Why did monetary systems of the past fail?

Money continues to hold value as everyone knows that it will be accepted as a form of payment. However, throughout history, both the usage and the form of money have evolved, with some forms becoming more successful than others and some failing outright. 

Read on to discover what went right and wrong in some of the more recognisable predecessors to the money we use today.

Bartering

What is it?

Money has been part of human history for thousands of years. But before that time, a system of bartering existed. In fact, there are still areas of the world and facets of our everyday lives today where barter is an accepted part of how money changes hands. 

Why did it fail?

However, those experiences have become much rarer in an increasingly digital world because the chance to trade that way is limited. One other drawback with barter-based trade is the double coincidence of wants problem. 

This problem comes about due to the difficulty for individual buyers and sellers to have the exact items available to sell in exchange for the item they want.  For an exchange to work, both parties in the trade must want to buy exactly what the other wants to sell – and that’s not as common as you might think. The reason for the creation of money is to provide a good that everyone is willing to trade for, allowing for transactions to be carried out without the need for debate or compromise between the different parties.

Coins to Paper

What is it?

While the use of gold and silver coins came about in 700 BC in Lydia (Turkey) and remained popular for almost a century. As trade continued to boom across the world and in larger and larger amounts, banks began to issue paper notes to avoid the need for customers to have to carry around large quantities of coins. These notes could be exchanged for an agreed amount of gold or silver coins and could be used to buy different goods and services, much like how we use money today. A key difference was that these notes were given by private banks and institutions and not the central government.

Why did it fail?

Its usage fell over time due to the fact it could not achieve two of the key features that make for a long-lasting store of value: divisibility (the ability to easily break down and divide the money into smaller amounts) and portability (the ease with which you can transport or move it). 

The Gold Standard

What is it?

The gold standard was a once successful monetary system where a country’s currency or paper money had a value directly linked to gold.

In the early 18th century, a gold standard commitment was formed that directed participating countries to fix prices of their own currencies to a specific amount of gold. National money would then be converted into gold at that agreed price.

Agreeing to take on the Gold Standard guaranteed that governments would redeem any paper money for its value in gold. It was a positive move, as transactions could now be done without the need for heavy gold bullion and coins. So, where did it all go wrong?

Why did it fail?

Gold has remained a unique asset class (a grouping of investments with similar characteristics) as it has a big effect on its own supply and demand. For example, the Gold Standard was originally fixed to $20.67 but these prices dropped every time miners found large new gold deposits. This led to the creation of the Federal Reserve in 1913 in an attempt to stabilise gold and currencies tied to its price.

Before this had a chance to stabilise, the arrival of World War I massively increased inflation and brought the gold standard down further. In 1933 on the brink of the Great Depression, U.S President Roosevelt nationalised gold owned by private citizens 

However, before this had a real chance to get off the ground, World War I broke out. War increased inflationary pressures and gradually, the gold standard began to break down, until in 1933 (on the brink of the Great Depression) U.S President Roosevelt nationalised gold owned by private citizens. The gold standard was no more and in its place, the Bretton Woods system was used to help countries settle their international debts in U.S dollars.

Ultimately, Gold’s scarcity meant that it was no longer the best option for guaranteeing larger amounts of money when needed, in this case during wartime. In August 1971, U.S President Nixon announced that the U.S would no longer be redeeming currency for gold, and the Gold Standard was fully abandoned.

While 1971 marked its official dismissal, the introduction of paper money from gold coins mentioned above was the first red flag as gold lacked the same flexibility that was becoming more important as the financial world continued to grow and evolve.

Although it’s no longer a standard, gold continues to serve an important function in today’s world as a financial asset used by banks to protect themselves against losses and indicate the health of the economy.