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INVESTMENT STRATEGY QUARTERLY

The Evolution of Money

Scott J. Brown, PhD, Chief Economist, Raymond James

Money is the lifeblood of the economy, a key factor in the These early forms suffered from a lack of central control or
historical development of society. Try to imagine life enforcement.
without it. However, money has changed a lot over time As civilisation developed, metals such as bronze, copper, or tin,
and technology will continue to drive further changes, would be exchanged, with the idea that they had an end use (they
could be made into cooking utensils or weapons, for example).
offering benefits as well as potential risks.
Authorities began to issue coins, and the value would be based on
Economists note three functions of money: it is a medium the metal used. This helped to improve commerce, but the value
depended on the scarcity of the type of metal used. Gold and silver
of exchange, a store of value, and a unit of account. Money
coins became more common.
is liquid so it can easily be used to purchase goods and
When Marco Polo returned from the East, he reported that the
services. Inflation reduces its purchasing power over
Chinese were using paper money. At the time, this sounded like a
time, but otherwise, money can be saved and spent later. crazy idea, but eventually it caught on. Initially, the paper money
Money serves as a yardstick to measure accounts, costs, was backed by a physical commodity such as gold or silver, the
and prices. value of which changes depending on supply and demand. When
gold and silver began arriving from the New World, inflation in
A BRIEF HISTORY Europe increased.
Prior to the development of money, people had to barter, The U.S. and other countries left the gold standard (the backing of
exchanging one type of good for another. An easier way was paper money by a reserve of gold) in 1973, and we now have what’s
needed to keep track of who owed what to whom and so systems called ‘fiat money.’ That is, there is no inherent value in the dollar;
of ledgers were developed. In some places these IOUs were in its worth is determined by a shared concept of what it can buy. The
tokens, such as shells, beads, or whale teeth, which could be dollar is ‘legal tender,’ meaning that courts of law recognise it as a
exchanged, serving as an early type of money (as well as credit). satisfactory payment of monetary debt.

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