The Development of Money
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When people think about the development of money, they tend to think it began with a couple of people trading what they have for what they need. For example, suppose you are an apple farmer and you want wheat. You could trade a bushel of apples for a bushel of wheat. Seems like a fair trade right? The system of trading this for that is called barter.
There are a couple of problems with the barter system. The first, apples and wheat aren’t harvested at the same time. When your apples are ready to trade the wheat is still growing. The apples will spoil before the wheat is ready. Second, what if you can’t find a wheat farmer that wants to trade you for apples. The science term for this problem is called a Coincidence of Wants. You have to coincidentally have something that someone else wants and they have to coincidentally have something you want in order to make a trade.
Most societies without money didn’t use the barter system very often. Barter was probably only used when trading with a complete stranger. Perhaps a trader came into the village with obsidian (used to make stone tools) and wanted to trade the obsidian for some food, then maybe barter will be used.
In most societies that didn’t have money there was an exchange of “gifts.” Here’s how the system works. A particularly good farmer or hunter, we’ll call him Robert so we don’t get confused. Robert has a lot of food and John doesn’t. Robert will give John some of his food. Now John owes Robert. If Robert ever is in need of food or something else that John has, Robert will go to John and ask for what he needs. Robert also gains fame and prestige from giving gifts to other people. If Robert gives a lot of gifts he will become a very important person in the village. He may even become chief.
Let's look again at the example of the obsidian trader. Obsidian, and other rocks like it are used to make tools. This makes obsidian valuable. It’s always valuable because is can always be turned into tools. So, let's say the apple farmer, who wanted wheat, trades his apples for obsidian. He can then trade the obsidian for wheat. The obsidian was used to hold the value of the apples. When used like this, the obsidian becomes what is called an intermediate commodity. In history, there are several things that were used as intermediate commodities. Gold, copper, silver, tin and obsidian are obvious examples of intermediate commodities in history. However, there are some weird ones. For example, a certain type of seashell was used as an intermediate commodity in China. There are many types of intermediary commodities. It seems that as long as everyone agrees something is valuable, it is.
From history, we see that metal was the favorite intermediate commodity, especially gold and silver. Metal was the favorite because it was easy to carry and it was easy to divide. Being able to divide a commodity was important. What if you only wanted a half a bushel of wheat or you needed a clay pot but only had cows to trade? Why would you want to trade a whole cow for a clay pot? That’s not a good deal. A half a lump of gold was something that people would accept more often than half a cow. I mean, what do you do with half a cow? It would lose its value very quickly as the meat was either eaten or spoiled.
Without the help of their leaders, the people of several different societies developed coins. Egypt used gold bars about 4000 BCE, about the same time the civilizations in Mesopotamia were using silver bars. In about 1000 BCE, civilizations in China were using spade or knife-shaped coins. They were also using coins in India. In all these places people were using coins as money without even talking to each other. It’s pretty amazing when you thing about it; different people have the same problem, at the same time, and they come up with a similar solution.
To make sure trade stayed fair, and to make sure the leaders stayed in control, governments started to issue coins. The idea was to make sure that coins were the same size and had the same amount of precious metal in each one, keeping everything fair. But that is a different story.