You have sown much, and bring in little – Haggai 1:6

For most people, every single day, hour and minute has something to do with money. Whether you’re in a supermarket, at the office, or with your friends buying ice-cream, these actions involve money. However, money hasn’t always been something that had value, though the items you purchase with it, have. Let’s explore a bit further.

Its original purpose

The reason why the need for money ever arose was quite simply, because of our needs and wants. People started wanting things that they didn’t have. But, way before money came into place, there was another system called the barter system.

Let’s say that in a imaginary caveman tribe of Uggs, one caveman (let’s call him Smugg) was living in his cave. Smugg became quite hungry and wanted to have breakfast, but he didn’t have a stone plate to cook on. So, he went to his neighbour Thugg and offered a portion of the deer he had caught yesterday in exchange for a stone plate. Thugg happily agreed and both cavemen went home to enjoy their lunch.

This form of exchange is an early example of the barter system. People ‘barter’, or trade, the resources they have for other resources that they don’t have but need or want. However, there was one drawback to this method. No one could accurately guess how much deer is equal to one stone plate, or how many sacks of wheat are equal to a goat. To address this issue, people started to compare their objects with something else that everyone could agree had the same value, such as gold.

All that glitters isn’t gold

People as far back as the early Egyptians started using gold and silver to act as a currency for their goods. Now, everyone could agree that one chicken is equal to half a bar of gold, and that a cow is two bars. This leads us to our first characteristic of money: it is a medium of exchange. Gold bars are also known as commodity money, since they have an intrinsic value of their own. This is why it was also generally accepted among the people of the past.

While the jingle of coins or the clanking of bars in your pocket would have been quite nice to hear, it ran headfirst into another problem which took some time to overcome: it was quite cumbersome. If you were going to buy a house, it would require quite a lot of coins or bars, which was quite difficult to carry in the olden days and made you an easy target for criminals. People tried to avoid this by boring holes in their coins and stringing them around their necks, but the real breakthrough came from the Chinese.

Tea, anyone?

The Chinese were starting to run out of the metals they needed to make their coins. As a result, they turned to a quite surprising alternative : Tea! Tea was actually preferred as a form of currency by nomads since not only was tea valuable, but it could be eaten and brewed into drinks that were thought to cure coughs and colds.

While this method did seem to be useful, it encountered yet another problem. Compressed tea couldn’t stand the test of time, as it began degrading. Since it couldn’t act as a store of value, the Chinese put their minds together and came up with yet another solution that we use to this day : paper! The first paper notes were supposedly used by the Chinese as a medium of exchange, and it ticked all the boxes. It was :

• Portable – It was easy to carry around.
• A store of value – It had a value that could be used when buying or selling.
• A medium of exchange – It was used to bridge buyers and sellers.
• Easily divisible – It had smaller denominations that could be used for smaller payments.
• Durable – It could stand the test of time.

Modern times

The paper currency printed by the government in China actually represented silver and gold in the treasury. This was the same in America in early times, where each note printed represented an amount of precious metal in the treasury.

This however, was slowly stopped. The reason why money isn’t a commodity money anymore is because the world economy was growing rapidly, and needed enough money to keep up with it. Since precious metals were low in supply, the government instead chose to print money based on inflationary rates. This led to the introduction of fiat currency.

Fiat currency is not backed by any valuable item and is only accepted by us because the government says so. This also means that if everyone gets the notion that this money isn’t worth anything, we’ll have useless pieces of paper lying about.

Present day

Nowadays, the prices of our goods are based on inflation. For example, more people wanting biscuits leads to biscuit manufacturers increasing prices. This increases inflation, and happens to be a perpetual cycle.

The rising level of inflation also changes the value of money. For example, a dollar in 1900 can buy 14.3 gallons of gasoline, whereas the same dollar can only buy 0.3 gallons today. Inflation has both good and bad effects on the economy: It can help suppliers and sellers by increasing the prices of their products, but it can also adversely affect consumers who have to cope with rising prices.

The aim of investors is to be on the good side of inflation, in order to ride out the rising prices of stocks to much higher valuations (that often seem unheard of) in order to generate unbelievable returns.