The Evolution Of Money – A Brief Introduction Into The Emergence Of Cryptocurrencies

Cryptocurrencies like Bitcoin and Ethereum are experiencing a veritable boom. However, the prevailing opinion among many investors and consumers, is that these digital currencies are only for computer experts, with no potential as a means of transaction or as an investment. Cryptocurrencies as applications on the Blockchain and community based decentralized open ledger technologies have been very controversial issues ever since they have come into existence.This literature review aims to provide a brief introduction to the history of money, illustrate the role of central banks and national banks in our economic system and explain why cryptocurrencies could be the next evolution of a modern value-transfer system. The underlying technology of cryptocurrencies, the Blockchain, may be an as disrupting technology leap as the invention of the Internet and there may be a chance this technology is going to change the way we trade and interact as human beings without the need of trustworthy third parties as banks. -------------------------------------------------------------------------------------------------------------------------------------Date of Submission: 03-02-2019 Date of acceptance: 18-02-2019 -------------------------------------------------------------------------------------------------------------------------------------I. The origins of money The history of money starts several thousand years ago. Although currencies were introduced with good intentions and their use in most cases made sense and is still useful today, money is certainly not just used in positive ways. To date, it not only simplifies trade but also contributes to deepening the gap between the poor and the rich, mainly due to the compounding interest principle. Long before the first coins came into circulation, trading took place as a barter transaction. As early as about 6,000 years before Christ, when people lived together in small communities, they exchanged things of everyday needs among themselves. From garments over food to spearheads, salt or tea was exchanged and traded without the use of money. About 2,000 years before Christ primitive money was introduced for the first time. In China, Southeast Asia and northern Africa, people used cowrie shells to trade among themselves. In Latin America, the Majas used cocoa beans (Allen 2009, 73-74), other peoples used special stones. What these first preforms of money all had in common was that they existed only in limited quantities. In addition, the currencies were relatively small and thus easy to transport. For the first time in human history, goods were converted into a currency, which could then be used to purchase other goods. Primitive types of money often included materials such as copper, silver, or gold. In part, the metals were cast in the form of ingots or bars. If necessary, a piece of it could be separated again and weighed appropriately to meet the desired value. This so-called "weight money" (to exchange metals according to their weight and not according to their number) already existed several centuries before Christ. But even in the Middle Ages, the Europeans used ingots or rings of precious metals, which were cut and weighed. However, in the Middle Ages there were also coins made of silver, for example, in Europe. But these, too, were mostly weighed at that time and not counted to determine their value. (Orrell and Chlupatý 2016, 17) From about 600 BC, people in Asia paid with the first coins. The Indo-European people of the Lydians are considered the inventors of coins. The Lyder made metal pieces in a uniform size for the first time. Later, the Romans and Greeks also used coins to pay for their goods. Over time, various valuable coins have been developed, making trading even easier. Depending on the time and place, for example, the Senate had the right to stamp brass and copper coins, as the Emperor had this right for silver and gold coins. (Orrell and Chlupatý 2016, 2) However, many scientists believe that the first coin money was produced in parallel and independently of one another in different places. Between about 700 and 500 BC, for example, this occurred in China, India and in many larger towns around the Aegean Sea (Macdonald 2012, 9). Although the coins have been developed in the same period, they were made of different materials and looked slightly different. As a rule, Chinese coins had a hole in the middle and were made of bronze (Macdonald 2012, 59). Coin money from the Aegean was The Evolution Of Money – A Brief Introduction Into The Emergence Of Cryptocurrencies DOI: 10.9790/5933-1001040107 www.iosrjournals. org 2 | Page hammered in shape under great heat and then got stamped. Coins from India mostly consisted of stamped metal plates. In the 8th century an attempt was made in Europe to introduce a single means of payment: the denarius. However, this "forerunner of the euro" was abolished quite quickly. As early as the 9th century, pennies, denarii and other coins had different value in different countries. (Macdonald 2012, 68) Above all, those who wanted to acquire higher-quality and more expensive goods quickly had the problem of having to carry around many heavy coins. Even if, for example, coins with a hole in the middle could be threaded well and hung on chains, at some point the weight was still too heavy and the carrying too laborious. The solution was very simple: they invented the paper money. In the 10th century, the Chinese were the first who did not want to utilize heavy iron coins for payment and invented paper money. Instead of having to carry the iron around, people now paid for goods with pieces of paper on which their respective value (in iron coins) was written (Chown 2005, 256). The Italians did likewise in the 14th century (Chown 2005, 259). The money was deposited in banks. The customers received "disbursement claims" that could be passed on and thus also constitute a kind of paper money. In other parts of Europe, the first banknotes also came into existence in the Middle Ages. Just like in Italy, they developed out of pay-out claims from bankers. The first "official" paper money was probably from 1661 in Sweden. There, the merchant Johan Palmstruch received permission from the Swedish king to found his own bank. The "Stockholm Banco" issued its customers receipts for copper coins, which can be considered as the first banknotes (Lui 2017, 14). Also, the “AmsterdamerWechselbank” was one of the first financial institutions that implemented banknotes as currency. However, the Dutch bank handled the paper money with particular caution and in contrast to Johan Palmstruch always paid attention to having enough coins in the house to be able to exchange the issued notes. (Ufer 2008, 119) In order to be able to trade globally simply and quickly today, cashless payment transactions are used. EC or credit cards make it unnecessary to use physical money during a transaction. Online banking ensures that people no longer need to leave the house to transfer money or shop on the Internet. Within milliseconds, huge sums of money can be transferred from one account to another as needed. II. The role of banks and central banks in our economy A complex economy without money is hard to imagine. Effective payment transactions are of fundamental importance to our current economic order. If you want to harm economies today, you no longer have to attack the production base. History has repeatedly shown us, that it is enough to interfere in the payment traffic with sanctions (G. Askari et al. 2003, 6). Monetary policy concerns central bank decisions that seek to influence the cost and availability of money in an economy. As far as the euro area is concerned, interest rate decisions are, under normal circumstances, the most important instrument of the European Central Bank in this regard. Changing interest rates will affect the level of interest rates at which commercial banks provide credit to their customers. In other words, interest rate decisions affect consumer spending and business investments. In the case of the ECB, the monetary policy objective is to ensure stable prices. As a result, it seeks to keep the rate of inflation below but close to 2% in the medium term. This is to support the EU's overall economic policy, which aims at full employment and economic growth (European Central Bank 2018). In times of continued low inflation and low interest rates, central banks may also take special monetary measures (such as asset purchase programs). That means to create money. The most common way of producing money happens through commercial banks. When lending, the borrower enters an obligation to repay their loan and backs up this obligation with a security to increase the confidence. The bank undertakes to credit the borrower with the loan amount in their account. Worth mentioning in this process is, the bank does not take existing money from investors, savers or money borrowed from other banks, but creates it by committing itself to the borrower at any time on request to pay off the loan in cash, but in practice of today's cashless payments this barely occurs. Thus, the bank creates the appearance of a permanent liability by the obligation to pay out the loan in cash at any time. In the double entry bookkeeping system, the bank is now required to make an offsetting entry to the liability, which is the requirement of the borrower to repay the loan. The money is created through these two bookings (book money), which extends the balance sheet of the bank on the assets side by the receivable and on the liabilities side by the liability. In summary, it can be stated that banks generate money by justifying the requirement on the borrower to repay the loan that they still owe the borrower the legal tender. This book money, which is also referred to as a bankroll, is not a legal tender. Hardly any bank customer knows that when paying cash into their bank account, l