How is it that we came to have money? Everybody understands trading or bartering, but few truly understand what money is, how it works and why it has value. Let’s start at the beginning. To make this less complicated I will speak of trading among just a few individuals, but it is all applicable to any number of traders.
Farmer Apple (who only has apples to trade) and Farmer Beef (who only has beef to trade) live in a small community with Farmer Wheat (who only has wheat to trade) and Farmer Milk (you know the drill). There is no money in this community so all transactions are made by trading goods (often called bartering). With this system the community survives very well because goods are traded and value is determined- and measured- by other goods.
However, one day every year comes the time when Farmer Apple finds that nobody needs anymore of his apples. What is Farmer Apple to do? Why, he must find other goods to trade with his neighbors. He is in luck, the other community members determine that they’d enjoy some fish. There are, however, no fisherman in their community.
This apparent deficiency is Farmer Apple’s opportunity.
Every year Farmer Apple loads up his wagon with apples and goes to a river community- some distance away- to trade with (didn’t you know his name had to be) Mr. Fish. Every year Farmer Apple trades his wagon-load of apples for the fish he brings back to his community to trade for beef, milk and wheat. Trading works well for the people of the community.
However, it is something of a hardship to travel with a wagon-load of apples so farmer Apple seeks to find a way to travel lighter. Into their community, one year, Mr. Miner comes to live. He is an expert at mining and smelting and fashioning metals (gold in this case) into jewelry, bullion and also into a form of guaranteed purity and weight (we call them “coins”).
Now, Mr. Apple, though he still needs to travel to the river community every year to trade for fish, doesn’t need to load up a wagon with apples and transport them a long distance to get that fish. Instead, he takes those apples that would have made the trip and trades them for some gold coins. Farmer Apple takes the gold coins (with the same value as those apples) and merely puts them into his pocket and goes off to trade for fish.
We see here one of the reasons that a “monetary system” always overtakes a strict trading system: convenience. Gold and/or other precious metals also make for an easy way to store wealth. If you attempt to store apples they will shrivel and spoil. Store gold coins, however, and avoid spoilage. Also one needn’t build a big warehouse to store apples but merely find a way to securely store a handful of coins.
The community is doubly in luck because, they find, Mr. Miner not only is good at producing those gold coins, he can expertly fashion a heavy vault which can safely store the coins which others bring to him for safekeeping. As the farmers leave their coins for safekeeping, having paid a small fee for the safekeeping service, Mr. Miner (who is also known as Mr. Banker) issues them a receipt for their coins.
For instance, if Mr. Apple leaves two coins of one ounce apiece Mr. Banker issues him two receipts each reading, “This receipt can be reimbursed for one gold coin of one ounce”. Anybody with the receipt can go in and redeem it for a gold coin any time they want. Well this makes trade/commerce even more convenient because, instead of carrying around the coins for trading, one can carry the receipts for trading. After all- the receipt is for the gold, so the receipt is as “good as gold.”
Voila – we have “money”.
And just as simple as that is, so you will find just as devious and treacherous is the larceny it enables. Here is how the farmers’ wealth could be stolen from them without their even knowing it. Suppose that their community has deposited the total of 100 gold coins of one ounce apiece into Mr. Miner/Banker’s vault. Of course 100 receipts for those coins have been issued and are traded among the farmers in the community with the value of the coins they represent. Very good, all on the up and up.
But suppose that Mr. Miner/Banker figures out that he can secretly write up some receipts for himself without even depositing any gold. To make it simple let’s say that he secretly writes up another 100 false receipts and uses them to trade/buy in the community. Do you see how the farmers have been fooled and cheated? The value of the receipts have effectively been reduced in an unfair manner. And Mr. Miner/Banker is “buying” goods from the farmers without his even having had to labor. He has plundered the farmers’ labor and, until reading something like this, those fictitious farmers may not ever have been able to discern that they have been cheated.
Of course we don’t need to worry about that because our money is no longer backed by gold.
“Published originally at EtherZone.com : republication allowed with this notice and hyperlink intact.”