What is Bitcoin #1: A History of Money From Barter to Banknotes to Bitcoin
Grasping the value proposition of Bitcoin can be difficult. For starters, it can take time for newcomers to understand how a currency that lives in the virtual realm can have any real-world value. ‘Seeing is believing,’ and so many have a hard time dissociating between the idea of money and the physical manifestation of money. Ask a child ‘What is money?’ and you’re likely to receive a range of answers, many of which reference something physical. Coins, notes, banks, credit cards are some of the words your young friend might use. Many adults would give a similar response. But there is so much more to money than meets the eye. Throughout history, money has evolved time and again, becoming more abstract in the process. Following this history can give us some perspective into the true nature of money and Bitcoin’s role in ushering in the next phase in the evolution of money.
Today, Bitcoin continues to draw in more and more holders on its aggressive march towards becoming full global money. In fact, the number of active addresses on the Bitcoin network broke records during January thanks to all the extra eyes focusing on Bitcoin.
With all the renewed enthusiasm comes a new wave of holders, many of whom haven’t had to give much thought to the history of money. Until now.
Barter, Beads, Bullion and Banks: The Four Eras of Pre-Bitcoin Money
The story about how we got here in the first place begins in prehistoric times. Back then people relied on barter to conduct their business. A tribe specializing in wooly mammoth fur, for example, could exchange said fur for berries gathered by a neighboring tribe. But this system ran into a problem known as the “double coincidence of wants.” That is, in order to complete a transaction, both tribes needed to have something that the other desired. In the summer months, no one wanted woolly mammoth fur, so the unfortunate mammoth hunter would have to forgo his berry snack.
Shells, beads, and other collectibles eventually filled the void, serving as representations of value through which tribes could transfer wealth. (For an excellent review of the origins of money systems, read Nick Szabo’s groundbreaking article.) Obviously, these are too flimsy to form the bedrock of a solid monetary system, and so humanity needed to look for other solutions.
Enter gold. Humanity’s love affair with gold began to take hold during the reign of the Pharaohs in Ancient Egypt. The shiny, lustrous metal began to captivate the imagination of the human race and quickly rose to prominence as the preferred store of value. Gold, and its less illustrious cousin silver, dominated much of civilization for millennia in both bullion form and as minted coins. Some of the qualities that make gold such an attractive form of money include:
- Durability: Gold doesn’t corrode easily
- Scarcity: The limitations of supply and the difficulty of extracting gold from the earth give it unmistakable value.
- Utility: Makes for beautiful jewelry
As we shall see later, the qualities that made gold such a timeless asset have been improved on by Bitcoin.
Despite continuing to enjoy immense popularity, gold would eventually make way for paper money and bank-controlled fiat. It all started when goldsmiths began to issue notes representing gold held in a vault on behalf of their clients. Nation-states soon realized the power inherent in money printing and began to outlaw these goldsmiths. Instead, nation-states created the concept of a central bank that would have the sole right to issue banknotes pegged to gold.
In 1944, the post-war Bretton Woods system set out the terms by which every national currency would be pegged to the dollar, which would, in turn, be backed by gold at a rate of $35/oz. However, inflation of the dollar supply led to the collapse of the Bretton Woods model as other countries began to lose trust in the American-led system.
But that too would not last.
Facing a run on the US gold reserves, Richard Nixon finally decided to unpeg the dollar from gold in 1971. This move, known as the Nixon shock, meant that the dollar was now a pure fiat currency, backed by nothing and controlled entirely by the Federal Reserve.
Since then, the Fed and other central banks have had the ability to print as much money as they want, with dramatic effects. President Biden’s proposed $1.9 trillion stimulus package will add yet another wave of liquidity to an already bloated money supply. All this monetary expansion has caused the dollar to lose 85% of its purchasing power since the Nixon shock. And that’s only according to the official statistics. Looking at the Big Mac Index, which tracks the price of Big Macs in various countries, the inflation rate over the last 20 years has been a cumulative 129%. Comparing this with the official rate of 50.75% over the same period suggests that the real effects of inflation are severely underestimated.
And so here we are, tens of thousands of years after the early Homo Sapiens set the history of money into motion. The road from barter to banknotes was paved with many an ingenious innovation. Toping them all off is Bitcoin, the 12-year old invention that represents the next phase in the storied history of money.
Next article we’ll address the trillion-dollar question; What is bitcoin? We’ll overview how Bitcoin came into our lives, what it’s good for and where it might be heading. Stay tuned.