Part 1: A brief summary about the origins of money

Why has money been present in mankind’s history for so many millennia? Different cultures in different places and periods of time have used very different commodities as money, such as cocoa, salt, gold, shells, circular stone disks (or cigarettes). In fact, the concept of “money”, or “medium of exchange”, has always arisen spontaneously when the sprouts of civilization have taken root. Why? Let’s trace money back to the absolute beginning.

Humans need to cooperate in order to survive and this is as true today as it was with our first ancestors, being the tribal life back then the most basic form of social cooperation.  The isolated life of nomadic tribes was harsh, as little groups of individuals were forced to provide everything for themselves, from food, to clothing, to shelter and so on. From one moment on, the stage of isolated tribal life evolved to embrace more complex human relationships, which meant to interact with unknown human beings outside the circle of the tribe. This interactions between groups were mostly based on exchanging goods such as furs, tools, food and the like. According to the many archeological sites discovered all across Europe with plenty of minerals and other commodities  coming from the most distant regions, this habit was widespread in prehistory. This barter economy, or direct exchange, had a big handicap limiting trade, as it severely depended on the coincidence of wants. For example, one tribe was willing to get new tools urgently offering fur in exchange, but the other tribe, which was also coincidentally near the same place, was not interested at all in fur but in food. The exchange does not take place, because what the first tribe offers is not what the second one wants at this precise moment.

How did mankind overcome such a handicap? It “invented” money as a concept. Thus, in an indirect exchange money plays the key role: The different parties don’t exchange one good (or service) for another good (or service), but one good or service for money. In other words, people had first to exchange some good for money (sell) in order to exchange this money for the desired good (buy). Money has therefore the function of being a medium of exchange commonly accepted (and recognized as such) by the people. It has taken many forms during history, but is has always been no more and no less than a normal commodity with special characteristics such as being fungible, divisible , relatively scarce, resistant, non-counterfeitable and transportable . The use of money solved the coincidence of wants problem and permitted an extension of trade, the division of labor, the existence of prices denominated in money which made economic calculation possible… In other words, it was the basis of a market economy.

The money of the Mayas were the cocoa grains, which could be eaten in form of chocolate as well as being used as a medium of exchange; in ancient Egypt workers were paid with salt, which was vital to preserve food; in feudal Japan  rice was money and at the same time the basis of subsistence… These commodities were useful on their own independently of their usefulness as a medium of exchange, they had therefore two demands or uses: An original non-monetary demand and, later, a monetary demand. But why arose this extra demand for them beyond simple consumption? According to Rothbard, because of their greater “marketability”: ‘If one good is more marketable than another –if everyone is confident that it will be more readily sold– then it will come into greater demand because it will be used as a medium of exchange. It will be the medium through which one specialist can exchange his product for the goods of other specialists (…) Some goods are more widely demanded than others, some are more divisible into smaller units without loss of value, some are more durable over long periods of time, some more transportable over larger distances. All of these advantages make for greater marketability (..) the most marketable goods will be gradually selected as the media for exchange. As they are more and more selected as media, the demand for them increases because of this use, and so they become even more marketable’ .¹ So, according to him, more marketability led to a wider use as a medium of exchange, which in turn increased the marketability of the commodity in a “reinforcing spiral”. During the process people discovered that some commodities were more suitable for the function than others, so the number of candidates shrank till one or two emerged as general media to be used in all exchanges.

During history many commodity moneys coexisted, but gold and silver emerged spontaneously as the most efficient moneys. Both enjoyed the characteristics that good mediums of exchange require (fungible, resistant, divisible, transportable, scarce, non-counterfeitable…), both were uniquely marketable and both had a non-monetary industrial demand “prior” and parallel to its monetary demand. The paper money of today was once just a money substitute, not “money” as such. It was redeemable in gold for the public, but redemption was successively limited by central banks and governments and gold reserves were centralized, so gold effectively disappeared from circulation; although not from the monetary system, as the main currencies continued to be linked to it. After the collapse of  Bretton Woods, gold finally disappeared from the monetary system, starting the present period of “pure” fiat currencies. But all this is another story.

Quotations, references and comments

¹ Murray N. Rothbard, What has government done to out money, page 7. Published by Ludwig von Mises Institute, fifth edition.

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