Salt, elephant hair, tobacco, owl coins, cattle, and the list goes on. You are probably wondering what all these items have in common. They were all forms of currency used throughout history and throughout the world. What is currency though? Is it money?
The answer is “no.” Money and currency are not the same thing. Money has no real value whatsoever. We only believe it has value because someone said it has value. Currency on the other hand is whatever we say it is. The accepted form of currency around the world today just happens to be money.
[dropcap]I[/dropcap] will admit it is not ordinary behavior for your average citizen to sit around contemplating money and currency. Rarely do I think to myself, “What is currency and how does it affect me?” What most people DO sit around and think about is, “Why are things so expensive? I wish I had more money. I wish I could get my head above water; I wish I could save more.” I believe in order to answer these questions, that keep people up at night, it is important to understand how money works and be able to understand the bigger picture of this financial machine we are all part of. How can I learn algebra if I don’t understand the basic fundamentals like addition, subtraction, multiplication and division? The answer is, I can’t. Understanding money doesn’t have to be hard, if you understand all the moving parts and start from the beginning.
Most of us learned about barter and trade in elementary school, and the next step we learned in the financial process is that to buy and pay for things we use money. Quite a jump I would say to go from cattle and animal skins being used as currency straight to the dollar bill. There has always been wants and needs that had to be met: food, clothing, weapons, animals and much more. We know these things as commodities. Barter and trade was effective as long as you had something the other person wanted, and they had what you wanted. This became more and more difficult as trade flourished around the world. Can you imagine all of us lugging around TV’s and Xbox’s as forms of currency? Buyers and sellers had to agree upon a system of payment for goods and services, and this is where money became an accepted form of currency. What happened in between though?
As far back as 2500bc metals, such as gold, silver and copper, were used as the most popular form of currency. The actual minting of metal coins began as early as 700bc. What made this form of currency so popular is the fact that it was easy to transport, and the coins were durable unlike currency that could rot or die on the way to market. Metal coins became so widely used that all currencies around the world were measured against metals like gold and silver. Just as coins were being minted back in 2500bc, the idea of paper money was already being developed by the Babylonians. Although the developmental process of the banknote started in the 7th century, the actual paper money was not introduced until the 11th century by the Song Dynasty of China. In 1661, the first European bank notes were printed by the Bank of Sweden. The popularity and success of bank notes spread through Europe and these paper notes were issued by multiple European governments. America, up until shortly after the end of the Revolutionary war, was still using the currency of England, Spain and France. However, before the U.S. actually became the United States of America, the Massachusetts Bay Colony issued the first form of paper money in all the colonies which would later form the United States of America.
What led up to the U.S. dollar is actually quite interesting. I myself had quite the history lesson in researching how the U.S. dollar came about. The use of bank notes was practiced throughout the 19th century in the United States. At one time in our country there were actually 5,000 different types of bank notes issued by various banks in America. It was only the largest banks, considered creditworthy, where these notes were actually accepted. What made these bank notes different from the money we use today in this country is that the bank notes used then could be exchanged for gold or silver. With the mass production of bank notes, there was not enough gold and silver on deposit so that the people became nervous and would start taking their bank notes out of the banking institutions where they held their notes, and this would cause a bank bankruptcy.
In 1863, the United States of America created the National Banking Act which established a uniform currency for our country. Up until 1963 our U.S. bills were referred to as silver certificates. Even still, all the money being printed here in America and in other parts of the world was to be backed by gold. What I found most fascinating though is that currency was one of the major causes of the market crash of 1929 taking this country into the Great Depression. [quote float=”right”]Our money today is worth something because we are told it is, and people accept it as forms of payment for goods and services. [/quote] Investors realized all the dollars in circulation couldn’t possibly be backed by gold, which caused masses of people to sell off their stock, and hence the market crashed. In fact, in 1932-33 Roosevelt signed an executive order to confiscate all gold privately owned by Americans to cover the shortage in the U.S. Treasury. The Treasury realized that too many gold backed American dollars had gone overseas, and if other countries decided to cash them in for gold, the Treasury would not be able to honor that debt. So in 1971, President Nixon told the world that the U.S. dollar would no longer be backed by gold. The currency of our country today is the USD (U.S. dollar), England has the GBP (Great Britain Pound) and of course there is the Euro which is the currency used by 18 countries of the European Union, not to mention the many other currencies that exist around the world.
Every day in this country we use dollar bills and coins, but it is money that is created by and authorized by our government. We call today’s currency, FIAT currency. FIAT meaning, “Faith In and Trust” of the U.S. government. This is also true for other foreign governments of the world.
Our money today is worth something because we are told it is, and people accept it as forms of payment for goods and services. Some might ask though how do we know our money will always have value? That, my friends, is where economics comes into play and that is an entirely different article.