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Understanding Money

The Idea of Money

For thousands of years, people have been using money of some type. The earliest money consisted of commodities, such as foods and animals. Over the years, many different types of commodities have been used as money: cacao beans (the Aztecs), almonds (in parts of India), barley (Babylonia and Assyria,) rice (Southeast Asia), butter (Norway), salt (China), oxen (Greece), sheep (the Hittites), buffalo (Borneo), cattle (Europe and India), and even human slaves (Ireland and equatorial Africa). In modern times, cigarettes and liquor were used as money in Germany following the Second World War.

At one time or another, just about every useful commodity that could be cultivated, bred, harvested or mined has been used as money. Although some of the commodity-based systems grew to be quite complex, they were, basically, glorified barter systems that were too limited to support a sophisticated economy. The biggest problem with commodities, especially animals, is that they are difficult to transport, count, store, and manipulate (as you know if you have ever walked into a convenience store late at night and tried to get change for a cow).

Some cultures developed monetary systems based on small, natural objects, such as shells, stones or animal teeth, which had little or no intrinsic value. Such objects were able to support a more sophisticated monetary system than one based solely on commodities. There are two reasons for this.

First, these types of small objects are more enduring than commodities such as rice, salt and cattle. Shells, stones and teeth don't spoil, disintegrate or die. Moreover, they are convenient to use and easy to carry from place to place.

Second, as a medium of exchange, shells, stones and teeth are more flexible, because they have little or no value in their own right. People who use these types of objects as money can assign the value in the way that best serves their needs. For example, it might be decided that blue shells are worth five times as much as yellow shells.

Although small natural objects are more practical and abstract than commodities, they do have some inherent problems. First, there is the matter of supply. If an economic system is to work well, the amount of money that circulates must be just right, not too much and not too little. If there are too many shells in one area, for instance, the people who live there will not consider the shells as having much value and will not accept them as money. If, in another area, shells are rare, there may not be enough of them to support all the buying and selling the people in the area need to do.

Another problem with natural objects is that they are not all the same, and this keeps them from being fungible. For example, one particular blue shell may be large and beautiful, while another one may be small, chipped and unattractive. In such a case, people will be reluctant to accept both shells as having equal value.

To solve these problems, it is necessary to make money out of materials that are relatively rare and of uniform quality. Traditionally, the materials that have been the most prized as a medium of exchange have been pieces of metal or coins made of metal. Throughout history, a variety of metals have been used as money, depending on what was available in a particular area, for example, iron (Europe and northern Africa), copper (Egypt), bronze (southern Europe), lead (Burma), and tin (Malay Peninsula).

One of the reasons metal works well as money is that it will hold its value over time. For example, rice will disappear when you eat it, and if you don't eat it, it will spoil. Cows and sheep will die eventually no matter what you do.

Metal, on the other hand, is permanent. Moreover, you can convert metal from one form to another at any time without having it lose its value. For example, a plain piece of metal can be formed into a tool or a piece of jewelry. Later, that same metal can be melted again and formed into something else and still hold its value.

Historically, the most important way in which metal was exchanged was in the form of coins. Once a group of people were able to create coins, their money became not only practical, but fungible, which allowed their economic system to grow more rapidly. For example, if you arrange to sell a cow to someone for 100 coins, there is no reason for you to care which particular coins you get. As long as they are all the same weight and purity, one coin is as good as another.

Of all the metals, gold is the one that human beings have prized the most, even though it has relatively few practical uses. One reason is that gold is more enduring than other metals. For example, over time, iron will rust, copper will turn green, and silver will tarnish. Pure gold, however, will remain unchanged for years and years. Another reason for gold's persistent value is that it is more attractive and more malleable than other metals. Thus, for centuries, gold has been the metal of choice for making jewelry and other decorations.

To a lesser extent, silver has some of these same properties and, in many parts of the world, is more abundant than gold. As a result, a great many cultures came to use gold or silver coins, or both, as a universal currency. Once such coins became widely available, they offered a medium of exchange that was convenient, permanent and fungible. Because, in historical times, gold and silver had few practical uses, coins made of these metals were sufficiently adaptable to represent wealth in whatever way a particular economic system needed at the time. A gold coin, for example, could be worth one cow, two cows or forty cows. An actual cow, on the other hand, is always a cow and nothing more.

As a general rule, the more abstract the medium of exchange, the more flexible it is and the better it lends itself to an increase in commerce and productivity. In this sense, we can consider the history of money to have taken places in two stages. First, money evolved slowly from bulky commodities into small, practical, convenient gold and silver coins. From there, it developed into intangible instruments of commerce that are based entirely on faith.

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