A paper presented to the Seminar on the Cruptocurrencies
Digital currencies have appeared within the context of the historical evolution of money. A quick review of monetary development in human societies clearly reveals that the digital currencies which have filled the world today and captured people’s attention are a natural progression of money. They seem to represent the final stage in a long history of development and innovation in the field of media of exchange.
When human societies became sedentary and agriculture became the main activity, they were able to achieve productive surpluses that resulted in the spread of exchange transactions in the form of barter and the emergence of markets to complete those operations. The presence of markets led to increased rates of economic growth and augmented production, which led to more barter.
Barter in its primitive form takes place when the first party needs the commodity offered by the second party, and the second party at the same time needs the commodity offered by the first party. Bartering in this way is effective if the commodities are few and of limited types. However, when there are many types of commodities and an increased volume of exchanges, it becomes an obstacle to achieving growth through exchange transactions.
Then people discovered that certain goods were desirable and needed by everyone (for example, animal skins). Thus, if Zayd could not find anyone who wanted the commodity that he offered, or if ʿAmr did not have the commodity that Zayd was seeking in return for his commodity, all he had to do was exchange his commodity for the skins (even though he may not have needed them). He could then offer the skins to obtain the commodity he required from a third party. Thus, the leather (or any other commodity that was likewise universally sought) became a medium of exchange. This resulted in increased market efficiency and an increased rate of economic growth.
However, these skins, which had an exchange value, never lost their material usefulness. When winter became severe, the skins would disappear from the exchange market because people needed to use them for clothing. Since leather played the role of money, this meant that an economic depression would occur due to a decrease in the money supply. On the contrary, if the season supported production and the number of livestock and skins increased, it would result in monetary inflation and a rise in prices.
As a result, attention turned to the search for a commodity like leather that would be desired by everyone, but with lower use value, in order to achieve monetary stability. People were thus guided to gold and silver, which represented a great qualitative leap that resulted in a high rate of economic growth along with monetary stability. This continued for many centuries.
However, this economic growth was not accompanied by much growth in the amount of gold and silver as the discovery of new mines was not an easy matter. Despite that, people continued to use gold and silver as money due to their great advantages as media of exchange, stores of value and their general acceptance in all corners of the globe. Then people began to search for auxiliary currencies to gold, resulting in the emergence of _fulūs_ (money made from metals other than gold and silver), but gold and silver remained the money that the value of _fulūs_ was calculated in relation to.
Then, when banks emerged, they devised a better way to solve this problem by keeping the gold all in one place and issuing banknotes, each of which represented a quantity of gold equal to what people were used in terms of dinars, dirhams, riyals or dollars. [Author’s note: All central banks in Western countries started as privately owned financial institutions, and some still are.] The bank that issued those notes would pledge to pay the bearer the equivalent amount of precious metal upon demand. People accepted them because they made transactions easier, they bore the ruler’s stamp upon them, and it was possible to redeem them for the precious metal they represented due to the issuing banks’ commitment to that effect. This resulted in economic growth that human societies had not previously witnessed, as it became possible to carry a few banknotes representing a weight of gold that would have previously weighed down a whole company of strong men. Meanwhile, there was always the assurance that the actual gold was at hand in case someone wanted to exchange the paper money for gold.
However, the increase in economic growth and exchange was not matched by an increase in the production of gold. It was not difficult for the banks to discover that the inability to increase the quantity of gold in the short run need not necessarily limit the quantity of money. They found they could issue banknotes that exceeded the amount of gold deposited in their vaults. [Author’s note: It means a bank would issues notes that represented a commitment to exchange 100 kilos of gold when it only had fifty kilos in its treasury.] What they had on hand was sufficient to pay the precious metal to those who desired it since the number of such individuals represented a small percentage of the public. Thus, the banks’ inclination to issue notes whose value exceeded the stock of gold would not lead to any problem, and this is what actually happened.
Then these banks discovered that there was no need to keep any gold at all. This discovery came by chance during the First World War when they were forced to stop redeeming banknotes for precious metals for fear that their [country’s national] wealth in the form of gold would make its way to enemy nations. According to theory, this was supposed to affect public acceptance of them. It came as a surprise that it did not affect the general acceptance of the banknotes. As a result, a separation occurred between paper money and its backing by gold.
This revealed that what is important is the trust that people place in the currency and its issuer. It also revealed that people did not place much importance in the linkage of paper money to gold, so the money in all countries turned into paper money based only on the trust that people have in its issuer.
