Money Evolution: The one who controls has the power
At its core, money represents value. Throughout history, value has taken many forms and people used loads of different substances to symbolize money. Salt, wheat, shells, and of course gold have all been used as a medium of exchange. However, for something to symbolize value, people ought to trust that it is indeed valuable and could live long enough for them to redeem that value in the future. Along the way, we've modified our trust model from trusting something to trusting in someone. Over time, people realized it was too bulky to stroll around the world carrying bars of gold or other forms of money, so paper money was invented. A bank or government could take possession of a bar of gold. That bank could come up with bills, amounting to equal value.
Those pieces of paper are certainly easier to carry. If you want your gold back, you simply give the bills back to the bank to redeem them for the actual form of money. In this case, the gold bar and so paper money began its use as a tool of practicality and convenience. However, due to macroeconomic changes, the bond between the paper money and the gold it stands for was broken.
The government itself instructed the people that they could be liable for the fee of that paper money. They say things like “let’s just forget about gold and trade paper instead”. People continued to trade with paper; this is backed by nothing but the government’s promise. And why did that keep working? Well, due to trust. Even though there may be no real commodity backing paper money, people depended on the government and that’s how fiat money was created. Fiat is a Latin word that means “by decree”. Meaning the dollars, or euros or another currency for that count have value because the government orders it to. It’s what is thought of as “legal tender” cash or banknotes that must be accepted if offered as payment. So, the value of money nowadays comes from a legal status given to it through the government. So, the trust model has been modified, from trusting something to trusting someone. In this case, the government.
Fiat money has major drawbacks. One, it is centralized. We have a government that controls and issues it. It may be the government or relevant banks. Two, it isn't always limited by quantity: The government or relevant bank can print as much as they need every time they wanted and inflate the money supply on the market. The hassle with printing money is that when you’re flooding the market with more money the value of each dollar drops. So money will be worthless. The greater the costs rise throughout the years, The buying power of money is dropping. We want more dollars to buy something that used to be “costless”. Once fiat money was in place, the flow to digital money becomes quite simple. We already have a government that issues money, so why not make money mostly digital and allow that authority to preserve track of who owns what.
Today we specifically use credit cards, wire transfers, Paypal, and other kinds of digital money. The quantity of physical money in the world is almost negligible and is getting smaller with every year that passes. If money nowadays is digital, how does that even work? If I have a record that represents a dollar, what’s to stop me from copying it a million times and having a million bucks? This is called the “double-spend problem”. The solution that banks use today is a “centralized” solution; they keep a ledger on their computer which keeps track of who owns what. Everyone has an account and this ledger keeps a tally for each account. We all trust the bank and the bank trusts their laptop, and so the solution is centralized on this ledger on this computer. Most may not know this, however, there have been many attempts to create alternative forms of digital currencies. But none were a success in fixing the double-spend problem without a government. Whenever one gives anyone control over the money supply one is giving them enormous power and this creates 3 predominant issues.
The first issue is corruption; power corrupts, and absolute power corrupts absolutely. When banks have a mandate to create money, or value, they control the flow of value in the world, which gives them almost limitless power. A small example of how power corrupts can be visible in Wells Fargo’s scandal wherein employees secretly created hundreds of thousands of unauthorized bank and credit card accounts to inflate the bank’s revenue stream, without their clients knowing about it for years.
The second issue of a centralized system is mismanagement. If the central authority’s interest isn’t aligned with the people it controls, there may be a case of mismanagement of the money. For instance, printing a lot of cash to save a certain bank or institution from collapsing. As what happened in 2008. The problem with printing too much money is that it causes inflation and erodes the value of the citizen’s money. One extreme example of that is Venezuela, wherein the government has printed a lot of money, and the value of it has dropped a lot, that people are not counting money but are weighing it instead.
The remaining issue is controlled. One is giving away all control of the money to the government or bank. At any factor in time, the government can decide to freeze an account and deny access to funds. Even if they only cold hard cash. The government can cancel the legal status of currency as was done in India some years back. This became the state of things until 2009. Creating an opportunity for the current monetary system appeared like a lost cause.