Before paper money existed we always thought it was trade by barter system. But it wasn't all that true because there were other means of trading goods that existed in between trade by barter system to today's present money system.
So I'm going to take you down this memory lane of the history of money, right from 6000 BC of trade by barter system up until gold standard of 1971.
So the first one is the trade by barter.
This is a well noted type of trading system so I won't dwell on it, rather I'll talk on the disadvantages and some other things.
So, let's bring it down to a community setting where a farmer that grows crops and a herdsman that raises pigs, at the end of each harvest there's a community gathering or not necessarily a community gathering, the farmer exchanges his corns for a pig or pigs.
This trade-by-barter system has to pass through 3 requirement
i. The exchange good has to be something of value to the next person which made it difficult for transacting because you have to bring what the next person needs the most at that time
Let me give you a very perfect example, now let's say you're a shoe maker and you need a table. On the other hand, the table maker does not need a shoe at that very point - what he needs is a bag. This leads to a conflict of interest. So you have to find someone that has what the table-maker needs and get it and now exchange it with the table maker.
ii. It has to store value. Value mustn't necessarily be monetary value. Like value can be like a food system, whether it's edible. You have to attach value to it. Just like what I said, that table maker needed the bag. That's the sense of value we are talking of
iii. It has to be a medium of exchange.
Before we conclude on this, the trade-by-barter system started in Egypt.
The next one is gold. Gold was a well-known currency across the world. A group of people or some communities came together and saw Gold as a rare thing of value, a rare natural element unlike copper and other stuff (like you know you can't compare copper and gold). Gold has a lot of elements, a lot of precious elements rather than copper and the rest of them.
You can keep gold from now till the kingdom comes, it will still be intact like that. This trading system (gold) had to pass through three requirements -
the first requirement was it had to be scarce and gold was very scarce at that time not like today that we have gold anyway; then, it was scarce; the second one was it had to be hard to harvest. Gold was used because it was difficult to find just any way and harvesting gold requires lot of equipment to do so
Thirdly it has to be durable. Just like what I said, it has to withstand the length of time.
But this Gold came with a lot of problems.
The first one was that it can easily be debased. I'm sure you've heard about 99.99% carat, 29.99% carat, 99.9% carat, 69.9 carat
To debase gold all was required was to pick up a bullion of gold, cut it, melt it down while adding other metals once it cools down, you discover the 99.9% Carat gold isn’t going to still be 99.9%.
This implies cutting a piece of that gold and adding other elements like copper, aluminum, it will still come out of gold but it's not going to be 99% gold again. It's going to be something around 69% and those days they did not have those technologies to test to know the percentage of gold.
That's one of the problems that came; the other problem was the fluctuation of supply. What happened I think in 1849 is called the California gold rush where in California there was this cave some men went to and they saw gold in abundance there. So what happened? The price just devalued gold to no sense. Let's say you found 100 tons of gold, do you think that gold price is going to be at $28.00 again? No, it's not going to be at $28.00, it's going to reduce to about $17.00. So, because of that California gold rush, it really fluctuated the base of supply. It was hard to transport. This is a very funny one. It was hard to transport. Imagine someone transporting 100 tons of gold. Imagine it in today's world. You need to have a truck, so it was very hard to transport those days.
So moving forward, in China a new type of money system which was called the paper bill was formed.
This paper bill was called I.O.U just like the acronym pronunciation it stands for I OWE YOU.
These I.O.Us were just used as a medium of exchange in their locality which brought about lot of challenges when trading with outsiders
For example, you deposited your gold or other precious stones worth about $200 to your local bank, they will now issue out an I.O.U. to you that you have $200 worth of goods with them.
So you go about the city purchasing goods you need. The shop collects the I.O.U from you and if you have change remaining with them, they will issue you another I.O.U
I’m sure you’re imagining the confusion it was causing during that time.