Money: Its Importance and Origins

The Importance of Money

Concedes that banking is mysterious to "the average person" and implies his goal is to demystify it, but concedes that there is still a great deal of controversy and disagreement among economists.

How Money Begins

Evolutionary perspective: the inefficiencies and limitations of direct barter in specific commodities (trading eggs for fish), and the needs for a universal commodity (money) to serve as a medium for exchange to facilitate trade among many buyers and sellers of various goods, and as a method for clearly calculating value.

The Proper Qualities of Money

Basic definition of money is not necessarily currency: "money" is a common commodity used for exchange. Indication that in various times and places, various things have been used as money: salt, shells, beads, tobacco, etc.

Quality 1: The money commodity be already widely used, such that people have it to trade and will accept it in trade.

Quality 2: The money commodity must be highly divisible to facilitate purchases of small sizes.

Quality 3: The money commodity must be easily portable in sufficient quantity. Specifically, a high value-to-weight ratio is desirable.

Quality 4: The money commodity must be durable, as opposed to perishable, so that it can store value over time.

The emergence and widespread use of precious metals (gold and silver) as commodities that satisfied these qualities well.

The Money Unit

A "price" is a ratio between two commodities - how much of one is exchanged for another (specifically, how much weight in metal is exchanged for a good).

The names of most modern currencies hail back to the time they represented a quantity of metal (a dollar was once a one-ounce a silver coin), and exchange rates among them was an objective measure of weight.

Government standards bureaus set these measures (mow much silver is a dollar), and historically would alter currency to reduce the amount of metal it contained (often by allowing, or debasing, they physical currency).

While debasement increases the supply of currency (number of coins in circulation), the amount of money (metal) remains the same ... each coin merely contains less of it. More on that later.