HMSM #01:- What is money and how did it emerge?

We live in a world where money is embedded in everyday life. It measures everything we need or want; shelter, food, energy, cars, goods, luxuries, etc. The idea of a world without money sounds foreign. After all, money makes the world go round, right?

Yet there was a time before people used money. Instead of assigning monetary value to goods or services, people bartered. They directly exchanged goods or services for other goods or services that they wanted.

For example, if I were a fisherman and I wanted bread, I would seek out a baker who was willing to exchange some of my fish for a loaf of bread – problem solved! Within very small communities, this worked. Nevertheless, problems with barter would soon emerge as these communities grew.

Within a system of barter, let’s say that I’m a hairdresser. I exchange haircuts for goods or services that I need. Now let’s say that I’m really craving scrambled eggs. Unfortunately, one haircut is typically worth at least a dozen eggs but I only want six eggs. I have three options:

1. Do I offer to give the local farmer half a haircut in return for six eggs?

2. Do I offer a full haircut, knowing that I’m ‘paying’ over the odds for the goods I’m getting in return?

3. Or do I exchange a full haircut for a dozen eggs and then expend time and energy seeking to find a buyer for the leftover eggs afterwards? Or worse, simply discard my leftover eggs and leave them to waste?

In another example, I grow and sell apples for a living. I want to settle down and purchase a house. I’ve managed to produce over 1000 apples and find a local woman that is selling her house – how fortunate! I offer my 1000 apples for the house however, the woman refuses. From her point of view, the value of the 1000 apples is equal to the house but the house provides shelter for many years. On the other hand, the apples will have rotted within a week. She does not wish to eat all of the apples within that timeframe so the offer is of no interest to her.

People soon started to realise that there were four key problems with barter:

1. What you want to acquire may not be exactly equal to what you have in exchange for it.

2. What you want to acquire might belong to someone that doesn’t want what you have.

3. What you want to sell may be perishable but what you want may be durable. For example, apples in an exchange for a house.

4. Lastly, you had to spend a lot of time finding a person that has what you need and also needs exactly what you have to offer in return.

People are smart though. They soon realised that you could indirectly trade goods or services by selling them for an intermediary good that could later be exchanged for whatever you wanted. This intermediary good is what we know today as ‘money’ and was used to measure the value of all goods and services, making it easier to trade with each other no matter what you did for a living.

Across the world, the concept of money emerged in various forms; seashells, metal coins, salt, cattle, stones, precious stones, pieces of paper and in more modern times, strings of code. You would sell your goods and/or services for money and then use that money to purchase things. All things were assigned a price in money, eliminating the mental gymnastics needed to work out what the value of everything was.

Certain monies emerged and failed over millennia. This process of trial and error highlighted a number of key properties that made one money better than another.

• It had to be durable and couldn’t be consumed. Bananas make tasty treats but they rot or can be eaten. Therefore, they’re probably not the best items to store your wealth in!

• It had to be portable. Heavy goods such as cattle may be valued amongst many people but they’re difficult to move and exchange over long distances.

• It shouldn’t lose its value. If I worked hard to earn my money and then later went to use it to purchase something, if it was deemed less valuable than when I first earned it, then it meant I would be able to afford less things than before.

• It should be divisible. To avoid having to overpay or underpay for things I wanted, a money that could be broken down into smaller units made it much easier to purchase all things big and small.

• It had to be desired. If nobody used the money you were using, you couldn’t use it to purchase anything. This defeats the purpose of putting your hard-earned wealth in it.

Ultimately, if a money retained those core properties, it would fit its purpose as a unit of measurement for all economic value. Put simply, we don’t work to acquire money because we like to hoard it. We work for money, which represents the value we’ve created through our work, so we can later exchange it for things we actually need or want, using monetary prices to measure the worth or value of a given item.

In that sense, money can be thought of as a universally-used measuring stick. Instead of everything we desire being priced in an infinite number of things such as haircuts, apples or fish, it’s assigned one price that is measured in money. As long as that money remains good money, we can earn and save it confidently, knowing we can later exchange it to purchase anything we need, whenever we want.

TL;DR: Prior to money, people bartered with one another, exchanging goods or services that they produced with somebody that produced goods or services that they needed. However, if you couldn’t find a person that had the very thing you needed and who also wanted to exchange it for exactly what you had, then you would go without. Instead, people developed the concept of money. This acted as the middle-man, allowing people to earn money for the work that they conducted and then later exchange that money for things that they needed or wanted. Shells, precious stones, metal coins, cattle, salt and pieces of paper all were used as money at some point. Unfortunately, many failed because they weren’t good money. The money that prevailed generally had the following characteristics; it would last a long time, it could be carried or transported easily, it retained its value, it could be divided up to make it easier to purchase large and small items, and was widely used and accepted.

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