What better place to start a financial blog than with the concept of money? Money is an idea, a shared belief. It is the quantification of one’s contribution to society (though it is extremely subjective). Few things influence our experience in life more than money. There is only one advanced civilization (that we know of) which has existed without an economy or form of money, the Incas. Money, it seems, plays an integral role in coordinating the actions of large groups of people. It has been created many times in many places. Money has been cocoa, stones, gold, wooden sticks, cigarettes, shells, and paper. It can most simply be defined as a generally accepted medium of exchange. There a few other characteristics of money which we will take a look at before taking a quick look at its history and evolution.
Characteristics of Money
Many different things have filled the role of money, with some doing a better job than others. What they had in common is that they were they were a medium of exchange, a unit of account, and a store of value.
Medium of Exchange – Eliminates the double coincidence of wants
Unit of Account – Allows a good to be valued over time relative to other goods, establishing prices that convey information about relative worth to buyers and sellers
Store of Value – an asset that carries purchasing power in liquid form
History of Money
In Adam Smith's, Wealth of Nations, he describes a barter economy developing before the inefficiencies of finding someone who had something you wanted who also wanted something that you had were so great that money was invented to facilitate trade. This view of money has been popularized and is what you were likely taught if you took Economics 101 in university. However, it might not paint the full picture. Early humans were hunters and gatherers. They produced everything they needed within their small groups and shared their goods between themselves through an economy of favours and obligations (a gift economy). If someone was given meat it was assumed at some point in the future they would receive something in the future. Some barter likely occurred between groups for items that weren't able to be produced locally.
Not much changed during the Agricultural Revolution (which began around 12,000 BC), there was some specialization of labour but villages were small and their economies were limited. It wasn't until the rise of cities and kingdoms, the specialization of labour, and the concept of private ownership which created markets and the need for a standardized medium of exchange. The first signs of this arise around 7,500 BC. The farmers of the Near East invented an accounting system using small tokens that represented the goods they produced. This system was used for 5,000 years until the advent of writing allowed for better record keeping as cities grew. The earliest form of writing, cuneiform, was developed around 3,200 BC by Sumerian scribes in the city of Uruk (present day Iraq) in order to record transactions and provide receipts. The early civilizations of the Middle-East (Egypt, Mesopotamia, and Palestine) created units of account to deal with the inefficiencies of the barter system. Items were given values based on their equivalence to gold or silver to standardize transactions.
Over time, some commodities tend to naturally fill the role of money. People will continually trade less liquid commodities for more liquid commodities. Precious metals tend to be favoured, particularly gold and silver, due to their properties. Despite precious metals being used in trade for millennia, it wasn't until the 7th century BC that governments minted a standardized coin. China was the first country to use paper money, started doing so during the Tang Dynasty (618 AD). It took another millenia before Sweden became the first country to issue a paper currency, the form of money we are most familiar with today, though that is changing. In 2021 cash was used for only 11% of point-of-sale transactions.
It is hard to imagine a world without money, it is also hard to imagine what money will look like in the future.
Bobby McBride holds the Certified Financial Planner (CFP) designation and is Financial Planner at Planning with Bobby Inc. He also holds the Chartered Financial Analyst (CFA) designation and is an Investment Advisor at Investing with Bobby of Designed Securities Ltd.
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