Barter and IOUs were the earliest forms of human trade, but as peoples grew more interconnected
they had to be replaced as they simply don't scale up.
We are now at the earliest forms of money, represented by gold and silver coins.
This, however, is not the end of the story.
Gold and silver are limited materials, and most countries have no major natural sources
of them.
This allowed countries that do have access to productive mines, such as Spain through
its colonies in South America, to grow rich and powerful.
It also made these countries a target, for example by British pirates.
As the trade between countries expanded, more money needed to be minted.
Wars and conquest were extremely expensive, and people began to horde ever increasing
amounts of wealth, meaning that larger and larger quantities of gold and silver had to
be stored and moved around.
Enter the goldsmiths, who already carried stocks of gold and had secure premises where
it could be kept safe.
The wealthy began to leave their stocks of gold with goldsmiths and, for a fee of course,
it would be kept safe until it was ready to be spent.
Gold is extremely heavy: a billion dollars worth of gold weighs 26 tons, the same as
four t-rexes or 262 Jeff Goldblums.
Carrying large sums of it around with you was not feasible.
So, a more convenient way to pass ownership of gold between people was made.
Goldsmiths began issuing promissory notes, bits of paper that could be exchanged for
gold at a later date.
At the same time, coins began to be cast from cheaper, lighter metals that similarly held
the promise that they could be exchanged for gold.
Soon, these promises became as useful as gold.
They were all that were needed for trade, and it became increasingly rare for anyone
to actually show up and ask for their £20 bill to be turned into gold.
Then, in the coffee houses of London, the goldsmiths-come-bankers hit on an idea.
What if they printed more promissory notes than they could actually back up with real
gold.
Since the people trusted the banks to always have gold to exchange, they could lend this
new money out at interest, and as long as most people didn't request their money there
would never be any shortfall.
Of course, if everyone wanted their money at the same time, then this would be a big
problem for the bank and a bigger one for the people who lost their money.
This was called a run on the bank.
So the promissory note had become money in a form close to as we know it today.
With that, promising and moving money with schemes like loans, insurance, shares and
currency exchanges became a business in its own right.
One that soon overtook the value of the supposedly "real" business of manufacturing goods
and providing services that the concept of money was originally intended to enable.
Gold soon became irrelevant to the whole system, and through twentieth century countries abandoned
the idea that money could be exchanged for gold, or that the value of money should be
tied to it.
All money became what is known as fiat money.
The money itself has no intrinsic value.
The paper or metal it is printed on is effectively worthless, and increasingly money only exists
as numbers on a computer.
The only thing it can be exchanged for is what someone else will give you for it.
Money has value only because everyone agrees it has value.
Next time we'll look at how this vast interconnected international system of money operates, and
occasionally fails to operate.
Can the current system be expected to continue, or are we heading for another upheaval in
how we do business?
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