LECTURE 3: The Evolution Of Currency
Lecture 3: In this lecture I want to go over the evolution of currency...
Before we start talking directly about Bitcoin, I think it is important to talk a little bit about currency in general, or money.
Here is the definition of "currency" at Investopedia.com:
"Currency is a generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services currency is the basis for trade".
Basically, money is simply a tool with an agreed upon exchange value that we use to trade for goods and services of like exchange value.
Anything can be used as currency as long as it has an agreed upon value. Throughout history you can see the use of seashells, salt, metals and even animals like sheep and cows as examples of currency.
As a matter of fact, hemp (a variety of cannabis grown for the fiber and seeds), was accepted as legal currency with which you could pay your taxes for over 150 years in Colonial America.
So, you see, just about anything can be used as currency, as long as everyone agrees on the exchange value.
Historically, GOLD has been one of the most popular currencies. Gold has withstood the test of time because it is rare, exclusive, durable and maintains its value regardless of what is going on in society, like who the king is or what government might be in charge at the time.
But gold also has its drawbacks, like being heavy and cumbersome, which leads to the next progression in the evolution of currency.
The next step is the transition from gold to paper money. In the beginning, paper money was essentially a "gold certificate" representing physical gold being held by the treasury. The value of the "certificate" was directly tied to physical gold.
Can you imagine how difficult this transition was in the beginning. Everyone was used to receiving gold for products and services. You could see, feel and weight the value in your hand at the time of a transaction. Then all of a sudden, somebody is handing you a piece of paper… and you are just supposed to trust the piece of paper equates to a quantity of gold of the same value.
I bet that was very difficult to understand in the beginning.
But the evolution does not stop there. This "gold standard", where paper money was backed by physical gold, was abandoned in the 1970's in the United States and the US Dollar became what is called a FIAT CURRENCY.
Here is a definition if "Fiat Money" at Investopedia.com:
"Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of".
Basically, the value of fiat currency is backed by the government that issued it. The government and central bank say it has value, so it does and is accepted as legal tender. While the material the money is made of doesn't have any real value, what is printed on the material is what's important and determines its value.
There is an ongoing and never ending debate as to what is better… the gold standard or fiat currency. But no matter what side of the debate you are on, fiat currency is used around the world as a means of exchange for goods and services.
One of the biggest results of the change from the "gold standard" to fiat currency is we are now dealing with numbers, not metals. This makes paper money much easier to be counted, managed and moved in comparison to using gold.
These days, believe it or not, money is more about numbers in a computer than actual paper money. Your bank, and to a larger extent the government, keeps a LEDGER of how much money you make, how much money you spend and how much money you have left.
This is a very important concept, so I want you to think about it. How often do you use paper money instead of some other means of payment like checks, credit cards, debit cards, etc.?
Now in the Internet age, there are even more ways to transfer and spend your money without actually turning it into paper money first… like bank transfers or cell phone applications and even watches that can make electronic payments.
For example, some people get their paycheck directly deposited to their bank account… and then spend the money using a debit card or have their bills paid electronically. So you can see, in the modern world, most of your money can be spent and traded for goods and services without ever becoming paper money you hold in your hand.
The amount of money you have is more about electronic record keeping, or a ledger, than it is about how much actual paper money you have in your possession.
It is important to understand the evolution of currency in order to understand Bitcoin:
- We started out with physical goods being used as currency, the most popular being gold and silver.
- We then moved on to paper money that represented a certain quantity of those physical goods, like the "gold certificate".
- Then we changed to paper money that did not represent any commodity, but rather had value because the government that issued it said it did.
- And finally the paper money turned into an electronic accounting system where your account ledger represents actual paper money but can be exchanged without ever becoming paper money.
Can you see where this is going? Can you guess the next step?
Right now your bank has a ledger of how much money you have, that can be exchanged for physical, paper money (just like the "gold certificate" could be exchanged for gold). But even so, most people never turn their money into paper money and spend their money electronically instead.
The next step in the evolution is to have an electronic ledger that keeps track of how much money you have, where the currency cannot be exchanged for anything physical, but can still be traded electronically for goods and services. And that is where Bitcoin comes in.
In this Introduction Section I wanted to give you pointers on how to get the most of this course, introduce myself and show you why you should listen to me and explain where we are in the evolution of money. Now that this is done… it is time to start talking about Bitcoin directly, which we will do in the next section.