What is money. Part 1 - Creation of commodity trading.
June 29, 2010
Where do we begin? Well I learned from the movie "The Sound of Music" that the very beginning is a very good place to start. So let's go back to the beginning of money.
Before the idea of money, people relied on gift economics, or a barter system. Under these economies people produced different goods and services and essentially traded stuff for stuff. As you can imagine, this kind of system would have it's difficulties. If sally bakes bread and John raises cows, then how do they determine how many loafs of bread equal a cow? What if the 2 people live far apart...it could be difficult to transport the goods back and forth between the 2 parties. What if Sally doesn't want a cow, but John wants some bread? How do they come to a trade? This problem is calle dthe "double coincidence of wants." The only way John can get bread from Sally is if he can give something that Sally wants. He may have to trade a cow for something else (which John doesn't really need or want) just in order to trade that other item to Sally for the bread. This trade is called "indirect exchange."
Eventually people came up with the idea of having some kind of item that people would universally accept as method of payment. The item had to be
Do you know what the next major advent in money was? Many might guess gold coins, but something else significant took place even before coins. BANKS! Stay tuned for how banks help define our world of money as we know it.
Before the idea of money, people relied on gift economics, or a barter system. Under these economies people produced different goods and services and essentially traded stuff for stuff. As you can imagine, this kind of system would have it's difficulties. If sally bakes bread and John raises cows, then how do they determine how many loafs of bread equal a cow? What if the 2 people live far apart...it could be difficult to transport the goods back and forth between the 2 parties. What if Sally doesn't want a cow, but John wants some bread? How do they come to a trade? This problem is calle dthe "double coincidence of wants." The only way John can get bread from Sally is if he can give something that Sally wants. He may have to trade a cow for something else (which John doesn't really need or want) just in order to trade that other item to Sally for the bread. This trade is called "indirect exchange."
Eventually people came up with the idea of having some kind of item that people would universally accept as method of payment. The item had to be
- difficult to reproduce or counterfeit,
- scarce in supply
- easily transportable
- and non perishable
There are records of many different civilizations using all kinds of things for trade. Some examples include amber, ivory, jade, leather, nails, rice, salt, vodka and sea shells. This was the creation of commodity trading.
Do you know what the next major advent in money was? Many might guess gold coins, but something else significant took place even before coins. BANKS! Stay tuned for how banks help define our world of money as we know it.
Posted by Dave Robertson.