What is this stuff called money?

Early man used barter to exchange anything that they had in excess for other goods that they required. The problem with barter is that you need to find someone who has what you want and wants what you have. Eventually, money was introduced to smooth trade. Provided the value of a coin was universally accepted, it could be interposed between the parties to a barter. You would sell your excess for coins and then exchange those coins for goods that you needed. The seller and the buyer no longer needed to want what the other was offering.

Originally money consisted of a scarce commodity, such as cowrie shells, gold, or silver, but as trade increased, more and more money was needed and paper money was invented and the concept was brought back from China to India  by Marco Polo and subsequently found its way to Europe. Of course, the paper had no inherent value and the only reason that it became trusted as a means of exchange was that it was generally accepted by buyer and seller alike. Initially, notes were backed up by the equivalent value of gold held in places like Fort Knox, but the link with gold reserves was subsequently abandoned and the bank notes of various countries relied purely on trust to represent value.

This arrangement generally worked well except in countries such as Zimbabwe where the economy collapsed and the government printed more and more money in an effort to prop up the shortfall arising from the country’s inability to earn foreign currency.

Anyone with excess cash was able to deposit it in the bank and withdraw it when needed. Because banks would then be sitting on a pile of money, they were in a position to lend money to individuals and businesses whom they considered to be creditworthy. With the advent of computers and later the internet, it became possible to make and receive payments electronically on line or by credit or debit card and the need for paper money declined significantly. Depositors measured the amount of money that they had simply by reading their bank balance on line, so, in fact, money has largely disappeared and been replaced by numbers in the banks’ databases.

And it all relies on trust.


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