Why Does Money Exist

Photo Credit to borman818

Let me ask you this, why did we create money in its modern form?  Be it gold and silver coins, paper bills or any of the things we typically have agreed to use as money.  This question is easier to answer and understand then our last one, “what is money” but once we examine the why of money we will better understand the what of money.

The simple answer is money exists to facilitate trade when basic barter isn’t practical.  This is the only reason money evolved in human culture in the first place.  Think about what it might have been like 10,000 years ago as one band of humans met another in travels.  Assuming the two bands managed to engage in some form of peaceful communications one of the first things they would have done is to seek trade.

Perhaps I am in one group with a surplus of dried meat and  you are in the other with a surplus of tubers.  It would stand to reason that we would agree to trade some quantity of one for the other.  But what if I don’t want your tubers?  Perhaps I have plenty of them already or I don’t like tubers.    Now I still have plenty of dry meat, I want to trade with you but you don’t have anything I need.

So we communicate further and you show me other items you have.  Eventually you show me some flint knife blades and I don’t need them because I have plenty of my own knife blades but I realize the following…

  • They never go bad, rot, etc. (durable)
  • I can trade them later for something I do want (intrinsic worth)
  • It took me less energy to get my meat then to make a blade (profit)
  • I can trade multiple blades with multiple individuals (divisible)

So we agree to value a specific number of blades for a specific quantity of meat.  Remember our last article?  We just created money.  We agreed to assign value to a commodity as a means of exchange.   In time odds are such a culture would begin to use something like flint blades as a common currency.

The why behind the creation of money is simple. When trade is possible both parties naturally want to take advantage of it especially in a world with limited resources.  However, often one party will not have something the other specifically desires or needs.  So as a societies began to develop certain commodities that were deemed to have a universal value became what we call  “a common means of exchange”.

Over time blades and beads gave way to gold, silver, copper and bronze but the why was the same at both points in human history.  So people could trade with each other in situations where one person didn’t  really want what the other had to offer in trade.

Over time the evolution of money from a crudely agreed upon commodity to a highly formulaic component of an economy has created both liberty and enslavement.  Next time we will examine how money created liberty for humanity.

3 comments to Why Does Money Exist

  • Jack, this is a necessary site on a very important topic. Very few people understand enough about money. Keep the great posts coming.

    The “durable” attribute has a “time displacement” characteristic you hint at. Maybe I don’t need what you have to trade me right now, but eventually I will need something that someone else has to trade, long after you and I part company. The money transports the value of the original commodity over time to subsequent transactions.

    • ModernSurvival

      Spot on Pete, exactly, one thing any commodity needs to be sustainable as a currency is durability. For instance in prison systems cigarettes act as a currency but they are not a long term practical currency as they go “stale” or at least I am told as I don’t smoke. The more durable a currency is the longer I can go between when I make one trade and the next. This lowers risk and makes the commodity more likely to be accepted by many people with in an economy.

      When you think about it the US dollar is becoming less durable in a sense over time, we call it inflation.

  • Jer

    Jack,

    Crazy coincidence. I spent the day writing an article about what money is and how it works. I just caught your twitter entry.

    Yesterday I tweeted that “Talking politics/economy with most people is like talking movies with someone who’s only seen trailers and Weekend At Bernie’s 2. Wake Up!”

    So I decided to write an article about the important parts of how money works and how it effects the individual. I’m planning to send it out to my friends and relatives.

    I’ll put this site in the email as a place that people can reference.

    Thanks for all your work. can’t wait to see how this site develops.

    Thanks,

    -J-

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