A brief history of money - From gold to bitcoin and cryptocurrencies

Summary

This insightful script traces the evolution of money from its origins in barter trade to the advent of digital cryptocurrencies. It highlights how money transitioned from a tangible commodity like gold and silver to a more abstract concept with the introduction of paper money and eventually to fiat currencies, which derive their value from government decree and public trust. The script also delves into the pitfalls of fiat currencies, exemplified by the hyperinflation in Zimbabwe and Venezuela's attempt to stabilize its economy with the Petro, a state-backed cryptocurrency. The narrative concludes with an exploration of the potential of blockchain technology to revolutionize our concept of money, offering a decentralized and secure alternative to traditional financial systems.

Takeaways

• 💰 Money as an abstraction of value has evolved with human civilization, starting with barter trade and moving through various forms to the current fiat currency system.
• 🏺 Gold and silver were the first universally accepted forms of money due to their durability, divisibility, and recognizability.
• 📜 Paper money emerged as a more convenient alternative to carrying heavy metals like gold and silver, with China being the first to adopt it in the 7th century.
• 🌍 The Western world adopted paper money later, with the first European banknotes appearing in the 17th century, marking a shift from physical to symbolic representation of value.
• 📈 The gold standard was established where banknotes were backed by a fixed amount of gold, providing a tangible link to intrinsic value.
• 🔄 The Bretton Woods agreement in 1944 led to the gold exchange standard, where currencies were pegged to the US dollar, which was convertible to gold, but only for central banks.
• 📉 The end of the Bretton Woods system in 1971 marked the transition to fiat currencies, which are not backed by physical commodities but by government decree and public trust.
• 🇺🇸 Fiat currencies like the US dollar and the Euro hold value internationally due to the credibility of their issuing governments and the size of their economies.
• 📊 The value of a fiat currency can be undermined by irresponsible or corrupt governance, as seen in the hyperinflation and collapse of the Zimbabwean dollar.
• 🇻🇪 Venezuela's introduction of the Petro, a government-issued cryptocurrency, represents an innovative attempt to stabilize its economy amidst hyperinflation.
• 🔗 The evolution of money to digital cryptocurrencies like Bitcoin is the next step in the abstraction of value, underpinned by blockchain technology, which provides a decentralized and trustless system for transactions.
• 🔑 The blockchain technology ensures the integrity and transparency of digital currencies, offering a more secure and less politically susceptible form of value exchange.

Q & A

What was the initial method of trade used by humans before the concept of money?

The initial method of trade used by humans was barter trade, which involved trading goods for goods without the use of money.

Why were gold and silver considered the first universally accepted forms of money?

Gold and silver were considered the first universally accepted forms of money because they were standardised, portable, durable, and had intrinsic value, fitting the criteria for a widely accepted medium of exchange.

How did the introduction of paper money change the way value was carried and moved around?

The introduction of paper money made it more user-friendly and convenient to carry and move around value compared to the heavy and cumbersome precious metals like gold and silver.

Which country was the first to adopt paper money, and when was this?

China was the first to adopt paper money in the 7th century.

What is the 'gold standard' and how did it come into existence?

The 'gold standard' is a system where paper money is backed by a physical amount of gold or silver, which can be redeemed by the holder. It came into existence as people shifted from using gold and silver coins to banknotes backed by these precious metals.

What significant event marked the end of the gold standard?

The gold standard ended in 1971 when the US dollar's convertibility to gold was terminated, marking the transition to fiat currencies.

How does a fiat currency hold value if it's not backed by any tangible asset?

A fiat currency holds value because it is declared by the government as legal tender, meaning it is recognized for financial transactions, trade settlement, or commerce within a country or jurisdiction.

What is the difference between a fiat currency and a cryptocurrency like Bitcoin?

A fiat currency is issued and regulated by a government and holds value through legal tender status and public trust, whereas a cryptocurrency like Bitcoin operates on a decentralized network, secured by cryptography and consensus mechanisms, without the need for central authority.

What extreme example is given in the script to illustrate the failure of a fiat currency system?

The extreme example given is Zimbabwe, where irresponsible government policies, including land confiscation and excessive money printing, led to hyperinflation and the eventual abandonment of the Zimbabwean dollar in favor of foreign currencies.

How did the Bretton Woods agreement influence the global monetary system?

