This might seem like a really ridiculous question. We use money every day. Certainly we all have an understanding of what it is. But answering the question and understanding the answer can lead to a tremendous and much deeper understanding of our economy and the personal decisions we must make to be successful in our lives. Additionally, the history of money is a story of intrigue and imagination. It’s interesting and entertaining. And it gives you lots of neat things to talk about at parties. Everyone likes money!
From the most basic point of view, you should understand that like everything else, money is an invention of man. This is significant. There is nothing magic about money. People ultimately decide everything about money, including what to use for money and how to value it.
As you can imagine, this has led to many different choices and experiments throughout history. Think about it. If you could make the decision as to what we would use for money, what would you pick?
I would be inclined to look through my closets and find the thing I had the most of. This might lead to a choice of something like staples, paperclips or toothpicks. Don’t laugh! When a Government makes a choice about using something for money, this is essentially what they do. Keep in mind that there isn’t anything magic about Government either. A government is just a group of people with the power to govern.
People have chosen to use a tremendous number and variety of things for money. Through the years people have used paper as well as the traditional metals such as copper, gold and silver. Iron and stones have also been used. People have also used beads, bullets, whiskey, cows and even tobacco. Sadly, my cache of paperclips remains relatively worthless.
When you are talking about money, it is really easy to get distracted. So to start, let’s get really basic and look at what it is that money is supposed to do. What is the reason it was invented in the first place?
The simplest way that we describe money is to say that it is a “medium of exchange.” That just means that we use it to buy and sell things. Money does other things that are much more important, but this is the most common thing that is done with money.
Money allows us to interact with each other and to trade the things we make or collect for other things. Imagine if you worked on a farm and there was no such thing as money. The farmer would have to pay you with the food that you helped to grow. If you wanted to “buy” anything else you would have to find someone who had what you wanted to buy and who also wanted the food that you had. You would also need to do this before the food goes bad. If you worked in a factory making widgets, you would likely be paid in widgets and have to find a farmer or someone with food who wanted to buy your widget just to be able to eat.
Everyone benefits if they can agree upon a thing to use as money. Just the fact that they agree to use it as money gives it the ability to be used for trading. Once an object is designated as money, everyone will want to have some of it so that they can buy what they need and everyone will be willing to accept it in a trade because they will understand that they can use it to buy other things they want.
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