Bartering And Commodity Money
In the beginning, people bartered, which the exchange of goods or services for other goods or services. For example, a fisherman may trade the days catch for a couple chickens, or farmer trades some of his produce for pelts from a trapper or blankets from someone else.
One major problem with the barter system was that there was no standardized rate of exchange. What would happen if the parties involved couldn’t agree that the goods or services being swapped were of equal value, or if the person in need of goods or services had nothing the person who had them wanted? To solve this problem, humans developed what is called commodity.
A commodity is a basic item that’s used by almost everyone in a given society. In the past, things such as salt, tea, tobacco, cattle, and seeds were considered commodities and therefore, were at one point used as money. However, using commodities as money created difficulties. Consider this, lugging heavy bags of salt or hauling oxen around could prove practical or logistical nightmares.
Using commodities for trade led to other problems as well, as many were difficult to store and could also be highly perishable. Think about losing most of your money because it rained, or because your oxen died or ran off, sounds terrible. Also, when a commodity traded involved a service, disputes also arose if that service failed to live up to expectations (realistic or not).
The Properties Of Money
The mainstream economic definition of money was first proposed by William Stanley Jevons in 1875. According to Jevons, money has three primary properties:
- store of value
- medium of exchange
- unit of account
When an asset serves as a store of value, this means you can reliably retrieve the value you paid for that asset. This disqualifies perishable assets like vegetables or oxen from serving as money. If your money can rot or die, it has a bad store of value. So for an asset to serve as a store of value, it must be durable.
However, durability is a necessary but not sufficient condition. To retrieve the value paid for an asset implies the ability to sell it to someone later at the asset’s original price. Thus, a second condition for an asset to serve as a store of value is that it must be consistently valued by others in the market.
A medium of exchange is the asset we use to directly settle transactions. This is the easiest hurdle to clear. You can use Gamestop rewards points to buy a game, so Gamestop points function as a medium of exchange. But of course, Gamestop points aren’t a great store of value—people know this instinctively and don’t store their savings into Gamestop points. This is not just because it’s impractical; people are aware that Gamestop might modify their program in a way that it devalues these points, also there’s not a stable market for selling saved up points.
But as a medium of exchange to buy video games, Gamestop points work just fine.
A unit of account is the unit in which you denominate prices. This one is pretty simple: how do you quote the price of a home? Is the price denominated in USD, in Euros, or in shells? That’s your unit of account.
One of the greatest achievements of the introduction of money was increasing the speed at which business, whether mammoth-slaying or monument-building, could be done.
First Official Currency Is Minted
In 600 B.C., Lydia’s King Alyattes minted the first official currency. These coins were made from electrum, a naturally occurring mixture of silver and gold, and the coins were stamped with pictures to show denominations. In the streets of Sardis, around 600 B.C., a clay jar may have cost two owls and a snake. Lydia’s currency helped the country increase both its internal and external trading systems, making it one of the richest empires in Asia Minor.
Transition to Paper Currency
Around 700 B.C., the Chinese moved from coins to paper money. By the time Marco Polo–the Venetian merchant, explorer, and writer who travelled through Asia along the Silk Road between A.D. 1271 and 1295–visited China in approximately A.D. 1271, the emperor of China had a good handle on both the money supply and various denominations. In fact, in the place where modern American bills say, “In God We Trust,” the Chinese inscription at that time warned: “Those who are counterfeiting will be decapitated,” woah.
Parts of Europe were still using metal coins as their sole form of currency all the way up to the 16th century. This was helped by their colonial efforts; the acquisition of new territories via European conquest provided them with new sources of precious metals and enabled them to keep minting a greater quantity of coins.
Banks eventually started using paper banknotes for depositors and borrowers to carry around in place of metal coins. These notes could be taken to the bank at any time and exchanged for their face value in metal–usually silver or gold–coins. This paper money could be used to buy goods and services. In this way, it operated much like currency does today in the modern world. However, it was issued by banks and private institutions, not the government, which is now responsible for issuing currency in most countries.
The first paper currency issued by European governments was actually issued by colonial governments in North America. Because shipments between Europe and the North American colonies took so long, the colonists often ran out of cash as operations expanded. Instead of going back to a barter system, the colonial governments issued IOUs that traded as a currency. The first instance was in Canada, at that time a French colony. In 1685, soldiers were issued playing cards denominated and signed by the governor to use as cash instead of coins from France.
The Emergence of Currency Wars
The shift to paper money in Europe increased the amount of international trade that could occur. Banks and the ruling classes started buying currencies from other nations and created the first currency market. The stability of a particular monarchy or government affected the value of the country’s currency, and thus, the ability for that country to trade on an increasingly international market.
The competition between countries often led to currency wars, where competing countries would try to change the value of the competitor’s currency by driving it up and making the enemy’s goods too expensive, by driving it down and reducing the enemy’s buying power (and ability to pay for a war), or by eliminating the currency completely.
The 21st century has given rise to two novel forms of currency: mobile payments and virtual currency. Mobile payments are money rendered for a product or service through a portable electronic device, such as a cell phone, smartphone, or a tablet device. Mobile payment technology can also be used to send money to friends or family members, in app through banks, Google Pay, Apple Pay, Square Cash, and Zelle being a few over very many options.
Bitcoin quickly established itself as the standard for virtual currencies. Virtual currencies have no physical bills or coins. A major appeal of virtual currency is the promise of lower transaction fees compared to traditional online payment, also virtual currencies are operated by a decentralized authority, unlike normal currencies issued and backed my the government.
The Bottom Line
With many advances, money continues to have very real and permanent effect on how individuals and businesses alike interact for goods and services.