Paper Money!!
Up until a hundred years ago or so we always trusted in someTHING to represent money. However something happened along the way and we’ve changed our trust model from trusting someTHING to trusting in someONE.
Let me explain.
Over time, people found it too cumbersome to walk around the world carrying bars of gold or other forms of money, so paper money was invented.
Here’s how it worked: a bank or government would offer to take possession of your bar of gold; let’s say worth $1000, and in return, that bank would give you receipt certificates, which we call bills, amounting to $1000.
Not only were these pieces of paper much easier to carry, but you could spend a dollar on a cup of coffee and not have to cut your gold bar into a thousand pieces. And if you wanted your gold back, you simply took $1000 in bills back to the bank to redeem them for the actual form of money, in this case that gold bar, whenever you needed…
And so, paper began its use as money as an instrument of practicality and convenience.
However as time progressed, and due to macroeconomic changes, this bond between the paper receipt and the gold it stands for was broken.
Now, to explain the path that led us away from the gold standard is extremely complex, but suffice to say that governments told their people that the government itself would be liable for the value of that paper money. Basically we all said “let’s just forget about gold and trade paper instead”.
So people continued to trade with receipts that are backed by nothing but the government’s promise. And why did it continue to work? Well, because of trust. Even though there is no actual commodity backing paper money, people trusted the government and that’s how fiat money was created....
