01 History

Why do we need money anyway?

Like many others, I too reckon the monetary system has been designed to be complicated in the hope that you won't see through the fa├žade, you won't recognize it for the scam that it is. Our first stop needs to be the past as history provides the understanding of where and how money came into being, a little bit of introduction as it were.

As we have discussed in The Story of Us section, humans are predisposed to exchange goods and services in order to survive beyond a very meager subsistence level if at all. The basic nature of this exchange we refer to as barter: the direct exchange of one good for another. The problem with this system however is what is termed as the (Double) Coincidence of Wants.

Rothbard outlines it like this:

Suppose Mary has a supply of eggs for sale and is looking to get a pair of shoes in exchange. Sally has shoes she is willing to part with, however has no interest in eggs, only in a lawnmower. This exchange will therefore not take place. Mary now needs to find someone who is interested in eggs AND has a lawnmower to exchange in return. As we can see, it won't take very long for this process to become very unwieldy and dysfunctional. The solution then is indirect exchange, that is, some common good that is accepted as a store of value by all in the marketplace. Mary can then exchange sell her eggs to Larry who exchanges an amount of this common medium in return. Mary then takes this good to Sally and exchanges it for the shoes. Mary does not accept this commodity, say feathers, for its own use value to her but rather for its exchange value in her quest for shoes.

Among the important takeaways here: while sometimes the material that is used as money has a
use value Use value: :
refers to the commodity itself which can or will fulfill some human want or need or serves some useful purpose itself. For example, we don't normally use salt anymore as money so it is purchased/traded for its use as a seasoning for food, its use value.

to the holder or exchanger, gold for jewelery for example, when any material is used as money, ie. gold in the form of coins, it is valued by the individual(s) for that purpose only, not its use value to that person. It is a means to an end, not the end unto itself. Having said that, successful money will be of a commodity already in demand in the marketplace, gold and silver for example, a demand rooted in some perceived use value. This value can be a simple as thinking the colour is pretty.

How did it come about?

At some point in our history, there doesn't appear to much recorded on this topic, the problem and limitation of direct exchange was recognized and other commodities emerged as mediums of exchange: shells, feathers, spices, livestock, tobacco to name a few. Some worked OK, others not so much for reasons that will become clear further in this section. Using multiple intermediaries has its own issues however, the double coincidence of wants was simply pushed further up the chain when different societies attempted trade: I use shells, you use feathers, neither of us recognizes the value of the other's money, stuck.

Over time, two metals solidified themselves as commodities in demand and that were also valued as mediums of exchange, those being gold and silver. Humans have placed a value on these two metals for ages, perhaps since their respective discoveries. They contain both psychic value, jewellery for example, as well as practical value, electronic and medical products. Both also meet the criteria of successful currency as seen later in this section.

At this point, let's take a big picture at money and banking via Paul Grignon's Money as Debt series. (running time 6:18min) From here I'll break things apart and we can look at each individual component.