The Bretton Woods agreement established a system where many countries fixed their national currencies' exchange rates to the US dollar, which was convertible to gold at a fixed rate. This system ended in 1971 when the US dollar's convertibility to gold was terminated.

What is the Petro, and how does it relate to Venezuela's economic situation?

The Petro is a government-issued cryptocurrency in Venezuela, backed by the country's oil reserves. It was proposed as a solution to the country's hyperinflation and is intended to be a legal tender, making Venezuela the first country to issue a sovereign cryptocurrency.

What technological advancements are credited with enabling the creation of digital cryptocurrencies?

Digital cryptocurrencies are enabled by advancements in blockchain technology, cryptography, and computer hardware, which together provide a secure and decentralized platform for creating and managing digital money.

Outlines

00:00

💰 The Evolution of Money: From Barter to Fiat Currencies

This paragraph delves into the historical evolution of money, starting from the barter system to the use of gold and silver as the first universal money. It then transitions to the introduction of paper money, pioneered by China in the 7th century and later adopted by Europe after the 13th century. The paragraph explains the concept of 'the gold standard', where banknotes were backed by precious metals. The narrative progresses to the Bretton Woods agreement in 1944, which established a new monetary system tying national currencies to the US dollar, convertible to gold. However, this system ended in 1971, leading to the era of fiat currencies not backed by tangible assets but by government decree and public trust. The summary also touches on the role of legal tender and how certain currencies like the US dollar and the Euro have become international through credibility and economic strength. The paragraph concludes with a cautionary tale of the Zimbabwean dollar, illustrating the potential pitfalls of fiat currency when mismanaged by irresponsible governments.

05:01

🌐 The Shift to Digital: Cryptocurrencies and Beyond

The second paragraph explores the shift from traditional fiat currencies to digital forms of money, such as cryptocurrencies. It discusses the crisis of trust in local currencies in countries like Zimbabwe, leading people to prefer 'hard' foreign currencies, gold, or digital assets like Bitcoin. The paragraph highlights the case of Venezuela, which is currently experiencing hyperinflation and has proposed the Petro, a government-issued cryptocurrency backed by oil reserves, as a solution. This marks Venezuela as the first country to issue a sovereign cryptocurrency, contrasting with the decentralized nature of cryptocurrencies like Bitcoin. The summary emphasizes the historical progression from physical commodities to digital representations of value and introduces blockchain technology as the foundation for a new era of trusted digital money, which operates without the need for central authorities or intermediaries.

Keywords

💡Money

Money is defined as a medium of exchange that allows goods and services to be traded. It is central to the functioning of human civilization and is an abstraction of value. In the video, money's evolution from barter trade to digital currencies is discussed, highlighting its role in representing and communicating value.

💡Barter Trade

Barter trade is a system of exchange where goods and services are directly traded for other goods and services without the use of money. It is the earliest form of trade mentioned in the video and was eventually replaced by standardized token money like gold and silver.

💡Gold Standard

The gold standard is a monetary system where a country's currency or banknotes have values directly linked to gold. The video explains that banknotes used to be backed by gold stored in treasury vaults, which gave them value and the right to be exchanged for gold.

💡Fiat Currency

Fiat currency is a type of currency that is not backed by any physical commodity, such as gold or silver, but rather by the trust that it will be accepted for future payment of goods and services. The video discusses how paper money became a fiat currency after the termination of the gold standard in 1971.

💡Legal Tender

Legal tender is money that, when offered, must be accepted in exchange for goods and services in the country of issue. It is a concept that underpins the value of fiat currencies, as explained in the video, where governments assign value to a currency and enforce its use.

💡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 uses the example of Zimbabwe to illustrate the disastrous effects of uncontrolled inflation on a country's economy.

💡Hyperinflation

Hyperinflation is an extremely high rate of inflation, typically reaching a peak rate that is extremely high or undefined. The video discusses how Zimbabwe experienced hyperinflation, with prices doubling daily, leading to the abandonment of its currency in favor of foreign currencies.

💡Blockchain

Blockchain is a decentralized, distributed ledger technology that securely records transactions across multiple computers. It is the underlying technology for cryptocurrencies like Bitcoin. The video suggests that blockchain technology provides a more solid foundation for currency value than government promises alone.

💡Bitcoin

Bitcoin is a digital cryptocurrency that uses blockchain technology to operate independently of a central bank. It is mentioned in the video as an example of a decentralized currency that has value because people believe in it and because of the mathematical and computational guarantees of the blockchain.

