At the most elementary level, is a five dollar bill is not actually more valuable than one dollar bill, because they are made of same material. From a practical perspective, no paper currency arguably less useful than a single crown, even though we still value these bills hundred times more. In the modern world, people recognize enough perceived value of paper money that a single penny, but it was not always the case. On the big scheme of things is the currency relatively new invention.
What's new? Well, mankind has had spoken to almost 100,000 and written in the better part of 5000 years. The earliest known currency, Chinese Cowry shells were first given as a gift only 3300 years ago. And coins of precious metals? It is a lively 2600 years old. This naturally brings the question, what did people do before the money?
Pre-monetary Era
The answer to this question is arguing. Well, argues in the form of a barter trade. In the time before money, produced the majority of people a lot of what they need. Supers were traded for things that a person or family may wish. But the marketing of these supplements were dependent on someone actually wants, what was traded. This system enhanced the concept of supply and demand to an extreme, where demand was itself a form of contract. Such a system highlighted a very important concept - value must be intrinsic and related directly to the objects that are traded. However, value is entirely dependent on the wishes and needs them to do the trade.
The Dawn of valuable Currencies
For an economy to develop a standard method for measuring the supply and demand needed to be adopted. The Standard came in the form of a universally approved third party in the form of early currency. The basis of this early money was that the currency were typically scarcity value in itself - be it Cowry shells, feathers, or weights. These early currencies often lacked a central issuing body and values could easily slip based on location, but their intrinsic value ever created a more stable platform for third-party dealer than simple barter. Besides this, it was even easier to carry around a bag of coins, than it was to Schlepper on a wagon with animal heads. Precious gold, silver, and electrum, eventually creating the early middle, barely enough to be valuable, even in small quantities, but common enough to be used in everyday life.
Shift towards cash currency
A few thousand years, and longer in some places, this is exactly how the currency worked. Yes, it was more standardized. Early, simple coin was transformed into a huge and expansive deal, since the growing international currency. Even with all this progress, still currency with intrinsic value created some problems. To begin with, walk around with large amounts of coints is difficult because of how much things actually weigh. And second, the storage of coins presented a security risk, in large measure of valuable coins, which constitutes a prime target for thieves.
It hardly took any time for organizations to begin to keep people coins for them, which led to the birth of banks. These banks would issue bills to their customers, which could then be redeemed for coins in the bank or any of its representatives. Shortly after the notes themselves were recognized as valuable. The system slowly started to go over notes, offered in various faiths, hashing the rough ideas behind the paper currency.
Keep pace with those in the private sector, governments, instead of individually valuable currency with them, backed up by valuable deposits - usually gold or silver - in the 19 century. This allowed governments to act together and created a de facto universal currency in gold, Gold Standard, if you will.
Dropping Gold Standard
Backing the currency with a fixed amount of gold appears to be a solid answer to the question of currency value. After all, said the paper money may have no value in itself, but something valuable could come with it. But using a gold standard has some drawbacks. For starters, how much the actual size economoy measured as the currency is in cicrculation is quite limited. It sounds like it could be a good thing - to help reduce inflation and deflation by keeping the overall economy in roughly the same size. In reality, even though economies need to be flexible. In a time of uncertainty, rapid growth or decline can be used to compensate for inflation and to prevent a recession becomes a depression.
A common example of this is war, and during the last half of the 19th and most of the 20th century, there were a fair number of wars started. Governments, to trigger the need for a large proportion of production from their economies, often stopped allowing citizens to trade government currency to gold. Other times, governments will temporarily abandon the gold-backed currency of what is known as Fiat currency - where the value of the currency stems not from gold but from the strength of the government.
During the same period, rapid growth in the private sector saw an increase in companies and international trade, which benefited from Fiat currencies like the "green back" dollars. Governments slowly slipped the gold standard currency, and instead evolved into a Fiat-like system. By 1971, had no government supports the gold standard. It was a new brand of foreign exchange - where whole economies were operating using money that had no intrinsic value, others as everyone thought it was. True to form, the economies of the world grew collectively older than any time in the past.
Beyond the Paper
Today, paper money itself is getting phased out, at least in informal day-to-day life. Several alternatives, from adding small purchases on mobile phone bills in Japan and Australia, the ever-present credit and debit cards in the Western world has taken money from many people's lives. As the currency has moved us farther away from the actual value of products by adding a third-party value-system that can remove such a regime should be seen as illogical conclusion. Valuable currency no loner responsible for the actual value anymore, instead the value is constructed from a mostly phantom currency. Entire pockets of the economy where money exists only in electronic theory.
As the currency has moved from something solid and real as gold, to its current theoretical state, it has had the opposite effect on the gold market. In the last few years the price of gold has literally exploded, jumping from about three hundred U.S. dollars per troy ounce to around a thousand. While some of these are certainly due to a desire for a universal standard currency other is from the perceived decline in supply. Now that the currency is no longer physically tied to the amount of gold nations are perceived availability decreased. End of cycle is almost bittersweet. Whereas gold was first used to create third value between the traders, it is no longer used. But, as a valuable commodity, gold has never been more worthwhile.
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