectively in promises

Any trader who owned a race tone on Yap could issue a

promissory note against the value of their stone and thus banking was born

and once the Chiefs accept these promissory notes instead of race tones

for their taxes they effectively lose control of the amount of money in

circulation the money supply

In the 20th century some economists argue that the

amount of money in circulation directly affects economic performance and it is

important for governments to try to control it but this is not easy

especially when it's private lenders that create most of it

Number 5

Money and inflation

In the 16th century Spain brought home massive additional supplies

of precious metals from the colonies.

But what seemed like a dream come true

and should surely have boosted trade turned sour when traders simply put up

the price of their goods to match this new purchasing power.

So the returning explorers were no better off and those without the new gold were even worse off

it was only those who had debts which had in effect got smaller

who were actually better off

This was the first appearance of a theory with too much

money chasing too few goods can cause inflation.

Unless that is that traders produce more goods

or unless the newer bigger money supply circulates less

rapidly by people saving more either because they are rich enough or because

they're particularly gloomy about the future.

Number six

International Money

In the 18th century the British forced their

colonies in America to pay their taxes in pounds and they made it illegal for

the British colonies to print their own money this meant that the colonies were

forced to trade with the motherland to access the currency

According to Benjamin Franklin the American War of Independence was caused by the sheer

burden of British taxation and the disadvantageous trade needed to access British pounds.

And the hard-won freedom after the war allowed the Americans to create the American dollar

Which because of the country's vast trade and

trustworthy tax base eventually became the most widely used currency on the

planet, leading many countries including Britain to store large reserves of dollars,

But by choosing to keep a reserve currency in dollars the UK ceded

at least some power back to those runaway Americans.

Number 7

Money and building banks

By the 19th century banking had become a thoroughly respectable business.

Making a profit by basic money lending banks paid a lower

rate of interest for the money they took in than they charged on the money they loaned out

But the bank soon realized that as long as depositors didn't all

ask for their money at once, they could in fact lend out many times more money

than they had on deposit

This is known as fractional reserve banking

On rare occasions when depositors all tried to get their money out at once

there was a run on the bank and the effect on the wider economy was so serious the

government started to ensure customers deposits to prevent it happening and

thereby enabling banks to loan out more and more

By the 21st century some banks

had taken fractional reserve banking to a whole new level funding most of their

loans not from cash deposits from savers but with loans from other banks often

secured against bundles of previous loans.

So when there was a run on the

bank in 2007 banks like Northern Rock not only didn't have enough money to pay

out but the effect went way beyond just one bank

Number eight

Money and saving The banks

To understand how government's tried to prevent

global financial meltdown after 2008.

Economists distinguished between two kinds of money.

Money created by banks inside the banking system and

money created by governments outside the banking system

When a bank creates money

by making a new loan. The bank acquires a new private asset the loan with an

equivalent private liability to the borrower to pay it.

This is money created inside the banking system.

Governments can create money by selling new bonds

these bonds go into circulation as new private assets but there is no

equivalent private liability to pay them instead this outside money is added to

the public debt although it's normally a very small percentage of total money in

the economy it was this outside money that was used to buy up the bank's bad

private debts and write them off.

The private sector retained its wealth with

new assets inside the system supported by government with public debt from

outside the system.

Number nine

The power of money

Since the last traces of a gold standard disappeared in 1973.

The world has carried on trading in u.s. dollars even

though these aren't backed by anything of intrinsic worth.

The US government's decision to borrow billions for its bank rescue and stimulus plan dramatically

increased supply of dollars and some predicted that this would lead to a big

fall in the dollars value on the basis that economies which print money so they

can consume more than they produce will suffer price inflation and exchange rate of depreciation.

But six years on this still hasn't happened.

Why then does the dollar retain its value?

perhaps with so much of the world

holding its wealth in u.s. dollar assets people simply have faith that the dollar

will retain its value and the knowledge that so many others share that faith

reinforces the general optimism that the dollar will stay strong

Number 10

Future money

Minted coins and paper money once the cutting edge of technology are now

used in only 2% of transactions

Credit card and electronic banking technology

has enabled massive global transactions to take place in the fraction of a second.

And digital technology is enabling new currencies to be created

Linden dollars Bitcoin and other cryptocurrencies which exhibit the

enduring characteristics of money being hard to forge durable portable divisible

and limited in supply and which may even challenge the power of government backed

money but until a government accepts taxes in bitcoins or other privately

issued currencies or banks start lending in them they are not much different from

any other token such as whale's teeth.

one sign that a new form of money has

become important will be when governments and banks try to control it

and if governments and banks continue to have the power to control money those

who use it will always wonder to what purpose will they put that power

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