Diploma in Cryptocurrency
The history of
money
Lesson 1 Notes
2
Contents
3 The history of money
4 The law of demand and supply
5 Central banks
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Lesson outcomes
In this lesson, we explore the history of money. More importantly, we lay the foundation to better
understand why fiat currency was created. We also discuss the flaws of fiat currency and why it has
failed to maintain its reliability. Lastly we’ll explore some basic economic principles such as
demand and supply, as well as inflation.
The history of money
Money defined
Money is best defined as a medium of exchange between two or more parties and is used for the
purchasing of goods and services. This was previously done through bartering before being replaced by
commodity money.
Characteristics of commodity money
Relatively scarce
Divisible
Recognisable
Substitutable
Portable
Forms of money in early days
Leather
Shells
Grains
Fish
Money in the form of coins
As time progressed, commodity money started to take the form of coins that were issued by central
authorities. These were used to substitute early forms of money since they lacked portability. These
coins were formed from metals and embodied the characteristics of commodity money. They were also
universally accepted as a form of money. As time progressed, coins were debased which resulted in
making them less valuable.
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Characteristics of paper money
Fiat currency
Substitute for gold
Adopted by international merchants
A promise to honour payment
The law of demand and supply
Demand (buyers) Supply (sellers)
Income Input prices
Preferences Technology
Price of substitute goods Number of producers
On the demand side assume income increases:
Demand increases
Demand curve shifts right
Price and quantity increase
On the demand side assume income decreases:
Demand decreases
Demand curve shifts left
Price and quantity decrease
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On the supply side assume input prices decrease:
Supply increases
Supply curve shifts right
Price decreases
Quantity increases
On the supply side assume input prices increase:
Supply decreases
Supply curve shifts left
Price increases
Quantity decreases
Central banks
The evolution of central banks
Central banks were deemed the custodians of money and this remains true in modern times. The role
of central banks is to directly influence the supply of money, this is achieved by expanding and
contracting the money supply through the printing of paper money and manipulating interest rates.
Central banks are also responsible for managing an economies credit and debt.
Diminishing link between gold and paper currency
USD became dominant currency
Paper currency unpegged from gold
Currency backed by credit (IOUs)
Increased inflation
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Inflation
Described as the general rise in prices of goods and services within a particular economy. As general
prices rise, the purchasing power of consumers decreases.
(Source: [Link])