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Money

What is Money?

What do the following items have in common?
Bronze knives, farm tools, cacao beans, salt chunks, stone disks,
fish hooks, beaver pelts, musket balls, nails and cigarettes. Well
the answer is that all of these items have been used as money! Money
you say oh wise one? Yes, money. Not money in the sense that you know
it today but yes, money.

Lets think about what money really
is:

Money: Anything accepted as payment for goods
and services by most people in an area at a given time.

Think about it, if most of the people in a
region are willing to accept a certain item as payment for goods and
services then that item has a use as money. It is sort of like the
way cigarettes are portrayed as money in the movies. Now the reality

is that these types of money, informal money that has another
basic use
if you will, are not money as you normally have thought
of it. This type of money is called commodity money. The
origins of money can be traced back to ancient times. Then commodity
money, money that has an alternative use, was used. In the South
Pacific and Africa, cowrie shells were the common forms of currency
while in New Guinea, it was dog teeth that were used. At Santa Cruz,
the feathers of hundreds of honey-eating birds were attached to short
sticks to make feather-stick money while in the Marshall Islands,
fishhooks were commonly used. In ancient China tea leaves were
compressed into “bricks” while the Russians used compressed cheese as
their currency. Commodity money was still present during the
colonial age when many products such as gunpowder, musket balls,
corn, and hemp were commonly used.

In 1618 tobacco became the most famous type of
colonial money because the governor of colonial Virginia gave it a
monetary value of three English shillings per pound. However, fiat
money, money by government decree, has come to replace commodity
money. In 1645 Connecticut established a monetary value for wampum,
a form of currency that the Narragansett made out of white conch and
black mussel shells. Because the Narragansett and the settlers used
wampum in trade, certain shells were made equal to 1 English penny.
In the 1700’s the Governor of the then territory of Tennessee was
paid a salary of 1000 deerskins a year! His secretary of state was
paid 500 raccoon skins. Quite a salary huh!

As time progressed, other forms of money were
used. In some states, laws were passed allowing citizens to print
their own paper currency. Backed by gold and silver deposits in
banks, it served as currency for the immediate area. Some states
passed tax-anticipation notes that could be redeemed at the end of
the year. The governments printed the notes, which were used to pay
salaries, buy supplies, and meet other expenditures until taxes were
received and the notes redeemed. The taxes though, were collected in
coins.

Paper money was really first seen around the
time of the Revolution. In 1775 the Continental Congress authorized
the printing of Continental Currency which had no gold or silver
backing. By the end of the war nearly $250 million had been printed
and spent.

Money as you know it today is not commodity
money. Today most money is what we call fiat money. Fiat money
is money by government decree. Wampum was the first fiat money
used in the America’s. It had a set value, equal to a certain amount
of gold, established by Connecticut in 1645. Since the government of
Connecticut established it as official money it is fiat
money.

The concept of paper currency was not well
regarded early on. Most Americans, indeed most people world wide,
felt that paper currency was risky since it had no inherent value. As
a result most fiat money was in the form of coins. This coined money
is known as specie. Specie was well regarded because it some
metallic content, either gold or silver. Due to scarcity this then
had some inherent value of its own. In fact paper currency was not
even issued until 1775 when the Continental Congress printed a very
small amount of paper currency to pay its debts.

So, why do we use money at all? Well the
reality is that the use of money is very much tied to the Industrial
Revolution. As the world grew increasingly modern money became
needed. Before money was used the world was primarily agricultural.
People living in traditional economies used barter as a means
of exchanging goods and services. Barter presented great difficulty
in completing transactions and in fixing value. With the Crusades and
the corresponding growth of towns and villages and increased trade
money became a necessity. Industrialization would have been
impossible without money.

 

Money serves, therefore, three essential
functions:

  • It is a Medium of Exchange – money
    is used so we can exchange goods and services easily. In barter
    this is very difficult because transfer of large items and
    perishable goods makes moving around a little tough.
  • It is a Measure of Value – money is
    used so we can assess fairly and consistently the comparative
    worth of items. In barter this could not occur because it is
    impossible to compare the value of different commodities
    consistently. For example, trading two cows for a goat and a three
    legged dog. Whose to say what is worth more??
  • It is a Store of Value – money is
    used so that we can save our earning for a later date In barter
    this cannot occur because often items might die or
    rot!

Money also has three essential
characteristics.

  • Portability – Money is small and
    transportable. Imagine using certain types of commodity money.
    What if Cows where accepted as commodity money. Can you imagine
    walking around with a cow in your pocket??? A little difficult
    huh?
  • Divisibility – Money can be broken
    down into smaller or larger units of measure to make transactions
    easier. Can you imagine the cow scenario? Its not like you can rip
    of a leg if the whole cow wasn’t necessary as payment!
  • Durability – Money lasts. Specie
    lasts forever and even paper currency is pretty durable. In class
    I ripped a twenty dollar bill in half once and then taped it
    back together. It was still worth the same wasn’t it? Imagine
    trying that with a cow! Eventually even an un dismembered cow
    would die, rot and stink. Not too durable.
  • Stability of Value – Money, despite
    the influences of inflation and deflation remains fairly stable in
    value. Money is not subjected to the natural forces of weather as
    much early commodity was. In traditional economies when one needed
    goods he would trade crops. If there was a drought, however, the
    value of said crops would shoot way up. Since most money is in one
    way shape or form tied to known gold reserves, it is stable in
    value.