Evolution of Money and Drawbacks of the Fiat Currency System
Evolution of Money and Drawbacks of the Fiat Currency System
By Krushi Parekh
The story of money goes even further back. In fact, the tradition of money goes back around 3000 years, before which a barter system was probably used. Early records (circa 1000 BC) show that the Chinese initially used miniature replicas of tools and weapons as a form of money which later developed into the form of the round coins we know today. The first manufactured coins occurred in India, China, and in cities around the Aegean Sea between 700 and 500 BC.
Around the 7th century A.D, the Chinese, having grown tired of carrying purses full of heavy coins, invented a form of paper money that allowed the notes to be converted to precious commodities like gold and silver. Paper money came to Europe much later after travelers like Marco Polo brought the concept to them in the 13th century. Promissory notes were used during transactions which later developed in to bank notes which could be exchanged for their face value in gold and silver coins.
The gold standard system whereby the value of a national currency was based on a fixed weight in gold was in use in one form or another until 1971. Bank notes further evolved to the form we know today.
Commodity Money vs. Fiat Money
Commodity money is backed by goods which have intrinsic value. In the past, precious metals like gold and silver were the most common items utilized to back currencies.
In contrast, fiat money has no intrinsic value and is any money declared by a government to be legal tender. It is usually paper or coinage that is not backed by a valuable commodity.
For example, imagine a government prints a large amount of money to increase the amount of liquidity, most of the money printed would be invested in real estate or the stock market or any other such commodity.
Since this fiat money has no intrinsic value of its own, it would only serve in pushing up prices but not actually stimulate an increase in the actual wealth of a country.
One of the biggest reasons that can lead to a major financial crisis is the amount of money printed as opposed to actual assets and how quickly the money can be converted to such assets. Failure or delays in converting the money to assets on demand would lead to the failure of the system.
Fiat Currency Collapse: Past History
A notable example is the financial crisis in France (1720) which is believed to have been one of the major causes that led to the French Revolution (1789-1799).
Those who don’t learn from history are doomed to repeat it – George Santayana
In 1640, the French state minted commodity money called Louis d’or (gold coin) and Ecu Blanc (silver coin).
The Beginning And Early Issues
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