A tiny look at the history of money

Let’s get this party started with a brief look at the history and purpose of money. This wont be an argument on which types of money is best or that whole gold standards or fiat money thing, I’ll get to that latter. This post looks at money from where it came from and why it has value.

Where does this value come from?

Giant flipping rocks.

The simple fact is all money, be it gold, fiat or giant flipping rocks only has value because we all agree that it does. That’s it, it’s a collective decision made by everyone who uses it. We, the market of buyers and sellers, determine what that value is. This is the simple truth and the huge secret of money. At this point I would like to point out a few caveats.

First, perception is king, we humans have mastered the art of creating of view of the world that may not necessarily be true. For example right now the iPhone 7 plus is priced just shy of $800 even though it’s estimated to cost $220 to manufacture. There is absolutely nothing wrong with this and Apple gets away with it because people are willing to pay that much for the product. An iPhone will only be too expensive when no one is willing to part with money to buy it, and not a cent earlier.

Secondly, sometimes parties outside the market can influence the value of money, e.g. governments. While at first glance it looks like they have complete control, history has shown us time and time again that it’s not sustainable. They have only a small degree of control and if they exceed what the the people will tolerate then the whole market will collapse.

But *why* do we assign it value?

In the beginning(well not that far back) people all made the things they needed and traded their extra directly for those they didn’t or couldn’t make, aka the barter system. I’ll trade you this bag of wheat for some meat please.

This system works but had a few problems:

  1. You need to find someone who not only wants the goods you are offering but also has the good you want… in acceptable quantities.
  2. Goods tend to be bulky and inconvenient to use to barter… Although not all money was convenient
  3. You can’t exactly cut a cow in half when the other guy only wants half a cow… well technically you can… but then
  4. Storage of value back then was a nightmare,

Then someone had the bright idea to represent value using some object people all agreed was valuable. Ideally this object should have been universally recognisable in the market, have a long life, be *cough* portable, *cough*, etc.

Many objects throughout history that met these requirements, and many that didn’t, were used as currency. But gold stood out as a particularly good candidate, because:

  • it’s stable and doesn’t corrode like iron
  • It’s soft and easy to mint into coins unlike platinum
  • But most important… pretty

However these factors only made it a good candidate, it’s value, just like all the other objects, came from people’s acceptance of it. Had people rejected it, it would have been just a pretty rock until we found a use for it in electronics.

Why is this important?

Once money arrived it changed the course of human development remarkably. It allowed humans to store the fruits of their labour and led to an interesting situation where people could leverage the concept of money it self to create more money. It allowed the creation of new industries, and allowed people to specialize in areas which they couldn’t previously and accelerated human progress.

As we advanced, our usage and understanding of money also got more complex. It stopped being just something we use to price commodities and turned into a commodity it self. Which leads us to our current situation where we’ve developed the idea of money to such an amazing extent that it’s barely recognisable from when it started.

There is more to money that this but that’s the basics I wanted to highlight right now, i.e. the simple principle that money is *supposed* to represent some existent good or a service. It represents the effort and time and ingenuity of humanity. We tend to lose sight of this fact in our pursuit of the all mighty dollar.  Lesson? Don’t chase money, it’s doesn’t actually exist, instead focus on providing something that people want and are willing to trade something of value for.

Image Credits: Yap_Stone_Money by Eric Guinther (English Wikipedia) used under CC-BY-SA-3.0.