Money is neither my god nor my devil. It is a form of energy that tends to make us more of who we already are, whether it’s greedy or loving. (Dan Millman)

Birdfeed by Hobvias Sudoneighm

We can’t imagine a world without money. It’s the driver of the economy, world development, and our everyday lives. However, the Incas didn’t use any form of money, although they were a highly-developed civilization that possessed huge amounts of gold and silver. Modern money has become an inseparable part of our world, but the way we create and destroy it nowadays is much different than the way that our predecessors did.

From Cattle to Coins (9000 B.C.–400 A.D.)

Interestingly, there isn’t any evidence of an economy that relied primarily on barter, an exchange method by which goods are directly exchanged for other goods without using money. Gift economy was much more common, although it seems quite absurd nowadays; could you image that you will be given a car or at least a slice of bread without paying? It was probably a form of altruisms that brought higher social status or other benefits. Only strangers and enemies had to use bartering in trading.

Money moved the world even in ancient times. Cattle is probably the oldest of all forms of money. Later, agricultural implements, people, and precious metals were also used as universal currency. The motivation of the writing invented in Mesopotamia was accounting. With growing trade, a need for a common currency appeared, and in 687 B.C., the first coins were minted (according to Herodotus). Coins spread from Lydia to Greece and then, thanks to Alexander the Great, to most of inhabited world. Later, Romans brought coins to their provinces, so almost the whole of Europe knew them even before 400 A.D.

Tallies, Goldsmiths, and Van der Burse (400-1800)

Looneys and Tooneys by Paolo Barcellos Jr

The minting of coins in Britain was abandoned after 435, and two hundred years later, when Bishop Mellitus issued coins from a mint in London, they were used more often as ornament and rarely as currency. Later, people understood their wide usefulness, and coins were minted in England as well as in France. At the end of the Middle Ages, European trade expanded considerably and bills of exchange became the most common form of purchasing.

The Crusades required large amounts of money to be transferred and supported the re-emergence of banking in Western Europe. The ancestors of loans are called tallies, wooden sticks. The size of their notches represented a particular sum of money and they were split down the middle. One part was kept by the creditor, the other by the debtor. Their use persisted until the early 19th century, even after paper money had been prevalent.

Modern money developed from the gold smithing at the end of the middle ages. The goldsmiths drove banking and created new money based on credit. They dealt in gold so they had sufficient security for the safe storage of valuable items. When gold or silver was put in storage, the owner was given a receipt issued by the goldsmith as a record of ownership. The paper receipts were much easier to carry than the precious metals, so they became popular and soon were used instead of the gold or silver. Later, the goldsmiths began loaning out the gold they held for their customers by printing receipts. Moreover, they could make more loans than they held in gold. Modern money comes from the idea of loaning gold that wasn’t owned, but just held, and from the value of this imaginary gold.

Another milestone in the history of money was the year 1309, when the first bourse was set in the house of a man called Van der Burse, and it was called “Bruges Bourse.” The idea spread quickly and “Bourses” were soon opened in Ghent and Amsterdam.

Gold Standard and Conference in Bretton Woods (1800-1944)

In 1816, the Privy Council recommended the establishment of the gold standard, a deal to fix the prices of domestic currencies in terms of a specified amount of gold. All the forms of money were converted into gold at the fixed price. However, during the Great Depression, the gold standard system limited monetary policies, and according to some economists, it caused a prolongation of the Depression.

The gold standard was replaced in 1944 when the United Nations Monetary and Financial Conference set in Bretton Woods decided about the establishment of the Bretton Woods system, the World Bank and International Monetary Fund. The US dollar replaced the United Kingdom’s pound sterling as the world currency.

Pure gold by Michael Mandiberg

The Bretton Woods System was a system similar to its gold predecessor. It was based on fixed exchange rates that allowed governments to sell their gold to the United States treasury at the price of $35/ounce.

In the same year, the International Monetary Fund was conceived. The Fund oversees the global financial system and controls the macroeconomic policies of its members. Canada now has 2.56 per cent of the total votes. The World Bank provides loans to poorer countries with the aim of reducing world poverty.

Nixon Shock and Fiat Money (1944-today)

The Bretton Woods system ended on August 15, 1971, when US President Richard Nixon ended trading of gold at the fixed price. It is known as “Nixon Shock.” Since then, all reserve currencies have become fiat currencies, money that has value based only on government regulation or law. The US dollar has remained the de facto world currency until now. The idea of fiat money comes from China, where it was invented in the 11th century.

Nowadays, money is created when a trader commits to buy goods or services from other traders to place goods or services in the market of equal value in the future. The debt creates money and is repaid when the trader puts goods and services back on the market. The process of creating money is explained here.

Future: End of One Era?

“The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the Second World War at intervals ranging from four to 10 years. However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency,” said billionaire financier George Soros. Will the debt crisis lead to new, big changes in the money system? Can the US dollar survive? Now, we can only guess as to what will happen.