Money is a dominant factor in most of our lives. It’s the number one cause of divorce and the biggest motivator for field of study in U.S. colleges. Money as we know it today has undergone a lot of changes throughout time. Today, we’re taking a closer look at this mysterious force that has so much impact on our lives.
Money is a Social Construct
No form of money has a fixed intrinsic value. Rather, it’s determined by social contract. We often make the mistake of thinking that bills and coins mean something all by themselves. Or, on the other hand, we feel that paper bills are a poor substitute for the good old days when we used actual precious metals to exchange value. But even then, the value of precious metal was only determined through social contract, because people had decided to value gold.
The Longest-Lasting System of Currency Isn’t Precious Metal
In the past, various societies have used many different forms of currency in order to trade and barter. The longest-lasting and most widespread form of currency wasn’t any kind of precious metal, as you might guess. Rather, it’s the cowry shell, which was traded in East, South, and southeast Asia. Colorful, durable, and transportable, these shells made excellent symbols to enable trade and exchange of goods. During the pre-Columbian era, Aztec people used cacao beans as currency. Once again, the durability and transportability of the beans made them ideal for trade.
Some other forms of currency could be supposed to have inherent value, like the salt used to pay Roman soldiers. Incidentally, that’s where we get the world salary, “sal” meaning “salt” in Latin. At the height of the tea trade, blocks of tea leaves were used as currency in parts of China. The word “buck” in the American vernacular comes from the era of the Old West, when buckskins were used as forms of exchange between storekeepers and their hunting, trapping patrons. The first form of currency in colonial Australia was rum!
The Evolution of Modern Money
The first metal coins were invented in ancient Mesopotamia, where metal “ingots” were traded and valued according to their weight. However, some of the most quintessential coins of the ancient world were Caesar's Roman coins, widely traded throughout the Empire, and the first currency to be stamped with the face of the governing force.
Paper money became popular throughout the last couple of centuries, although the first few forms of “banknotes” were actually vouchers that could be exchanged at any bank for the representative amount of precious metal. While we may call it “paper money,” it’s actually closer to cloth money. Most notes, like American money, are made up of a combination of cotton and linen. Or, there’s the Australian approach, where paper money is actually plastic.
Today, only 8% of our capital is actually represented by physical currency. That’s right--the rest is just digital accounts and intangible investments. Initially, this might seem like the most absurd way that we’ve ever chosen to represent wealth yet, but then again, it’s important to remember that currency is more social contract than anything else. Think about the Pacific Island of Yap, where giant stones in the center of town were used to represent personal wealth. Since they were too heavy to move around from person to person, the stones were exchanged only through verbal agreements.
Currency Relies on Trust and Society
The overall lesson to remember here is that money has no inherent value. It’s not vital for survival. Rather, it’s a tool used to enable exchange. When we remember that, it becomes a lot easier to deal with, to invest, manage, and grow.