Money as a concept isn’t just paper or metal; it’s a shared story built on trust. Why money acts the way it does needs to be understood from its history.
In its purest form, money can be thought of as a way of exchanging one’s labour for another’s labour. Money, thus, can be considered as an accumulation of labour efforts. Having more money allows us to do less labour ourselves and to utilise others’ labor in place.
The story we are trying to explain here spans thousands of years. It took countless experiments by different cultures and regions to reach the current state of economic models.
Barter — The First Form of Exchange
Every economy starts with labor. People use their efforts to create goods or services — rice, tools, clothes — and exchange them for what they need. This was the barter system: exchanging one product of labor for another.
But barter had one fatal flaw — the double coincidence of wants. If you have mangoes and need rice, the rice farmer must also want mangoes right now. If not, no trade happens. So more labor is needed to find the buyer who needs mangoes and will sell rice.
Barter made trade slow, limited, and inefficient. For the economy to grow, it needs more efficient and faster transactions to occur.
Commodity Money — Finding Something Everyone Wants
To solve barter’s limitations, people tried using a common medium of exchange — something everyone values and accepts. First came commodity money was used in the form of goods like salt, grains, cattle, or metals. Everyone wanted it, and transactions became faster.
Many cultures tried using many kinds of commodity money, but they figured out that it works only if they had the three traits:
- Consensus: Wheat cannot be used in a community where rice is used as the staple food.
- Durable: Perishable goods don’t work well because they spoil if you store them for future needs.
- Scarce: using common metals doesn’t work, because foreigners can easily come with cheap metals from their place and ruin the home economy.
Over a period of time, after using various commodities, Metals like gold and silver became the first form of true money. They had durability, scarcity, and universal appeal.
Gold and the Store of Value
Gold solved storage and durability — it doesn’t rot, rust, or decay. It was scarce enough that not everyone could produce it easily, making it trustworthy. The most important decision factor was that, majority of cultures, in isolation, did the commodity money experiment narrowed down to using valuable metals like gold or silver. This gave a value across the globe to gold.
However, gold had a new problem — transportability. Moving large quantities for trade or land purchases was risky and inefficient. It involved a larger cost and thus made trading with other regions more difficult.
Paper Promises — The Birth of Banking
Rich Merchants found a solution; they established many number of banks across the country, and they began accepting gold and issuing receipts. These receipts can be redeemed at any bank in the country. This allowed people to safely travel long distances and trade.
Over time, trust rose, and people realized the receipts could be exchanged directly, without ever claiming the gold. That paper became as good as gold because everyone trusted it. Traders now accept gold deposit receipts as payment.
But trust invites temptation. Bankers realized not everyone redeemed gold at once, so they issued more receipts than the gold they held. Fractional reserves were born. Traders started printing their own money in the form of gold deposit receipts (without any gold backing them)
It worked — until panic struck. When too many tried redeeming at once, banks collapsed. The collapse of one bank means people lose trust in many banks, and all start collapsing at the same time. Governments stepped in, promising to give back the gold. The government even started accepting the gold deposits as tax payments.
The government took the next step; they started issuing the paper receipts, which were backed by gold. They said, anyone can come to our mint and exchange it for gold. This created widespread trust, and paper money was used across the country by everyone.
Fiat Money — The Power of Belief
Eventually, Gold shortages happened, and states stopped backing money with gold entirely. Instead, they declared paper legal tender — valuable because the government says so, and because you must use it to pay taxes.
That changed everything. Money’s value no longer came from what it was, but from what people believed it would buy. A meaningless paper started to carry huge weight in the mind of the common man. Fiat currency is, fundamentally, institutionalized trust.
Governments can create it, regulate it, or destroy it — but it stays valuable because taxes must be paid on it and everyone has to accept them legally.
🪙 From Fiat to Bitcoin — Redefining Trust
For anything to function as money, it must satisfy a few core principles we discussed earlier: Consensus, Scarcity, and Durability.
Cryptocurrency figured this out but in a different order; they realised they could create something that is both scarce and durable. Then they can work slowly to reach consensus. They made Bitcoin. Scarcity was based on the Code structure and programming. Durability was based on blockchain technology. Consensus for cryptocurrency was not forced upon anyone; they built it one step at a time.
💵 The Fiat Problem — When Scarcity Breaks
Take a modern example: Zimbabwe or Venezuela. When governments overprint currency to fund deficits, they destroy its scarcity.
If money can be created without cost, it stops representing labor, time, or productivity. Inflation becomes hyperinflation. This
Prices skyrocket, trust collapses, and people revert to older forms of exchange — dollars, goods, or even gold.
This is what most government tries to figure out: how much they can print without losing the trust/ consensus of the people.
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