What we learn in school about money is what it does. However, a lot of us don’t know what money actually is. This is very unfortunate because in today’s society money is linked to everything in our lives; thus having a powerful effect on us. Don’t you think something of this importance would be taught to us in more depth in our schools? Let us explore this mysterious phenomenon.
Here’s a quote from monetary theorist Bernard Lietaer, who was a co-architect of the Euro:
“Money is an agreement by a community of people to accept a medium of exchange.”
Let’s break down that definition...
Money is an agreement...
“Agreement - an arrangement that is accepted by all parties to a transaction.”
...by a community of people...
“Community - a group of people sharing common interests.”
...to accept a medium of exchange.
"Medium of Exchange - anything generally accepted as representing a standard of value and exchangeable for goods or services."
Here's another quote by David Graeber, Antropoligist and Author of "The First 5000 Years of Debt"
“Money is a yardstick that measures debt.”
Let's break down that quote as well.
Money...
"Money - an agreement"
….is just a yardstick
"Yardstick - a measuring tool"
…that measures debt.
"Debt - an exchange that has not been brought to completion"
So by using both of these definitions, we can also say that...
Money is an agreement by a community of people that acts as a measuring tool for what they owe each other.
Many people believe that the formation of money happened in this order: Barter, Money, and then Credit. Additionally, the belief is that money was created due to the inefficiency of barter. For example, if you had pigs and I had chickens, and I wanted your pigs but you didn’t want my chickens, then I have to find something you want in order to make the exchange happen. This is called “The Double Coincidence of Wants.”
However, according to anthropologist/author David Graeber, evidence suggests that money started out as an instrument of credit, or virtual money issued by a community of people in small villages in Mesopotamia as a medium of exchange.2 People didn’t carry around little pieces of silver, they put things on their tabs. Merchants and temples used expense accounts and kept record of who owed what on clay tablets. This means this type of commerce was based on trust. This form of money can also be called mutual credit.
Graeber also suggests that coined money in precious metals such as gold and silver (commodity money) was created as a way for the king to pay his military so they can buy things they needed in conquered countries such as food, etc. from the commoners2. The commoners would then pay a tax in the form of the coined money they got from the soldiers, to the king. Essentially, when the king did this, he employed everyone in the newly conquered town to get the soldiers the things they needed. Coined money and taxes were used as ways to create markets. Markets were created as side effects of military operations. Basically, when a king issued currency to the newly conquered areas, the people essentially pledged their labor to him.
Besides coins, people have used items such as sea shells, salt, tobacco, seeds, and cattle as money. Back in ancient Egypt, people have also used warehouse receipts as money as well. For example, if I harvested a certain amount of wheat and brought it to a warehouse, they gave me a receipt that represents how much wheat I stored. I can now trade that receipt instead of barrels of wheat for the goods or service I needed.
Some of the first known creations of paper money was found in China around 960 A.D.2 Fast forward to 19th and 20th centuries, we had paper money backed by gold and silver. People were able to redeem their money for those precious metals. Then from that type of money, we transitioned into Money 3.0 fiat money.
The prevalent form of money today is fiat money. Fiat is a latin word that means "let it be done; it shall be." Fiat money gets its value from government regulation or law. There is nothing backing the currency such as gold or silver, just our faith in government and the ability to pay taxes and government debts with it. So, if people lost faith in their government, then the fiat currency will be worthless. This type of money isn't good or bad per say, it just depends on how it is managed. The currency is elastic like a rubberband, and can expand in supply when the right conditions call for it. However, by having this elastic feature, the currency can also "pop" like a rubberband as well if it is abused.
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