Have you ever wondered about the origins of money? Or wondered what different currencies of the world people used in their transactions before money existed? Before money became a medium of exchange, people mainly used barter, where people exchanged one good for another – rice for wood for example, or services performed for goods. Some people used stone money.
The Soviet Union was a system that largely often functioned with barter. People exchanged services for publicly unavailable goods or services. Since the economics of the society did not encourage private initiative, there existed limited variety of products available for a common person to purchase with their currency at the store. As such, it required to have an extensive network of connections whereby people provided favors for one another, not in exchange for currency, but in exchange for goods and services.
As history has shown there are many challenges associated with employing barter, such as measuring quantity or establishing a fair exchange rate, or having a commodity that is acceptable by all, and so forth.
The Island of Stone: Local Currency
It might appear that one of the most basic challenges to a barter trade system is that it is hard to be implemented in a large community. But even in small communities, where people knew each other, it was hardly used. One example is Yap island, 800 miles to the east of the Philippines, in the Caroline Islands in the Pacific Ocean. This island did not have precious metals such as gold or silver to use as a medium of exchange, nor were they familiar with the idea of paper currencies. Instead, they used limestone. People of the Yap island used carved disk shaped stones as a form a currency. It was called fei.
The fei currency consisted of large and thick disk stones varying in diameter from one to twelve feet, with a hole in the center where a pole could be inserted to facilitate transportation. But even though moving the stones was practically possible, carrying out transactions did not necessarily require the transportation of the stone from one owner to the other. Adding a tick or a scratch on the stone to indicate the transaction was enough. Sometimes even only acknowledgement by the buyer that the ownership of the stone has transferred from the seller was sufficient.
Currency Hinges On Trust
How people of the Yap carried out their transactions offers a lot of insight into the nature of currency. The entire system of keeping records in the society about the possession of currency depended not on the possession of the stone itself, but on trust among individuals. A remarkable example of this is a wealthy family in the Yap island whose wealth is acknowledged by all inhabitants, yet they did not own an actual large limestone (or fei). In fact, it was told that the large stone representing this family’s wealth laid for three generations somewhere deep in the ocean.
The fei system shows us that regardless of which object we use to keep our records of credit or debt in society, as calculated by either currency or money, trust is a fundamental factor in making it feasible. Without trust, whatever object we use as currency will not perform its intended function. Whenever our currency or money fails at being acknowledged by all people as an acceptable medium of exchange, it ceases its monetary value.
Difference Between Currency And Money
We often confuse currency with money. Currency is more of a record than an object of value itself. Banks, for example, have records of millions of dollars in credit or debt on accounts. However, at any given moment they have only small percentage of those records as liquid currency in the form of physical notes readily available for payments of liabilities, such as for withdrawals.
Today, when you make a purchase using your credit card there is no actual exchange of physical currency taking place, such as dollars; The process involves a transfer of credit from your account to the seller’s bank account, in a similar way to saying that now the seller owns the Fei stone even though they do not have it in their house. In the future, there is a high chance we will conduct our transactions using digital currency, a large part of our current banking system. However the potential risks of such a system is the inability to convert this digital currency into physical notes – something that creates the potential for a whole host of issues that would be better to discuss in another article.
Currency – a unit of account that is durable, portable, divisible, and interchangeable which serves as a medium of exchange.
Commodity – a raw material in finite supply that is in demand for consumption or production.
Money – a currency that is a commodity.
For an in-depth review of the distinction between currency and money and its brief history you can read this article.
Even without banks, we usually adapt by coming up with new ideas to keep records of credit or debt. In Ireland, 1970, banks went on a strike, and the country operated without banks from the 1st of May till the 17th of November in the same year. The Irish often remember this period with nostalgia, away from the pressing demands of the banks. Back then, people found a way to handle payment and credit, by using checks endorsed to others without a date, as a form of currency. Even when there were no more checks, people made ones by writing the amount on a piece of paper and adding a mail stamp to make them official. Some Pubs and shops in the country replaced banks and provided information about the solvency of the creditors in the community. After the strike had ended, most checks had matching credit balances in the bank, and the entire system proved to be highly efficient.
Our current monetary system depends heavily on central banks and commercial banks to run. Those banks currently handle the book and record keeping of our transactions. While central banks largely control the currency supply, it is commercial banks that actually create the significant amount of inflation (currency printing) through fractional reserve banking. Increasing the supply of currency devalues the currency, thus destroying the purchasing power we have in our wallets. As a result the actual amount of currency does not represent an accurate amount of checks and balances in society based on value provided.
What centrals and commercial banks do today in the form of monetary policy and fractional reserve banking is similar to forging the records on the fei stones, skewing accounts in a certain artificial direction. For example, Dow Jones’s 1,000% rise throughout the past 27 years appears to be more of an illusion when adjusted for inflation. It is not surprising that when there is such a forging of records, as the creation of currency (inflation), that this increases the risks for potential systemic imbalances that could swing violently in one direction or another – something that harms the ultimate financier of these monetary experiments, you the taxpayer.