Money

What It Means

Over the course of history various items have been used as money. These include shells, stone disks, gold, silver, and government-issued paper bills and metal coins. Generally speaking, money is anything to which people assign value in order to make it easier to exchange goods and services.

Without money people must rely on bartering (trading goods and services directly for other goods and services). For example, if you were hungry, you might go to a restaurant with several books that you had already read, hoping that the restaurant owner might be willing to accept one or more of the books in exchange for lunch. If she wanted your books, you might be pleased with the simplicity of the barter system. If she did not want your books, you would have to come up with a new plan, and you would still be hungry.

While simple when it works properly, bartering gets extremely complicated when it is the only way of acquiring goods and services. People still barter today (for instance, a tenant might perform repairs on his apartment in place of paying rent to his landlord), but without money many basic transactions would be much more troublesome.

Although paper bills and metal coins serve as the primary form of money in most countries today, often people do not even need actual bank notes or coins to purchase goods and services. For example, money can be exchanged via checks, credit cards, and electronic bank transfers. In these cases nothing real is even exchanged. All that happens is that numbers are changed in computers that keep track of people’s bank-account and credit balances. Such technological innovations make it clear that, in the modern world, money is a symbol and not an actual valuable object. Instead, the items (or numbers in computers) that we consider money have value only because we, as a society, have agreed to believe that they are valuable. In reality, money has always been symbolic. Even gold, which was the primary form of money for centuries in Europe, has value only when societies agree that it does. For instance, when Europeans colonized the Americas and Africa, the tribal peoples they encountered typically had no use for gold. The Native Americans and Africans could purchase things with gold only if they chose or were forced to participate in the Europeans’ society.

Money stands in for the goods and services that we need or want (such as apples or haircuts) so that we can obtain these things efficiently. By increasing the efficiency of the way people exchange goods and services, money allows for a wide variety of activity that would not be possible otherwise.

When Did It Begin

People in ancient Mesopotamia (a region that lies in present-day Iraq, Syria, and Turkey) may have used money as early as 3000 bc . According to clay tablets found there by modern archaeologists, some of the first forms of money used were silver, grain, and cattle.

The first coins made of gold and silver are said to have appeared Lydia (a country that is now part of Turkey) in the seventh century bc . (The Lydian king Croesus, who reigned in the following century, became synonymous with wealth, as in the phrase “as rich as Croesus.”) The appearance of coins was a significant step in the evolution of money because it marked the first time that money was given a legal guarantee. Coins in the ancient world, like government-issued bills and coins today, typically bore designs on both sides to show the authority under which they were created. Such designs indicated that the ruler who had issued the coins was guaranteeing their worth.

The ancient Chinese used money as early as the twelfth century bc , and they did so in a fashion similar to that of their contemporaries in the Middle East and the Western world. In China animals, metals, and shells were among the early materials assigned value in economic transactions. In the sixth century bc one form of money was miniature bronze farming hoes marked with the name of the imperial dynasty of the time. Coins appeared in China in about the third century bc .

More Detailed Information

Money evolved in response to the overwhelming complexity of a bartering economy. In this kind of economy buying and selling happen at the same time. Both parties to the trade are simultaneously acquiring and letting go of something, and this requires a complexity of thought that goes beyond what is required to perform either of these tasks alone. The complication of bartering is further enhanced by the fact that, for the trade to occur at all, both parties must want what the other person has to offer.

For instance, imagine that a farmer in a primitive society has a surplus of milk and needs someone to help him rebuild his fireplace. He might take a jug of milk to the stonemason’s house and suggest trading the milk for the stonemason’s time, building materials, and expertise in constructing fireplaces. The stonemason, however, might believe that the building of a fireplace is worth five jugs of milk. Assuming that the farmer agreed on this trade, he might have to go home, wait for his cow to produce the correct amount of milk, milk his cow, and then hitch up his horse and wagon in order to carry the milk to the stonemason and conclude the deal.

Perhaps after the farmer had left to retrieve the extra milk, the stonemason would find himself wondering if he had calculated the value of his work properly: an entire fireplace, requiring several days of hard work, in exchange for a few jugs of milk? Possibly the stonemason did not balance his roles as seller and buyer properly, and now he must either compromise his dignity by backing out of the deal or feel as though he has been cheated.

