Evolution of the Medium of Exchange

Anything used to settle sale and purchase of goods and services is referred to as medium of exchange. In ancient times, the barter system was the medium of exchange. People exchanged goods for goods. For example, if a farmer wanted clothes, they would trade some of his wheat for clothes. But like any other system, it was not free of complexities. Every seller had to look for a buyer who wanted to purchase the exact same thing he wanted to sell and buy the exact same thing the other person wanted to offer. Apart from the problem of double coincidence of wants, the barter system had no means for savings. Seeing these problems, humans evolved in a more efficient way.

What came next was the silver standard. Introduced by the Spanish Empire, silver coinage and silver certificate became the most widely circulating coins in Europe and in America. The shortage of British coinage in its thirteen colonies, forced some of these colonies to print their own paper currency. This led to hyperinflation in many of these colonies and Britain banned the printing of paper currency in all these thirteen colonies in 1764. After its independence, the USA started minting its own coin however due to shortage of gold and silver, it had to make the Spanish Dollar as legal tender indefinitely. Silver standard lasted for about four hundred years. The silver standard ended in the 1870s after the substantial decline in value of silver in comparison to gold. The USA government passed the Coinage Act in 1873 which gave more importance to gold standards and demonetized the silver coins.

Hence came the gold standard. The gold standard was a monetary system under which fiat currencies were convertible into a fixed amount of gold. Wherever paper money was printed, inflation followed, so, people thought of backing fiat money with gold. British West Indies was the first to adopt the gold standard in 1704. Britain adopted the gold standard in 1816 followed by some of its colonies like Canada and Australia. The USA passed another Coinage Act in 1834 to fix the value of the Dollar at USD 20.67 per ounce of gold. The gold standard lasted between 1871-1913 and then was interrupted by WWI. The outbreak of WWI and the Great Depression worsened the conditions for the gold standard. Countries started leaving the gold standard largely because it constrained the federal government. In the case of America, if a person wanted to exchange their 20 dollar note for one ounce of gold, the bank was obliged to do so. Leaving the gold standard meant the banks were no longer obliged, and the Treasury did not have to hold vast gold or silver reserves to back up the currency.

The money which we use today (fiat money) has no intrinsic value, it has value because we believe that it has. The present form, cash and coins are successful as they carry out the functions of money : medium of exchange, store of value, unit of account, and standard of deferred payment. They are generally acceptable, durable, divisible, homogeneous, and recognisable which make them very convenient. The present form of money is presumed to be the most successful and convenient, yet it poses some issues. For starters, it can be stolen and theft is easy, it makes us targets for thieves. You also have to often go to the bank to withdraw. Though not perfect, cash is sustainable and is the present form of money.

Lastly, discussing the future possibilities for mediums of exchanges, cryptocurrency. First created in 2009, this unregulated digital currency took the world by storm. Cryptocurrency is favoured by governments in certain applications, such as being a fast, easy, and cost effective mode of transaction. On the other hand, it is decentralised, which has most governments reluctant to further explore and enable its implementation. Cryptocurrency is a viable option in the future, but due to its decentralised pivot, it is unlikely to garner any significant support from our governments - in most cases, it is quite the contrary, with governments outlawing cryptocurrency or restricting them in some form.

Throughout history humans have evolved through multiple mediums of exchange, going from the barter system, silver standard, gold standard to fiat money today. Looking through the past, we truly can appreciate the world we currently live in and get a deeper understanding into how we reached the position we are in now. Looking into the future, we can be certain that our medium of exchange will once again evolve - whether it is to cryptocurrency or not.

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