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Payment evolution – the history of payment

HUMAN BEING – an exceptional creature with the ability to think abstractly…

A human being is an exceptional creature in many dimensions. One of these dimensions is the ability to think abstractly, which can be illustrated by the concept of money. Money is valuable only because everyone knows that everyone will accept it as a form of payment , and this is a global phenomenon. So let’s look at where the concept of money appeared, how it evolved, how money is used today, and finally, how the payments of the future may look like..

MONEY – a fix idea accepted by mankind…

People have engaged in trade and exchanged goods and services for a fee over the centuries. These transactions (today called financial transactions) did not always involve cash payments. There was a time when standard money didn’t even exist, and people used other forms of payment to make transactions. Money, as we understand it today, has been with humanity for over 3,000 years…

At first, the easiest and at the same time, the most intuitive way to make a transaction was to exchange a good or service for another good or service.

Since ancient times, barter – because that is the name of this transaction model – has been a beneficial way of exchanging goods and services. A system perfect at that time enabled both parties to get what they needed. In addition to silk, incense, spices and other artefacts desired in the region, livestock was considered to be a wealth that could be accumulated. Already in the oldest piece of Greek and European literature, the Iliad poem, written during the 8th or 7th century BC, Homer, following his well-known payment system, determined the value of the armour as equivalent to nine oxen.

The system based on exchange for grain, which was treated as money in agricultural countries, was more sophisticated. The grain is relatively light and regular. Using these advantages, the grain was measured by adding or removing the grain depending on the estimated value of a given good or service. During this archaic period, the value of various goods was expressed in grain equivalents… almost like the Big-Mac Index®…

Apart from grain, another frequently used payment commodity with similar characteristics to grain was salt. Poland was one of the countries where it was used as a means of payment for a very long time. In addition to making sales, salt could be used to bail out of oppression and trouble under the law (the courts of that time, as one of their penalties, imposed a fee of 300 crumbs of salt, from the accused). The transactional significance of salt in Poland has been transferred to modern times through semantics. To this day, the following words are used in Polish: “to pay salty for something” which means to pay dearly for something.

Temptation – the clink of coins and the glitter of precious metals…

Value. Mathematically, it is an abstract concept and is used in this way for money.

At the beginning, though, more jewellery artefacts were used, which were very valuable to humanity at that time. Ancient civilisations (for example, Aztec culture) used beads and shells as coins. Around 770 BC the Chinese moved from using real tools and weapons as a means of exchange to using miniature replicas of the same tools cast in bronze. However, these objects were not the most comfortable (they stabbed and injured the hands), so over time these small daggers, pikes and hoes were abandoned for the less spiky shape of a circle, which became one of the first coins.

China was the first country to use recognisable coins. These were round coins with a square hole in the middle. It was introduced in 221 BC by Emperor Qin Shi Huang. Coins were minted in China according to a similar design until 1912. It can be said that and in the case of money – a good thing devalues for a long time…

Historically – chronologically – the first minted coins were made in Lydia (now western Turkey). In this case, precious metals – gold and silver – were used to make coins. This currency was both valuable and easy to carry. According to Britannica, in the streets of Sardes (Ancient Greek: Σάρδεις), the capital of Lydia, around 600 BC, a clay pitcher could cost two owls and one snake.

The currency of Lydia helped the country increase both internal and external trade, making it one of the richest empires in Asia Minor. Interestingly, when someone says “as rich as Croesus”, they mean the last Lydian king who minted the first gold coin.

Unfortunately, the minting of the first coins and the development of a strong trade economy did not protect Lydia from the sword of the Persian army, but this is a completely different story…

Let’s keep track of the evolution of money.

From leather goods to paper…

Leather was another material used to make currency. In ancient China, people used white deerskin as a banknote. Interestingly, due to the size of the records (bills) at that time, this leather money could be as big as sheets of deer leather (about 1 m2).

