3. Understanding The History Of Money - GOLD and Paper Money

What once started as barter trade (trading goods for goods) was replaced using standardised token money. Gold and silver were the first universally accepted natural choices for money. Actually, they fit the bill so well that they were the primary form of money for centuries across the globe and have been instilled in human culture... I bet when I say "gold" you instinctively think of value or wealth. After this came paper money – a more user-friendly way to carry and move around value compared to precious metals. China was the first to adopt it in the 7th century. The first European banknotes weren't issued until the 17th century. It took people several centuries to accept the new paradigm at the time and shift from gold and silver coins to banknotes backed by these same precious metals as the widely used form of money. This led to the birth of 'the gold standard'. The banknotes themselves didn't hold any intrinsic value like gold and silver coins do. Instead, paper money was backed by precious metals (like gold and silver) stored in a treasury vault somewhere. This was the case until 1944. At the end of World War II, yet another related system was introduced, the "gold exchange standard", under the Bretton Woods agreement. This meant that many countries fixed their national currencies’ exchange rates to the US dollar which was in turn convertible to gold at a fixed rate. Not only that, but this convertibility was no longer available to individuals or companies, only to central banks. However, the Bretton Woods system ended in 1971, when the US dollar convertibility to gold was terminated. So long "the gold standard" and commodity-linked money. Paper money is no longer backed by gold or anything else tangible but just faith! Welcome to the world of fiat currencies! So how does paper hold any value if it's not backed by anything? Well, that's where concepts like legal tender come in. The fiat system, which we still use today, has governments assign value to a currency, declaring it a legal tender. This means a government decides whether a medium of payment will be recognised for financial transactions, trade settlement or commerce in a country or jurisdiction. Throughout all these stages we had an idea of value in our mind but it has evolved hand in hand with our civilisation and technology. From something you can touch and actually use, to something you can touch but cannot use except for trade, to just an abstract idea.