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Money: The Evolution of Money and How It’s Value Is Determined (Part 2 Of 4) - YouTube
Channel: Random Walk ED
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Evolution of money
Currency has evolved over time from commodities
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such as grain and gold into its current form
of paper and fabric blended notes.
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The first stage in the evolution of money
was - Commodity money
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This is the oldest form of money and its value
is based on the value of the commodity used
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as a currency.
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Initially grains and other easily accessible
commodities were used by ancient agricultural
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economies.
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These commodities tend to decompose and lose
their value over time, this eventually caused
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metals, especially gold to turn into the primary
currency.
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Commodity money is characterised by the fact
that its value is equal to the value or the
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commodity used as a currency.
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A gold coin of one gram has the intrinsic
value of one gram of gold and can purchase
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any goods or services worth one gram of gold.
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The next stage of this evolution was - Representative
money
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In this form of currency, paper money or certificates
are issued whose value is fixed to that of
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a commodity and can be exchanged for an equal
amount of that commodity.
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Although paper money was first used in 11th
century China it was globally adopted in the
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18th and 19th century.
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The system where currency value was fixed
to gold and could be exchanged for gold is
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commonly known as the Gold Standard.
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The Gold Standard was widely used until the
end of the Second World War.
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After the Second World War the Bretton Woods
Agreements had the US Dollar pegged to the
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value of gold and other currencies pegged
to the value of the US Dollar.
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Eventually countries abandoned this system
as it created excessive dependence on the
[115]
conditions of the US economy.
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To this day there are still countries that
have their value pegged to the US Dollar.
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We now move to the type currency that we currently
use - Fiat Money
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Fiat money is currency that a government has
declared to be legal tender, but is not backed
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by a physical commodity.
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The value of fiat money is derived from the
relationship between supply and demand rather
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than the value of the material that the money
is made of.
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Fiat money is based solely on faith.
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Fiat is the Latin word for "it shall be".
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Fiat money is inconvertible and cannot be
redeemed.
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Fiat money rose to prominence after the collapse
of the Bretton Woods system in 1971, when
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the United States ceased to allow the conversion
of the US dollar into gold.
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A fiat-money based currency greatly loses
its value should the issuing government or
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central bank either lose the ability to, or
refuse to, further guarantee its value.
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Most modern currencies are fiat money based
and are controlled and managed by central
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banks using a system called fractional reserve
banking.
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The adoption of fiat currency by many countries,
from the 18th century onwards, made much larger
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variations in the supply of money possible.
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Since then, huge increases in the supply of
paper money have taken place in a number of
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countries, producing hyperinflations – episodes
of extreme inflation rates, much higher than
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those observed in earlier periods of commodity
money.
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Our next episode will cover inflation and
how it this invisible force effects you.
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