The Making of Money

In different places all over the world, the idea of a medium of exchange grew. People noticed that some goods were easier to trade than others. And people also noticed that these more goods that were easier to trade had similar properties.  They were durable, they were easily divisible into larger or smaller amounts, they were comparatively scarce as procuring them required effort, they were homogeneous as every item of the commodity was exactly like every other item, and they were convenient. It was easy to carry enough around to made trades for other commodities.

Over time a shorter and shorter list of commodities passed all these tests. These select commodities began to exhibit a sixth property, all important in the evolution of money.

This short list of commodities, most of them metals, had one thing in common with all other commodities. They were useful and commanded an exchange value in their own right. But because they were easier to trade than any other goods, they came to be perceived as having a value over and above their basic utility. They came to have a value as a most good that was very easy to trade. They came to have a value as a MEDIUM OF EXCHANGE.

Once this value became widely recognized, the commodity in question was no longer consumed for anything but the most vital purposes. Instead, it was used in exchange. It had become a MONEY.

intrinsic (adj.) Of or relating to the essential nature of a thing, inherent.

There is no such thing as intrinsic value in economics. Value does not reside in the atoms, molecules, chemical composition, or structure of an economic good. It always resides in the mind of the individual seeing the good. When looking to acquire an economic good, an individual must decide how much time, or effort, or other economic goods he or she is willing to offer in exchange. That decision determines the value of that economic good, at that particular time, to that unique individual.  i.e. Is it worth one day of work for that dress?  If I buy the family size package then I am only giving up one hour of work for dinner.

This is a crucial difference. Value is not in what is beheld, it is in the eye and mind of the beholder. The reason why some goods become money while most others do not has nothing to do with the intrinsic value of the goods. It is because a large number of individuals have realized that goods used as money have a unique usefulness. Unlike all other goods, they can be exchanged easily, and at any time, for anything.

Exchange or Trade

Animals don't exchange or trade with each other. They are self-sufficient, or take from each other, or have superior strength and/or cunning. There are some human beings who get along in the same way, but the majority recognizes the benefits of voluntary exchange. The phrase "your money or your life" is not the beginnings of an exchange, whether the person uttering it waves a gun or a government id card.

The first rule of voluntary exchange is very simple. If two people are willing to exchange, each must view the results of the exchange as being beneficial. If either of them is not of that view, the exchange will not take place.  In other words, do unto others as you would have them do unto you.  Everyone must benefit or no exchange happens.

Direct exchange, or barter, is exactly that, my good or service for your good or service. The problem is that I might want what you have, but you might not want what I have to offer in exchange. With no medium of exchange, there is no deal. 

Indirect exchange takes place when one party has a medium that is always acceptable, not for what it is, but for what can be done with it. If you offer me money, I will accept it, because I know that I can exchange it for what I want, whenever I want it.

Indirect exchange involves the use of money or the medium of exchange. Money is the universal key, it fits all locks in the world. And the world it has unlocked is the world we live in today. Money has made the division of labor possible. It has made specialization possible. It has made the accumulation of wealth over periods which are longer than a human lifetime possible. But most of all, it has hugely advanced the potential for friendly interaction between people. To survive as such, and to prosper, a rational human being must exchange. He or she has language, to exchange ideas, and money, to exchange the fruits of ideas. From that foundation, everything else we see around us has been built.

What is money? 

It is a medium of exchange. 

What does it do? 

It ensures the success of exchange by being the one item on offer that is always acceptable. 

Why is it necessary? 

Because human beings must exchange to live together in peace, and to prosper. 

How important was the discovery of the idea of money? 

Look around you.

That covers the concept or idea of money. But an idea does not exist as a physical form. Money must be a physical form. Neither the electronic money of today nor the notes and coin which circulate as cash has any official or legal connection with Gold and Silver. 

They once did, and most people think that they still do. As long as that situation exists, the modern monetary system will continue to function.

That is what the Central Bankers of the world want you to believe.  What must be believed because the entire system is built on this one belief.

When the majority starts to understand what they have is not money at all but IOUs, then the fireworks will really fly.