It’s been a while since I’ve done an economics post. So here’s one on money.
Money has been around since its invention in Asia Minor nearly 3000 years ago (the ancient kingdom of Lydia). The use of metals as a medium of exchange goes back even farther, to at least 5000 BC.
Money makes trade easier. Consider a purely barter economy. If you make something, chairs for instance, and you want something you don’t make, you have to find someone willing to trade chairs for what you want.
Suppose you wanted milk. You could go to the guy with dairy cows or goats or whatever milk-producing animals and offer to trade a chair for milk but what if he doesn’t want any chairs. “Got all the chairs I need, thanks.” What do you do then? Well, you could find out what the milk producer does want (ewers, say, to store the milk) and find who provides that. So you go to the potter to see about trading a chair for an ewer that you could then trade to the milk producer for the milk you want. But the potter doesn’t want chairs either. So you find what he wants. And so on until you finally get to someone who will trade for your chair. And then you have to go down the chain, making each of the trades, until you finally get the milk that you wanted.
That’s a lot of work to get something to pour on your cereal. (And again to get the cereal on which to pour the milk.) That’s time and effort you could have spent on making more chairs to trade.
That’s where we were for much of prehistory. This basically made trade so difficult that most people produced most of their own goods even if it weren’t the most efficient way of doing it. Trade was limited, largely to resources of widespread applicability. (The early flint trade was simply amazing in its scope.) But somewhere along the line people figured out that a common medium of exchange made trade so much easier. You could trade your chair to someone who needs chairs for this medium of exchange, then when you need milk, you can take the medium of exchange to the milk producer and trade for milk.
Precious metals were among the first media of exchange. Gold and silver were easy to recognize, rare enough that modest amounts could be traded for considerable other goods, and yet easy to divide into small pieces for smaller transactions. Weight and purity determined their value. Weight was measured by balancing against known weights and purity by rubbing against a touchstone. The touchstone was a piece of fine grained schist or jasper. When a piece of gold was rubbed against it it left a streak, the color of which revealed the purity of the gold.
Unfortunately, almost as soon as gold was recognized as a medium of exchange, cheating began. Merchants would have two sets of weights–heavy ones to use when selling for gold and light ones (although claimed to be the same weight) when buying with gold. Everyone had to carry their own weights to check against the person with whom they are dealing to avoid such cheating. And, of course, the use of the touchstone was mandatory. This added a bit of extra time and effort to every transaction, never mind the arguments if weights did not agree or disputes over what the touchstone revealed.
Then, along about 600 BC the Kingdom of Lydia began taking small pieces of gold of known weight and purity and stamping them with a design, making the first coins. People did not need to use weights nor touchstones. They merely needed to count coins.
It was not long, however, before yet more cheating began. People would shave bits of gold from the coins or make fake coins of lesser purity. Nevertheless, the introduction of coinage, of money, made trade far easier.
With the increase of trade came increased specialization in production. A potter, for instance, instead of making a wide variety of pottery so as to be able to trade with more individuals, with fewer intermediate steps, for the things he needs, could instead produce ewers to sell to a few individuals who need those vessels, trade them for money, and then use the money to trade directly for the things he needs. And making just ewers he can get very good at their production, making more ewers in less time allowing him to trade for more money to buy the things he not only needs but wants. This allowed for greater economic efficiency and increased prosperity of the society as a whole.
The other aspect of a common medium of trade, of money, is that it allowed separation in time between the halves of a trade. One could trade what one produces when it is convenient or profitable to do so, then hold onto the money until one needs to make a purchase of something else. This split in time between selling and buying, and the reserve of money between those two lead to a host of other economic activities which I’ll go into another time.