Money: The Basics– Part I: “What is Money?”

What is money? How did it come to be? Where does new money come from? These may seem like trivial questions, but the fact is that the average person knows very little about their money.

In fact, one of the first steps in becoming economically literate is understanding what money truly is and why it goes bad. In this post we will discuss what money is and how it came to be.

The Origins of Money

No one “invented” money. Money did not come about by the decree of some Egyptian pharaoh or a Sumerian King. Rather, money is the result of billions of singular economic transactions.

Before money, economic exchange took place in a bartering system using surplus goods. But, as you can imagine, this system placed severe limitations on the scope and complexity of economic exchange.

For instance, the barter system does not solve the double coincidence of wants. This basically means that both parties must have an interest in what the other party is offering. For example: If you are selling a goat, I have to offer you something that you want.

Other limitations of the barter system include: 1) the indivisibility of certain goods, 2) the impossibility of performing accurate business calculations, and 3) complications associated with long-term savings.

In the first case, it is true that some goods are unable to be divided for exchange. If I want to sell my house, I cannot cut it into three pieces and use each piece to get what I want. In the second case, it is hard for businesses to calculate whether they are making or losing income if their assets are made of commodities. In the third case, some commodities are impossible, or very difficult to store for a prolonged period of time.

Money came about as a medium of indirect exchange; it presents a third object which satisfies the double coincidence of wants. Money represented a gigantic leap forward in human evolution. Businesses could now divide complex assets for sale, pay their workers with universal value, and create a comparable market of prices. Civilization followed.

In the next installment of our series on money, we will tackle the question of “what makes good money?”

For a more in-depth analysis of money, refer to these titles through my Amazon affiliate links:

                 

The Mystery of Banking; Murray Rothbard                                           Chapter I: Money–Its Importance and Origins

Principles of Economics; Carl Menger                                                                     Chapter VIII: The Theory of Money

Tell me what you think!