💡Cryptocurrency

Cryptocurrency is a digital or virtual currency that uses cryptography for security. It is difficult to counterfeit because of this security feature. The video positions cryptocurrencies as the next evolutionary step in the concept of money, relying on trust and technological guarantees rather than physical commodities or government backing.

💡Petro

The Petro is a government-issued cryptocurrency proposed by Venezuela, which is intended to be backed by the country's oil reserves. It is highlighted in the video as an innovative solution to Venezuela's hyperinflation crisis and an example of a sovereign cryptocurrency, contrasting with decentralized cryptocurrencies like Bitcoin.

Highlights

Money is an abstraction of value, essential for exchanging, accounting for, and transferring value in human civilization.

Barter trade was replaced by standardized token money, with gold and silver being the first universally accepted forms of money.

Paper money emerged as a more user-friendly alternative to carrying around precious metals, first adopted in China in the 7th century.

The Western world did not adopt paper money until the 13th century when Marco Polo introduced it to Europe.

The first European banknotes were issued in the 17th century, backed by gold and silver reserves in a treasury vault.

The gold standard was born, where banknotes were backed by precious metals, representing the right to collect those metals from a bank.

The Bretton Woods agreement in 1944 established the gold exchange standard, fixing national currencies to the US dollar, which was convertible to gold.

The Bretton Woods system ended in 1971 when the US dollar's convertibility to gold was terminated, marking the end of commodity-linked money.

Fiat currencies, like the US dollar and Euro, are not backed by tangible assets but by faith in the government that issues them.

Legal tender laws give fiat currencies value by declaring them the recognized medium of payment for transactions in a country.

The value of a fiat currency can be undermined by irresponsible or corrupt government policies, as seen in the Zimbabwean dollar crisis.

Hyperinflation in Zimbabwe led to the abandonment of the national currency in 2009 in favor of using only foreign currencies.

Many countries experiencing currency crises have populations that prefer holding savings in hard foreign currencies or alternatives like gold.

Venezuela is currently experiencing rampant inflation, proposing the Petro, a government-issued cryptocurrency backed by oil reserves, as a solution.

The Petro would be the first sovereign cryptocurrency intended to be legal tender, representing a shift from decentralized cryptocurrencies like Bitcoin.

The evolution of money has transitioned from tangible goods to intangible concepts, with value represented by numbers on a computer screen.

Digital cryptocurrencies like Bitcoin represent the next step in this evolution, backed by solid science, mathematics, and computer hardware rather than government promises.

Blockchain technology enables trustless digital money without the need for central authorities or intermediaries.

Transcripts

Now, let's consider the concept of money as an abstraction of value.

Money is as old as human civilisation and civilisation itself is reliant on possessing

ways in which to exchange, account for, and transfer value.

What once started as barter trade (trading goods for goods) was replaced using standardised

token money.

Gold and silver were the first universally accepted natural choices for money.

Actually, they fit the bill so well that they were the primary form of money for centuries

across the globe and have been instilled in human culture...

I bet when I say "gold" you instinctively think of value or wealth.

After this came paper money – a more user-friendly way to carry and move around value compared

to precious metals.

China was the first to adopt it in the 7th century.

However, the western world didn't catch up on this monetary innovation until Marco Polo

introduced it to Europe around the 13th century.

Even then, the first European banknotes weren't issued until the 17th century.

It took people several centuries to accept the new paradigm at the time and shift from

gold and silver coins to banknotes backed by these same precious metals as the widely

used form of money.

This led to the birth of 'the gold standard'.

The banknotes themselves didn't hold any intrinsic value like gold and silver coins do.

Instead, paper money was backed by precious metals (like gold and silver) stored in a

treasury vault somewhere.

Think Fort Knox.

The banknotes represented the right to collect said precious metals from a bank.

More convenient than taking a wheelbarrow of gold bullion to the post office to pay

the mortgage!

This was the case until 1944.

At the end of World War II, yet another related system was introduced, the "gold exchange

standard", under the Bretton Woods agreement.

This meant that many countries fixed their national currencies’ exchange rates to the

US dollar which was in turn convertible to gold at a fixed rate.

Not only that, but this convertibility was no longer available to individuals or companies,

only to central banks.

However, the Bretton Woods system ended in 1971, when the US dollar convertibility to

gold was terminated.

So long "the gold standard" and commodity-linked money.

Paper money is no longer backed by gold or anything else tangible but just faith!

