A brief account of the history of money and currency: Part 2 - Blood money

April 07, 2023 07:00 Sukrit Sunama Knowledge  

In the first part, I explained how money has been created. Now it's time to talk about the next generation of money!

In the 17th century, colonist hunting was a popular activity among European countries. When they colonized countries and received money, banks were created to manage the funds. Banks issued banknotes instead of coins made of precious metals because it was safer to carry notes instead of coins in barbarian lands. This idea led to the creation of currency.

Governments now issue currency instead of precious metals. However, if currency is created out of thin air, it can have disastrous consequences. Zimbabwe is a good example of this, where they printed notes to buy USD to repay their debt to the IMF in 2008. After Zimbabwe repaid their debt, hyperinflation occurred, with an inflation rate of 7.96 x 10^10% per year. The normal inflation rate should be around 3-5% to promote economic growth. (Full Read: https://en.m.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe)

Did you know that for the past 10,000 years, humans have only mined and refined enough gold to fill three Olympic-size swimming pools? While this may seem like a large amount, if it were distributed equally among the 7.7 billion people in the world, it would only be a small amount of money. This is why we need currency instead of precious metals to promote economic growth, even though it can cause inflation.

The normal practice for currency is that a country can issue currency equal to the amount of gold they have, which is called gold-backed. If a country wants to print more money, they need to have more gold. However, after the Second Industrial Revolution, the world's economy grew at an exponential rate. After World War II, the United States of America sold a lot of their weapons to Europe because Europe was the main battlefield and could not produce enough weapons for the war. During this period (and until now), many countries held USD (US Dollar) as their reserve currency or treasury, replacing gold, which was rare and had a limited supply. They trusted that America had a large quantity of gold in their treasury.

Until 1979, the US was able to float the value of the USD from gold. This meant that the US could print any amount of USD they wanted, even if they didn't have any gold. But why didn't hyperinflation occur in the US? Find out in the next episode of this article.


Sukrit Sunama

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