The interesting history of money and its relationship to gold and silver and the concept of economic inflation.
Welcome to all of you to a new topic in which we will deal with the entire history of money and its relationship with gold and silver
Before the invention of money, people used to make transactions by bartering. That is the exchange of goods and services between two or more people without the use of money.
However, there were some difficulties in using this method. An example of this would be, if I had an excess of bananas and I wanted to cross the river, how would I pay for this service.
I would have to find someone who owns a boat, and is willing to exchange his service for some of my bananas.
Since it would be difficult to consistently align everybody is needs with mine, the use of bartering was eventually replaced using metals, animals, seashells, and anything with an agreed upon value.
This eventually led to rare and precious metals such as Silver and Gold being used in trade.
People started making coins out of those metals and using those coins as an accepted form of currency to pay for goods or services.
In time, the use of coins became inconvenient, especially when it came to situations in which we needed to use large amounts of coins.
Since it became harder to make large transactions using coins, the need for a different method increased. This came into the form of lOU, which is an abbreviation for “I owe you”.
The way that worked is that you would carry your gold coins and deliver them to a trusted party who owns a very well-guarded vault.
They would count your gold coins and issue you an IOU document stating the number of coins you have in their vault with the promise that you or anybody who holds such a document could collect the stated amount of gold any time.
For a small interest, of course. That way, it would be much easier for you to pay for goods and services without the need to carry large amounts of coin. It was much safer, too.
The IOU started to gain a value of their own. Which led the providers of those IOU to realize that they could print out more of those IOU without the need to have a gold or silver coin back up
Shortly after the introduction of IOU's came banknotes from semi-official bank now with banknotes, anyone can exchange said paper at the bank for the denoted amount of coin. But since the banks realized that people rarely turn in their banknotes in exchange for coins, they started loaning banknotes to people secured by land or property.
Thus, loans were introduced, that way the banks can print out more banknotes without gold or silver reserve and loan them out to people so that they could make money out of debt interest.
In the late 1660s in Stockholm, the central bank started lending out way too many banknotes that people started to notice. Which later led to everyone rushing to the bank to turn in their banknotes.
But of course, since the bank was printing out way more banknotes than their gold and silver coin reserve, they were not able to return everybody's coins which resulted in the collapse of the Swedish economy at that time.
after the collapse of the Swedish economy,
the main economic doctrine that was followed almost everywhere in the world at the time was "Mercantilism" Which means that every state view itself as being at an economic war with the next.
aiming to import as little as possible and export as much as possible while piling up gold and silver. But the problem is, by following that economic system, your economy can only be as big as the amount of gold and silver that you have.
One person who opposed following that system was Nicholas Baron, he had a different idea. He believed that gold and silver do not have innate value, but whatever their market value is at any point in time. Therefore, instead of stockpiling gold and silver to grow the economy. People should move entirely to paper money.
Another issue with the obligation to have the money tied to the supply of gold and silver was that if you are going to print out money to ion it to people, you must have the gold and silver to back it up. And this is what bankers at the time believed to be bottlenecking their state's economy.
The need for a central bank increased especially because when each bank first started printing out banknotes, they used to have their own special banknote. Do, in each state, you would have as many different banknotes as there are banks.
Since that was not convenient at all, having a central bank to take over the economic function of the state was almost non-negotiable. Which in turn would make each country have a unified banknote of their own instead of having multiple.
But the thing is, having the idea of paper money being good is one thing and getting people to believe and trust in dealing with paper money that does not have a gold or silver back up, and take paper money at its face value, that is a different story.
Since for so long, paper money, or banknotes, were always tied to the amount of gold and silver that was at the bank which was called "the gold standard". By having a central bank, it would also be easier for people to trust the entire idea of paper money, especially if the central bank was government owned.
The main problem with having paper money without the gold standard, was if it goes unregulated, meaning that if the central bank at any given time printed out too many banknotes, that would cause inflation which means that each banknote that is printed, is worth less than the last.
That is why people trusted the gold standard more than anything. But that changed when both world wars happened.
since, well, they had no gold.
So instead, those countries tied their own currency to the US dollar, meaning that instead of having a gold backup.
The main problem with that is, after WW2, when countries decided that they would turn in their currency in exchange for US dollars and claim the gold along with the US having both the war in Vietnam and cold war, they just could not afford following the gold standard and having to give everyone gold in exchange for the dollar.
Which led President Richard Nixon to finally take the step to take the US dollar off the gold standard. With that, the gold standard was no longer, that's how paper money became what today we know a piece of paper that everyone just believes to have its own value, without it being backed up by anything.
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