Money money, money.

We toil to earn and save it, while loving to spend it. But what is it really?

Many of the ideas below are borrowed from Adam Smith's Wealth of Nations. A very good read, but it can get a bit heavy at times.

Our needs

We all have materials needs to be met. For starters, we like to eat. But, we also need clothes, shelter and the list only goes on. (Perhaps some would include their phone in this list.)

One basic way to accomplish the task of taking care of our needs would be to do everything ourselves. Provide everything by our own efforts. Being self-reliant is a definite virtue and is a good feeling. Yet this would require everyone to have their own cows, grow all their own food, make their own furniture and clothing and so on.

One might end up being like a recluse or castaway.

There is a more efficient way.

It's better to all get along

A more efficient way is for individuals or families to come together as a community and work together. Why does everyone need a cow that produces more milk than the family needs?

Imagine a fictitious community where Miriam raises all the cows and produces all the milk needed from everyone. Likewise, Sara makes all the clothing and John all the furniture.

Now each person can focus and specialize in producing something they are good at. Sara makes clothing and trades it with Miriam for milk. Miriam trades the milk from her cows with John for furniture. This trading is called Bartering.

In this way, everyone specializes and everyone prospers.

But there is one matter left unexplored. How many items of clothes, for example, must Sara trade to obtain, say, a chair from John? This is where the art of business comes in. For a business transaction to take place both parties must discuss the matter and agree on the amounts.

Adam Smith, in his book Wealth of Nations, expressed the view that the value of an object to a potential buyer is equal to the convenience and cost to the buyer as opposed to doing it themselves. For example, John could produce milk for himself if he wished. However, this would require him to obtain a cow, tend to, and milk it himself. For him, the value of the milk he gets from Miriam equals the time, effort and resources he would have expended if he did it all himself.

It should then come as no surprise then that items that are hard to obtain or make tend to be valuable, while items that are easy to obtain or make tend to be of small value. (There seems to be a life lesson in that.)

Show me the Money

Pure bartering is all very well, but it does have its limits.

Suppose John needed to go to a nearby community to buy a cart from Bill, the nearest maker of wagons. If John were to be able to purchase the cart, he would have to haul a load of furniture he made over to Bill's shop. A tedious prospect.

To make the whole business of bartering easier, John can take with him some items both agree to be of great value. Now John needs to take only a few of these valuable bobbles with him. These valuable "bobbles" are in fact what money is.

Money around the world

At first, money consisted of objects of direct value. Some examples are:

Gold became very valuable traditionally since it is fairly rare, makes great jewelry and does not rust or corrode like other metals, iron for example.

Trivia: For many centuries aluminum was more valuable than gold. It is said that Napoleon Bonaparte had aluminum knives, forks, and spoons for his extra special occasions. But when aluminum became easy to produce and abundant the value decreased to the inexpensive metal we know it today.

Silver and gold coins became the standard money for thousands of years. In the Constitution of the United States states are forbidden from making “any Thing but gold and silver Coin a Tender in Payment of Debts.”

This type of money changed with the issuing of Bank Notes. Bank Notes are pieces of paper where a Bank promises to exchange the note for valuable objects, such as gold, on-demand.

So now a person can carry paper money around with them and treat the paper as valuable since anyone may exchange it for gold, silver etc. This is known as being on the Gold Standard. When the United States was on the Gold Standard, every 20 dollars could be traded in for 1 ounce of gold. In England, the British pound could be traded for a certain number of pounds of silver (hence its name).

Fiat Money

Sometimes governments feel the need to create more money than can be traded in for something of value. Such money has no value in itself and only is useable since the government declares it so. Since money is called Fiat money (Fiat meaning by decree or command).

The paper money used in the United States today are called Federal Reserve Notes (look at the top of any bill) and is essentially fiat money. Such is true for most of the paper money used in the world today.

So from buying an ice cream cone to corporate take-overs, money becomes the method to trade and for all to prosper.

Around the web

School House Rock – This for that

School House Rock has been teaching children about a wide range of topics for decades. The episode This for That teaches about the history of money and bartering in a fun way.

Finance: The History of Money and A Brief History of Money: From Barter to Bitcoin

Both videos animate the history of money.

Exploring Yap (Micronesia) and its incredible Stone Money (Rai)

Vic Stefano explores Micronesia (In the south pacific) and learns about the giant stone money the use.

What is the Gold Standard?

This video explores the gold standard. What it was and why it is no longer used.

Don't miss out on future posts! Sign up for our email list and like us on Facebook!

Check out more hot topics, go back to Home Page