If you were born before 2000s, you probably would remember that one instance where your dad gave you a fat bundle of cash to pay your coaching classes or school fee installment. I can still feel that anxiety with which I left that bag full of treasure in classroom to take a leak, asking a fiend to keep an eye. That anxiety probably made me take a leak in the first place, but that's not the point.
The payment landscape in India has taken a 180 turn with UPI. No need of complicated, ugly netbanking interface, works on a phone, settles in seconds and its free! It was not the same though. Imagine the stress of a kid some 10000 years ago, carrying a herd of cattle to pay his coaching classes fees or to buy those cool new pair leopard fur pants which he saw on that egoistic neighboring tribe kid.
Before I post rants on why the concept of money, despite all the fancy developments, as it exists is deeply flawed and needs to change, we should take a quick tour of history of money in this one. And there's more to it than moving from cattle to gold to paper money. So, stick with me here.
Ancient commerce was nothing more than trading your surplus grains, livestock and its derivatives for something that was scarce for you. How was value of something like a cow or cool leopard fur pants decided? Well, just like its decided today, basis the demand and supply. What do you mean you want one more sheep for that piece of fur pants?
Cattle and grains were eventually replaced by metals. Humans started putting value to copper, gold, silver, iron, etc. The rarest and hardest to mine metals took the top spot. Note that all these transactions involved exchange of something derived by investing work in it. Leopard ain't killing itself so you get fur pants. Investment could be time, labor or risk - essentially proof of work.
Birth of Modern Financial System
Its obviously very expensive and tiresome to carry shitloads of gold on you all the time. Not to mention, unsafe. And who is gonna dig through 5 feet of soil to withdraw your gold because your wife wants a shiny new seashell necklace?
To solve this problem, goldsmiths and other smartasses started issuing a 'receipt', if you may, for depositing gold with them. The people trusted the goldsmith to hold their gold in exchange of this receipt which could be used to pay for stuff. The person who got the receipt in exchange of goods could take it back to the goldsmith to exchange it for actual gold, OR buy other stuff with it. And the cycle continues. This was the birth of what you today call a Central Bank Note.
That one over-smart goldsmith
At some point of time, receipts or notes became primary way of transacting and even getting paid for with an assumption that the gold sat safely in the goldsmith's safe (this could be a good tongue twister). This is when some smarty pants goldsmith thought "What if I issue the gold notes even without having that much of gold in the first place? Not everyone is going to withdraw the gold at once ,right?" Well, short answer - No. But, the scam did work for most of the part. Goldsmiths issued gold notes for loans and proof of payment without actually holding that amount of gold, essentially creating money out of thin air! Sounds familiar? Anyway, this scam could only work till the time everyone for some reason starting trading back their gold notes for their gold and the ones too late found out there is no gold left with the goldsmith. This caused what we today call as 'Bankrun'. As soon as one person got to know that his notes can no longer be exchanged for gold, everyone in the town would run to the goldsmith to try and get their gold, only to return empty handed. Wait, is that goldsmith's head in his han...? Never mind.
But in essence, this would not have happened with the cattle and the fur coat as the transaction happened peer to peer and could be verified by them in real time and the assets were limited. There is no need to trust central institution in this transaction. Cool leopard fur pants don't come out of thin air.
The Gold Standard
Well, fast forward to 1913. The Federal Reserve Act was created and the United States dollar became the Global reserve currency backed by gold and other currencies were tied to USD (therefore indirectly to gold). Its not like USA will just stop backing USD by gold overnight, right? RIGHT? In 1971, US President Nixon showed a middle finger to the world and debased USD from gold. USD was no longer linked to gold. Here is where the money printing started. Central banks slowly realized that recessions due to poor economic policies could be easily avoided by simply turning on your money printer on ultra mode. I believe the fundamental change is here lack of proof of work.
Today, the financial infrastructure seems to have made significant leaps. However, this is merely technological advance. The fundamentals of fiat currencies are at the weakest they have been and the burden is carried by common people in form of central control and inflation. We will go into depth of what are the underlying issue with current state of money and how can this change in not so distant future.
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