In this day and age no one seems to really be able to explain what money is. The easy answer is the little green pieces of paper that are in our wallets, but that does not begin to touch the surface. It would be like saying what rocks and answering limestone. Limestone is a type of rock, but it doesn't explain what rocks are. The same goes for money. I hope by the end of this you will be able to understand and explain what money is and how it started.
In order to understand what money is, we must start at the beginning. When civilizations first began to develop, barter was the system of trade. When I wanted an item you had, I would trade you for it with something I had. For example, if I had a computer and you had a big screen T.V that I desired, I would trade you my computer four your T.V(Note: First in order for barter to work we each must considered the item the other has to be of more value, or we wouldn't trade. Second I will be returning to this analogy of the T.V throughout.) Barter worked for awhile, but it became burdomesome to carry around large materials to trade, and also ineffective for large scale trade.
Soon a new form of a monatary unit developed. This new form of exchange used resources, such as livestock, in trade. So if I wanted your T.V, I would trade you two of my cows. Livestock was able to be used in trade because livestock has intrinsic value. This simply means that livestock has value by nature. Cows can be milked or slaughtered for food, i.e they have value. This type of money is called Commodity money.
As commodity money grew in popularity, it also began to change. Again, it became inconvenient to carry around livestock, so precious metals were adopted as the form of trade. With the dawn of the Bronze Age, metals became valuable as they could be melted down to create tools and weapons. Precious metals were preferable when it came to money because there value could easily be calculated by their weight and purity. The value of 1g of 99% pure copper, for example, had a universal value. Of all the precious metals, gold emerged as the universal standard currency, with silver at a close second. This happened for several reasons, that we won't get into now, but the main reason was that there is the perfect amount of gold in the world, for it to retain its value. The important thing to understand is that gold is the universally preferred monetary unit, with silver at a close second.
It is important at this time to adress the issue of quantity. The question is, how is their enough gold to supply the whole worlds economy. The answer is that quantity doesn't make any difference. If there is less gold, the market works itself out so the prices seem to go down. If there is more gold, prices appear to go up. The truth is, that the more gold there is, the less its worth. This is the basic law of inflation. Let me break it down using a micro example. There are groups on an island. One mines gold, and the other makes shoes. They work it out so that 1 ounce of gold is worth one pair of new shoes. This is determined by the idea that the amount of time, labor it takes to mine the gold, and intrisinic value of the gold is equal to that of the shoes. Now suppose the miners found a stash of gold, and all of the sudden the miners had more gold than the cobblers have shoes. This seems to create a problem, and in our society the gov't would intervene. However, the truth of the matter is that the market will work itself out. When the cobblers see that the miners have more money( the monetary quantity is increased) they simply raise prices, and it is like the miners never found the money to begin with.(analogy borrowed from The Creature From Jekyll Island) The market corrects itself.
Again as society grew and developed, a new form of monetary form developed. As men began to acquire more and more precious metals, they became inconvienent to carry. What developed was a new type money called reciept money. This worked by giving your gold to a goldsmith, who would give you a reciept in exchange. This piece of paper would say pay to the bearer on demand. This guaranteed that if you returned your receipt to the goldsmith he would give you your gold. This is where your dollars originated, and before we went off the gold standard in the sixties, under Nixon, your dollar was redeemable in gold.
So why should we be on a gold standard? Simple, because since there is a limited amount of gold, it is less suseptable to inflation. Over the years gold is the only thing that has stood the test of time. Gold has retained is value. Also, a gov't on the gold standard can't rack up huge debt. Since they are dealing with real money, they have limits and are bound to reality. This differs from our gov't today that can print money out of thin air, allowing itself to fall into huge debt.
I will introduce you to two other forms of money in my next post.
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