It should be noted that it was the Chinese who significantly influenced the evolution of money, also switching from coins to paper money. As Professor H. U. Voge stresses (an eminent researcher of Chinese history and society), until Marco Polo’s visit in 1271 AD, the Emperor of China had constant control over both the money supply and various denominations. He used many elements and channels to control the process, e.g., in place of the statements strongly emphasised on American banknotes: “In God We Trust” – the Chinese writing warned: „Those who counterfeit will be beheaded”…

However, Europeans used coins until the 16th century. In order to be able to mint more and more coins, the import of precious metals from the colonies was encouraged.

However, banks started to use special notes for depositors and borrowers at some point. This was necessary because of the weight of these “noble” coins – the equivalent value of goods and services. These innovative banknotes for those times could be taken to the bank at any time and exchanged for their denominations in silver or gold coins. This paper money could still be used to buy goods and functioned similarly to today’s currencies, but it was issued by banks and private institutions and not by the government, which is now responsible for “printing” the currency in most countries.

What is worth emphasising is that the first paper currency issued by European governments was in fact issued by colonial governments in North America.

As deliveries between Europe and the colonies took so long and growing in intensity, there was a cash shortage as these transactions developed. Instead of returning to the barter trade system, colonial governments used an innovative contractual formula: I owe you, which has been traded as currency. As we read in a document prepared by the Canadian Bank, the first recorded place of use of this formula, or more precisely its abbreviation – “IOU” – was Canada, and then the French colonies. According to records, in 1685, soldiers were issued with playing cards, specially marked and signed by the governor, to be used as a cash substitute (coins from France).

The power of gold…

Although gold has had a power of attraction since ancient times, and as an object of desire it was also often used as a means of payment, England was the first to set gold as its standard of value in 1816. It was only after this event that Europe began to support (balance) banknotes with the so-called “a gold standard”. This meant that the value of each currency had to be determined as the value in gold. The United States of America began to introduce this standard only in 1900. Until then, both gold and silver were used interchangeably with dollars. In 1913, the US dollar was secured with gold. The Federal Reserve System was established – this official central bank served the financial interests of the nation. At that time, the Federal Reserve banknotes were secured with gold. One of the roles of the Federal Reserve was to ensure that banknotes and cheques were honoured and could be exchanged for gold.

In 1933, however, the United States stopped using the gold standard to stop Americans from cashing in their currency for gold, reducing domestic gold supply in the face of worsening deflation. Since then, the federal government has become an official supporter of the monetary system instead of gold…

And, as many economists have pointed out, in the utopian world, the currency would always be perfectly stable in value!

The market economy is organised according to prices, profit margins, return on capital and interest rates. Changes in the value of the currency disturb this process, causing chaos and havoc. In 1923 John Maynard Keynes, an English economist and creator of the theory of state interventionism, whose theories significantly influenced micro and macroeconomic development, wrote:

“[Markets] cannot work properly if the money, which is treated as a stable measurement value, is unreliable”.

According to Keynes, unemployment, insecure employment, the disappointment caused by excessive waiting, sudden loss of savings and speculation – all this is largely due to the volatility of the value standard.

According to Forbes magazine, in 1971, the economist Arthur Laffer – then Chief Economist at the US Office of Management and Budget – was asked what, in his opinion, were the consequences of “closing the golden window” by Nixon, which effectively ended the Bretton Woods period when the dollar was set at USD 35 per ounce of gold.

Laffer was supposed to say: “being an American is not going to be so pleasant anymore”..

More convenient shopping with a deferred payment – IOU – I owe you… and I’ll pay you back later…

Consumers started using credit from retailers in the 20th century. Some retailers (such as department stores and petrol stations) started to create individual credit cards that were issued to consumers. These cards were created to make spending money more convenient for people. The Diners Club Card was the first actual credit card to give consumers the opportunity to buy meals in several restaurants in New York City, and to spread globally over time.

