A Brief History and Understanding of Money (and Gold)

“Money is one of those things that’s completely familiar and completely mysterious” – James Surowiecki, “The Financial Page” column for The New Yorker.

With that thought in mind, here are two well presented posts on money and its history, found via Kotte. The first post is reply on reddit in response to someone wondering where all the money in the world has gone. The result is an enlightening walk-through of how we got to money and what money is.

From www.reddit.com:

It’s hard to explain this to a five-year-old, because there are some fairly abstract concepts involved, but here goes…

All actual “money” is debt. All of it, including monetary gold, etc. (Don’t argue with me yet, I’ll get to that.)
Imagine a pretend world with no money, some kind of primitive villiage or something. Now let’s invent paper money. You can’t just print a bunch of paper that says people have to give you stuff, because nobody would honor it. But you could print IOUs. Let’s walk through this…

  • Let’s say you’re an apple-farmer and I’m a hunter. You want some meat but haven’t harvested your crops yet. You say to me, “hey, go hunt me some meat and I’ll give you 1/10th of my apple harvest in the fall”. Fair enough, I give you meat, you owe me apples. There’s probably a lot of this kind of stuff going on, in addition to normal barter. In time, standard “prices” start to emerge: a deer haunch is worth a bushel of apples, or whatever.

The second article comes from one of my favorite magazines, IEEE Spectrum1, by way of the afore quoted James Surowiecki who gives a brief history of money and some of its effects:

From spectrum.ieee.org:

Money’s decline in feudal times is worth noting for what it reveals about money’s essential nature. For one thing, money is impersonal. With it, you can cut a deal with, say, a guy named Jeff Bezos, whom you don’t know and will probably never meet–and that’s okay. As long as your money and his products are good, you two can do business. Similarly, money fosters a curious kind of equality: As long as you have sufficient cash, all doors are open to you. Finally, money seems to encourage people to value things solely in terms of their market value, to reduce their worth to a single number.”©

These characteristics make money invaluable to modern financial systems: They encourage trade and the division of labor, they reduce transaction costs–that is, the cost incurred in executing an economic exchange–and they make economies more efficient and productive. These same qualities, though, are why money tends to corrode traditional social orders, and why it is commonly believed that when money enters the picture, economic relationships trump all other kinds.”©

It’s unsurprising, then, that feudal lords had little use for the stuff. In their world, maintaining the social hierarchy was far more important than economic growth (or, for that matter, economic freedom or social mobility). The widespread use of money, with its impersonal transactions, its equalizing effect, and its calculated values, would have upended that order.”©

Both of these articles got me thinking about an episode of NPR’s Planet Money I listened to a while back on why we use gold as a de facto base unit of currency. It boils down to this: of all the basic elements on the periodic table that meet these basic requirements:

  • Not a gas
  • Doesn’t corrode
  • Doesn’t burst into flames
  • Doesn’t kill you
  • Is rare, but not too rare
  • Easier for pre-industrial people to forge

…gold is the element that fits the bill best.

  1. Fair Disclosure: I am a member of IEEE