Discover the Meaning of the Currency: Evolution and Impact on the Global Economy

Introduction

Money is a fundamental pillar of modern civilization. For thousands of years, it has served as a universal language of value, facilitating trade between people and allowing them to efficiently accumulate the fruits of their labor.

Generally speaking, currency is defined as a widely recognized method for the payment of goods and services. Throughout history, different societies have developed various types of currency, so numerous that it becomes complex to classify them systematically.

This article will explore the fundamental differences between commodity money, proxy money, and fiat money, analyzing their economic characteristics and their evolution into today's cryptocurrencies.

Barter: Precursor to the Monetary System

Barter represents the direct exchange of goods and services for other goods and services. This basic economic behavior is observed in various natural contexts. Numerous species from the animal and plant kingdoms have developed symbiotic relationships where both parties obtain mutual benefits. For example, the Acacia angustifolia provides food and shelter to ants, receiving protection against parasites in return. Similarly, zebras and rhinoceroses allow woodpeckers to feed on the insects from their skin, benefiting from this cleaning.

Humans developed more complex forms of value exchange. Before the emergence of modern money, barter was the predominant trading practice.

A simple example illustrates this concept: if you own a coat and your neighbor has apples, she is cold and you are hungry. The exchange of the coat for twenty apples satisfies the immediate needs of both. However, this simple transaction reveals the inherent limitations of bartering.

Later, when you want more apples, your neighbor will no longer need another coat. If she requires fuel, but the gas station owner is allergic to apples, a trade obstacle arises. This economic phenomenon is called "double coincidence of wants": a transaction can only occur when each party possesses exactly what the other desires, a fundamental limitation that drove the search for more efficient monetary systems.

Commodity Currency: Intrinsic Value

Commodity-based currencies use raw materials with intrinsic value as a medium of exchange. This category includes precious metals like gold, silver, and copper, as well as consumable goods like wheat, coffee, and rice.

History offers numerous examples of commodities used as currency. In the 17th century, tobacco was officially recognized as legal tender in Virginia. As documented by Nick Szabo in his influential article "Shelling Out: The Origins of Money", North American indigenous tribes used wampum ( beads made from clam shells ) as a recognized medium of payment, even circulating as official currency for decades.

Although superficially the trade in commodities seems similar to bartering, there is a fundamental difference: these raw materials function as universally accepted mediums of exchange. When rice is widely used as a method of payment, it becomes a trade intermediary that overcomes the limitations of direct bartering.

This system allows the calculation of the value of goods according to the purchasing power of the basic product used as currency. By accepting rice as payment, it is not necessary to consume it personally, but it can be exchanged for various products. When a good acquires this monetary function, it often also becomes a unit of account, expressing the value of other goods, for example, the price of coffee in kilograms of rice.

Commodity-based currencies effectively resolved the issue of matching barter needs, allowing for the storage of value for future transactions.

Precious metals, particularly gold and silver, have historically represented the most prominent commodity currencies. Gold has maintained its relevance in civilized society both as currency and as an industrial metal. To this day, gold coins and bars constitute a standard in value investment, where investors preserve their wealth against economic uncertainty.

Although commodities maintain their importance in modern financial markets, as monetary instruments they have largely been replaced by more efficient systems.

Substitute Currency: Portability and Backup

The commodity currency, although superior to bartering, had significant drawbacks in terms of portability and divisibility. While it was possible to carry some gold or silver coins for small transactions, this system proved impractical on a larger scale.

In contemporary terms, using physical coins for expensive purchases would be extremely inefficient. For example, if we consider a Bitcoin valued at 8,000 euros, the equivalent weight in metal coins would reach approximately 60 kilograms.

As a solution to this problem, substitute coins emerged: certificates issued by a central entity that could be redeemed for a specified amount of valuable goods. This system allowed for the carrying of proof of ownership without the need to transport precious metals, enabling their redemption for tangible goods through the issuer or their transfer as a means of payment to third parties.

Although occasionally private companies issued substitute currencies, central banks predominantly took on this role. The gold standard is the best-known example of this monetary system, where national currencies were backed by gold reserves. Less than a century ago, it was possible to present banknotes at a bank and exchange them directly for precious metals.

This system offered significant economic advantages. The gold standard made it difficult for monetary devaluation through inflation, as governments theoretically could not issue more banknotes than the value of their gold reserves. However, banks developed fractional reserve policies, issuing more money than their physical gold holdings.

The gold standard system facilitated transactions with gold without the need to physically handle the metal, also allowing it to be subdivided for smaller payments. Additionally, the international recognition of gold as a stable value facilitated global trade between countries adhering to this standard.

Fiat Currency: The Contemporary Monetary System

With the abandonment of the gold standard, a new type of currency completely detached from commodities emerged: fiat currency.

Fiat currency ( from the Latin "fides", trust) is one issued by a government without specific material backing. The US dollars, euros, Mexican pesos, and Japanese yen exemplify this monetary system. Its value is closely tied to the decisions of governments and central banks, fundamentally based on the collective trust in the issuing institutions.

Although it may seem like a modern invention, fiat currency originally emerged in China during the 11th century, with this concept being experimented with for centuries in Europe and America since the 17th century.

Unlike previous monetary systems, fiat currencies are not limited by natural scarcity. While the production of precious metals or agricultural goods requires extractive or farming processes, the issuance of banknotes is relatively straightforward. Entities such as central banks can create new money according to perceived economic needs.

This feature simultaneously constitutes the main advantage and disadvantage of the fiduciary system. Advocates argue that the ability to adjust the money supply allows for a swift response to financial crises and effectively regulates the economy. By controlling the money markets and interest rates, governments can decisively influence national financial markets.

Paradoxically, critics of the fiat system point to the same mechanisms as problematic. Excessive money issuance generates inflation, eroding the purchasing power of citizens. Inadequate management can trigger hyperinflation, causing massive currency devaluation and generating profound economic and social instability.

Cryptocurrencies: Digital Monetary Revolution

Bitcoin has been recognized both as digital cash and digital gold, combining features of both concepts. On one hand, it replicates fundamental attributes of commodity-based money (homogeneity, divisibility, and portability), becoming an efficient medium of exchange in the digital environment.

On the other hand, its capacity as a store of value has increased its popularity. Advocates of Bitcoin as digital gold argue that its deflationary supply policy (more precisely "disinflationary") preserves purchasing power in the long term, contrasting with the inflation characteristic of fiat currencies like the US dollar, whose value can depreciate according to Federal Reserve policies.

Superficially, cryptocurrencies seem to behave like commodity currencies. Although they have no utility outside of their respective protocols, they are also not issued or backed by governmental entities. In the digital currency ecosystem, value fundamentally derives from free market valuation and distributed consensus mechanisms.

Conclusion: The Continuous Evolution of Money

Money has taken multiple forms throughout human history. While we typically conceive of value in terms of national fiat currencies, these represent a relatively recent innovation. The payment applications we use daily are the result of millennia of monetary evolution.

Cryptocurrencies constitute a significant experiment in this historical development. If Bitcoin or other cryptocurrencies achieve widespread adoption, they would represent the first genuine example of digital commodities with monetary function, potentially challenging the global dominance of traditional fiat currencies.

The monetary history continues to be written, with technological innovations that transform our understanding of value and economic transactions in the digital age.