A Brief History of Money

Formally defined, money is something that is widely accepted for purchasing goods and services or repaying debts and taxes. You might think that this is limited to paper bills and minted coins, but the reality is that anything can be money, so long as it fulfills these fundamental use cases: a unit of account, a medium of exchange, and a store of value.

Looking back in history, the items that our ancient ancestors once traded and bartered were considered their forms of money. This included everything from shells and animals to silver and gold. In modern times, we see a reflection of this in places where government money is of little value, such as in remote communities and villages. 

Eventually, bartering was replaced with currencies as a medium of exchange. Initially, we had “commodity money,” which is a currency that has intrinsic value because it contains a precious metal, such as gold or silver, which is embedded in the coin. Then we shifted to “representative money,” which is money that has intrinsic value because it is backed by and can be converted into precious metal or another commodity. Until 1971, the US Dollar was a representative money”. 

Now we have “fiat money,” which is not backed by any commodity like gold or silver. Fiat money does not have intrinsic value. It has value only because the people who use it as a medium of exchange agree on its value. [1] They trust that it will be accepted by merchants and other people.

Fiat money started to predominate during the 20th century. In 1971, the United States announced it was decoupling the dollar from gold, thereby making the dollar a fiat currency. Currently, all the major currencies in the world, like the US Dollar, the Euro, the British pound, and the Chinese Yuan, are all fiat currencies.