Or imagine that the stonemason has a surplus of milk and does not want any more. Perhaps what the stonemason really wants at the moment is a pair of pants and a shirt. He might agree to build the fireplace for the farmer on the condition that the farmer finds him a pair of pants and a shirt. To get the pants and shirt, then, the farmer could take his milk jug to the tailor’s house and hope that the tailor is currently in need of milk. But what if the tailor does not need milk or wants to negotiate the amount of milk that must be exchanged for pants and a shirt?

Transactions in a bartering economy have the potential to get infinitely complicated. Money’s most basic function, and possibly its most important one, is to provide a medium of exchange, something everyone in a society accepts as payment for goods and services. When they all use the same medium for payment, the farmer can set a price for his milk, the stonemason can set a price for his services, and the tailor can set a price for his shirts and pants. Everyone can sell their products and then buy what they need and want with the proceeds, resulting in huge savings of time and energy for all.

Secondly, money serves the related function of acting as a standard of value, or a “unit of account.” When a monetary system of value is established in a society, all goods and services can be characterized according to the amount of money required to buy them. Therefore, although the value of money might fluctuate, and although the cost of milk, fireplaces, and pants might vary over time, the farmer, the stonemason, and the tailor can all expect to address one another on a more predictable footing than that provided by a barter economy. Personal preferences and other unforeseen factors play a smaller part in any transaction.

The third function of money is that it allows for stored value. The farmer, the stonemason, and the tailor can all ply their trades in exchange for money, and they can store that money, in the form of coins or bills, for later purchases. This is much less possible in a barter economy, in which objects and services to be exchanged (such as milk, cows, fireplaces, and pants) might be much less convenient to store or less likely to maintain their value over time.

Money’s fourth function is that it operates as a standard for deferred payment. In other words, it allows for a common system for borrowing and lending. The farmer, for instance, might be able to buy his fireplace on credit, meaning that the stonemason will let him pay later and will charge him for the cost of the fireplace plus a fee called interest. Meanwhile, the farmer might use the money still in his possession to hire more workers so that his wheat fields can be cultivated. At the same time, the stonemason is able to increase his own wealth through the collection of interest.

Since ancient times all of the various functions of money have been further complicated by inflation (the general rising of prices), which causes money to lose value. Although money is usually a stable way of measuring value, during times of rapid inflation it becomes an ineffective tool. People lose faith in the value of a badly inflated currency, and it stops performing the functions that we require of money.

Recent Trends

Today economies are much more complicated than they used to be. Many more goods and services are bought and sold, and a large amount of this buying and selling is enabled by loans, which are made using not actual money but checking-account balances. Loaned money is literally created by banks. It does not correspond to money that physically exists in the form of bills and coins, but this money is nevertheless crucial to the functioning of the economy. Similarly, people engage in a wide variety of trading in abstract items, such as shares of stock (which represent partial ownership of a corporation) or even different countries’ currencies, hoping to amass wealth when the values of these items change. None of this would be possible if money did not perform the four functions described above.

The world’s governments thus have a more complex task than their ancient forerunners when it comes to supplying and guaranteeing the value of the money that they create. Most countries have central banks whose job is, essentially, to create money. But this is much more difficult than it sounds, because any change in the money supply has dramatic effects on a nation’s economy.

Consider the central bank of the United States, the Federal Reserve System (commonly called the Fed). Before deciding to increase or decrease the supply of dollars in circulation, the Fed monitors key economic factors, such as inflation and unemployment (the number of Americans who are out of work). In general, increasing the amount of money in circulation causes economic growth, while decreasing the money supply slows growth. It usually takes about six months, however, for these increases or decreases to have their intended effect. This means that when the Fed makes decisions, it bases them on predictions of what world economic conditions will be like six months from the present.

Given such complexity, one might wonder whether the original point of money (essentially, to make life simpler than it was in a bartering economy) has been lost. The truth is that, while a person’s understanding of money might be dizzyingly complex if he or she works for the Fed, for the average citizen in the twenty-first century it remains largely possible to treat money as the ancient Lydians might have treated it: as a convenience allowing you to get what you want when you want it, with a minimal amount of difficulty.