Welcome to the world of fiat currencies!

So how does paper hold any value if it's not backed by anything?

Well, that's where concepts like legal tender come in.

The fiat system, which we still use today, has governments assign value to a currency,

declaring it a legal tender.

This means a government decides whether a medium of payment will be recognised for financial

transactions, trade settlement or commerce in a country or jurisdiction.

Some fiat currencies like the US dollar and the Euro are recognised internationally and

used for global trade because they are backed by some of the most credible governments and

largest economies in the world.

To sum up, a fiat currency has value because a government uses its power to enforce this

value or because exchanging parties agree to its value…

Some may even describe this as a collective illusion.

It’s not hard to see how problems could occur with this.

Let’s see some examples when the fiat currency system backfired under the control of irresponsible

or corrupt governments prone to economic and political mismanagement.

At the time of the independence of Zimbabwe from British colonial rule in 1980, the Zimbabwean

dollar (ZWD) was worth about 1.25 US dollars.

Soon after, inflation started creeping up and got completely out of control when President

Robert Mugabe began confiscating land from the white farming community in 1998, resulting

in a near total collapse in food production and the decline of foreign investment.

In order to help pay the government’s expenditures, the Reserve Bank of Zimbabwe started printing

more and more banknotes with higher and higher face values.

As a result, the annual inflation rate rose from 32% in 1998 to 231,000,000% in July 2008

when official statistics stopped being reported.

After that, it was estimated by international economists that the hyperinflation peaked

at a staggering annual rate of 89.7 sextillion percent (89,700,000,000,000,000,000,000%)

in mid-November 2008.

The peak monthly rate was 79.6 billion percent, which is equivalent to a 98% daily rate, in

other words prices were pretty much doubling every day.

In April 2009, the Zimbabwean dollar was completely abandoned in favour of using only foreign

currencies.

Once one of the richest countries in Africa, Zimbabwe descended into economic chaos largely

blamed on its government’s policies.

This is an extreme example of how the trust in a fiat currency can be lost leading to

economic turmoil.

In Zimbabwe, the collective illusion quickly turned into a collective disbelief.

This is not an isolated example of a currency crisis though.

There are many countries around the world where local currencies hold hardly any value

and people prefer keeping their savings in the so called “hard” foreign currencies,

or other alternatives like gold, and most recently – Bitcoin!

Currently, Venezuela is undergoing a period of raging inflation of its own.

In January 2018, inflation was 84% for the month, implying an annualized rate of 150,000%,

meaning prices would double every 35 days.

Now, the Venezuelan government has come up with an innovative proposed solution for a

stable currency – the Petro, a government-issued cryptocurrency running on blockchain and backed

the country’s oil reserves.

The Petro is intended to be a legal tender in Venezuela, which becomes the first country

in the world to issue a sovereign cryptocurrency.

It remains to be seen how successful or not this experiment will be.

Such a centrally-issued cryptocurrency is a far cry from the decentralized nature of

Bitcoin and its digital siblings.

However, it should also be noted that, with its actions, Venezuela is recognizing and

reaffirming the great advantages and potential blockchain holds.2.3.

To conclude and summarize – we have seen how the idea of money has evolved through

history from a more tangible to a more intangible concept, with each stage having its pros and

cons.

From barter trade, we moved to commodity money, through commodity-backed paper money, all

of which have some intrinsic value, on to the fiat money we use now.

This was a historical journey from real goods and commodities to numbers on a computer screen

representing value and money.

Throughout all these stages we had an idea of value in our mind but it has evolved hand

in hand with our civilisation and technology.

From something you can touch and actually use, to something you can touch but cannot

use except for trade, to just an abstract idea.

As you can see – the form has changed but the idea of value has always remained the

same.

And we represent and communicate this idea of value in terms of money.

Good!

Because this abstraction of value brings us to the next evolutionary step - digital cryptocurrencies

powered by blockchain technology.

Similar to the fiat system, this form of money has value because people believe in it.

But there is more to it than just a government promise.

Promises made by people have been broken many times in history.

Here we have solid science, mathematics, and computer hardware guaranteeing the blockchain

works as expected.

Next, we’ll see how the technologies underpinning Bitcoin emerged, and how they were put to

work together.

This technology mix enabled us to have digital money we can trust without the need for any

central agents or middlemen.

Now, if this sounds like the logical next step to you, then stick with us and we'll

show you how it all happened...