Origins of Banking & Currency
What is banking?
In its most basic sense, banking is simply the act of lending money to others. However, this simple concept has grown over time and today exists in a very complex system through which we move our money around. Let’s take a look at some of the earliest forms of currency and how they led to where we are today.
How did we get obtain something we wanted before currency?
The first form of money was “trade”. People would barter goods and services in order to get what they wanted. However, this system had its limitations because not everyone always had what someone else wanted. For example, if I wanted a chicken but had nothing that the chicken farmer wanted, I would be out of luck. This is where the concept of “coincidence of wants” comes in.
For example, if I wanted a chicken but had nothing that the chicken farmer wanted, I would be out of luck. This is where the concept of “coincidence of wants” comes in.
What was our first accepted form of currency?
Gold and silver became accepted as forms of currency because they were rare and had value that was universally accepted. This meant that I could trade my chicken for a certain amount of gold or silver, and then use that gold or silver to buy something else that I needed. However, carrying around large amounts of gold or silver was impractical and costly, so people started using banknotes instead.
Why Did we need Central Banking?
Eventually, central banks emerged that would back notes with gold or silver reserves to protect against inflation. This system helped to stabilize the currency and ensure trust in the banking system as a whole.
How did we get to our current system that is no longer part of the gold standard?
However, this system began to unravel in the early 20th century. First, World War I led to many countries leaving the gold standard in order to print more money to fund the war effort. Then, during the Great Depression, people began hoarding gold and withdrawing their money from banks, leading to a further decline in trust. Finally, in 1971, the United States abandoned the gold standard altogether, ushering in a new era of currency backed only by trust and confidence.
What backs the currency today?
So today, our currency is not backed by anything physical, but rather by the trust and confidence that we have in our central banks and the overseeing government of that currency. While there are still risks involved, this system has proven to be remarkably resilient and adaptable to the ever-changing needs of modern economies.
What do central banking and cryptocurrency look like in our future?
The role of central banks is changing as we move into the future. With the rise of cryptocurrency, there is a new asset class that is not under the control of any central authority. This presents both opportunities and challenges for central banks, which must now adapt to this new landscape. At the same time, cryptocurrency also has the potential to revolutionize the way we send and receive payments, making central banks even more important in the future.
Banking and currency have come a long way from their origins in trade and barter. Today, we have a complex system that is constantly evolving to meet the needs of our ever-changing economy.
Central banks play a vital role in this system, and they will need to adapt and change in order to stay relevant in the future. Cryptocurrency is just one example of the challenges that they face, but it also presents an opportunity for them to reinvent themselves and become even more important in the years to come.
* The content on this site is not investment advice and shouldn’t be interpreted as investment advice. Do your own research as the digital asset space is extremely volatile and you should never invest more than you can afford to lose.
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