As it happens in the case of solutions that were created with the convenience of a given group of recipients in mind, seeing the benefit of this solution, other organisations (including banks) have adopted this form, and the credit card (payment card) has become a popular means of making purchase and sale transactions.

Internet – the communication revolution and its impact on the payment system…

As the Internet developed and expanded in the 1990s, opportunities for on-line shopping emerged.

A phenomenon involving consumers taking advantage of the possibility of browsing through the websites of many shops, comparing them and making purchases has been called the e-commerce market. According to analyses, Pizza Hut was one of the first retailers to complete an e-commerce transaction. This company (a chain of restaurants owned by American Restaurants) enabled its customers to order pizza through its website as early as 1994.

However, ordering is only part of the purchasing process. At a later stage, banks introduced virtual transfers (via the Internet), and then it was the turn for mobile payments…

Mobility – the freedom of modern times…

The year 1997 is assumed to be the date of the first payment transaction using a mobile solution. Beverage retailer – iconic and timeless (certainly because it always follows the spirit of the times), the Coca-Cola brand has created special vending machines that have enabled consumers to pay for drinks by sending text messages from mobile devices.

Since then, the number of mobile payments has increased sharply. Now more people than ever before pay from anywhere, and more merchants can accept payments anywhere without being tied to a cash register.

As technology has evolved, money and payments have changed drastically. Current credit card processing technology and advanced business solutions make financial transactions possible almost anytime and anywhere.

A coin avatar – electronic money…

It can be said that nowadays, electronic money is a natural stage in the evolution of means of payment.

Although the novelty of electronic money is only technical, nevertheless, in 2008 the world was dazzled!

Bitcoin – this is the reason why it’s considered the most important crypto-money in the world, but there are still many secrets associated with its creation. According to BusinessInsider, the domain name bitcoin.org was registered in August 2008. Two months later, an article entitled Bitcoin: Peer-to-Peer electronic cash system was spread on the web via e-mail. In this article, like the name of Jeanine Salla in AI. Artificial Intelligence by Steven Spielberg, there appears a mysterious character – Satoshi Nakamoto, which permanently links this name to the crypto-money.

As a digital currency it is called a cryptocurrency, which functions as a means of exchange using cryptography to secure financial transactions, control the creation of bitcoins, and verify money transfers.

Bitcoin (BTC) is based on an open-source system – there is no single owner, and everyone can actively participate in its use and development. The system, therefore, eliminates at least one intermediary – banking institutions.

This cryptocurrency is created by computers that take part in managing the public register (public databases). Computers verify and approve bitcoin transactions, and for each “block” added to the blockchain (each transaction in this network is saved in the blockchain) they receive new bitcoins. This process is called “digging” and computers are equivalent to “miners”.

Government institutions and banks basically generate new money endlessly (euros, dollars, pounds, etc.), while Bitcoin emissions are limited to 21 million coins.Currently, about 17.5 million have been mined, while the last Bitcoin will be mined around 2140. One Bitcoin is divided into eight decimal places, and its smallest unit is unofficially called Satoshi, and it is 0.00000001.

Researchers, including Andrea V.Vlasov, on the subject of cryptocurrency, stress that it can be said that the evolution of electronic money has led to the fact that the cryptocurrency now has a significant advantage over other forms of money.

Money itself is nothing valuable… It can be a shell, a metal coin or a piece of paper with a historical image. The value people put on it has nothing to do with the physical value of money.

Money draws its value, being a means of exchange, a unit of measurement and a storehouse of wealth. Money allows people to trade goods and services indirectly, to understand the price of goods and to save on larger purchases in the future…

Natural r-evolution

Money changed its form because the human being, striving for perfection, was looking for a more convenient, safer and faster form of payment. Today we can use the combination of virtual money and innovative use of the iris of the eye as a very secure form of confirming transactions. PayEye – one look is enough.

20 May 2020
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