Money—An Origin Story

Money solves a huge problem. As I explained in my last post it is better to specialize and trade, than to try to produce everything alone. Imagine that money does not exist. People simply barter. The word barter means that people simply trade goods for goods without using a medium of exchange. Now imagine that I am a designer and I have appendicitis. I can either die, or I can find a surgeon that is willing to trade design work for an appendectomy. I will likely die before I can ever find such a surgeon. This problem is what economists call the double coincidence of wants problem. Simply defined, if I am in an economy that trades goods for goods, then I have to find somebody that wants what I have and simultaneously has what I want. This is a huge transaction cost. In virtually every known society or culture something called "money" evolves to solve the double coincident want problem. Instead of trading goods for goods individuals trade goods for something that is commonly traded, that everybody wants and then they use that thing to trade. Money is anything that is commonly accepted in trade. Money does not have to be issued by the government to be used as money. In fact there are many government issued monies that people don't commonly accept for trade.

The earliest known form of money was red ochre in Aboriginal Australia. Ancient Mesopotamia traded in wheat. Marco Polo records that spices were used as money in the East. The Herodotus recorded that the ancient Lydians were the first people to use coins for money. Prisoners have been known to use cigarettes as money. The big stones in the picture below was used as money (That money didn't move much but was exchanged often in word only.)

 Rai—stone-Money-Micronesia

Rai—stone-Money-Micronesia

We could agree on anything to be money—even invisible bits of data. It doesn't matter what we use. It only matters that we commonly accept it. Money is one of the most important inventions of all time. Individual and societal success depends on wise usage of this most valuable invention.