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Money is simply the means of exchange. Got that? Anybody can understand that. If you can’t, you should get your head checked. What? Too harsh? Tough!.... or… maybe there is something else there. Maybe, just maybe, there is a huge conspiracy and disinformation campaign going on for the longest time to prevent you from understanding this. Could this be possible? Most certainly is!

If you feel that you have been left out, if you feel that there is much that you do not understand and that it is confusing, it is most certainly so. You have indeed been left out and been confused by design, not by ignorance. It is most definitively true that you are not stupid; it is that you have been programmed to think in a specific way.

Today, we are going to provide you with the initial arguments and truths that will hopefully begin to de-program you in this matter because money matters. We need real money for a real economy.

 

IN THE BEGINNING

Originally there were no markets. People were just hunting, gathering and eating or using what they got. Eventually, over time, when there was a need to get something else and some food to spare, people began to exchange. It was only logical. I got an extra apple but I am not hungry and I need a sharp rock. You have an extra sharp rock and you are hungry. We exchange an apple for a sharp rock. Both our needs are satisfied. We both benefited. This is how it all started.

This is called barter. The exchange of stuff for stuff. It is also called Direct Exchange since two people exchange stuff directly between themselves. This is how markets originated. People began to realize that it wasn’t necessary for everybody to be able to do everything in order to get the stuff they needed. We need not to be proficient in hunting, gathering, making tools, cooking, creating shelters, and so on. It was much more efficient to specialize in one subject, get really good at it, get surpluses and then exchange them for other stuff.

This was the path of least resistance. Consider this. Improving a skill one already has is relatively easy, however, learning a brand new skill to proficiency is hard. If one can improve on an existing skill, then one can create surpluses easier than one could with a new skill one does not master. It is simple economy of effort. We are all lazy because it is a biological imperative. The person who expends the least amount of energy, also requires least energy to survive. This means that the life of this person will be longer, which means that it will have a higher chance of spreading its genes throughout the population.

This “laziness” in economy is called division of labour. Thanks to the division of labor, markets emerged and we all benefited.

 

THINGS GET COMPLICATED

In the beginning markets were simply gatherings of people exchanging stuff. Barter worked, but it had its problems. Let’s take a look.

Indirect exchange

Consider this scenario:

  • Marion needs a basket of apples and has two chickens to exchange
  • Amadou wants two chickens, but only has a basket of corn to exchange
  • Abass wants a basket of corn and has a basket of apple to exchange

Marion would go to the market and announce what she wanted and what she had for exchange. The problem was that nobody had what it took to make the trade. Marion’s needs were not satisfied. This is, until Amadou figured out that he could exchange his basket of corn for a basket of apples with Abass and later on he would exchange his basket of apples for two chickens with Marion.

Voila! Marion’s, Amadou’s and Abass’ needs were satisfied. It worked, but it took a great deal of effort to figure out the whole process. What if Amadou lived too far away? What if Amadou did not figure out that he could do two trades? What if Marion went home? There is a million different what ifs that conspire against this kind of transactions. They are complicated and there is no guarantee that they will work. They are called Indirect Exchanges, because although one gets what one wants, we do so indirectly through another person. It worked and it was better than not performing a transaction and return home empty handed, however, it was very inefficient.

 

Divisibility

Barter also had a different problem. Suppose that Naha had an extra cow and needed two chickens, a basket of corn, two sharpened stones and a small hut.

The chances that Naha could find a person that had all those items and was willing to trade them for a cow was practically zero. Which meant that Naha would have to wait for a very long time indeed, hoping that somebody would perform a myriad of transactions in order to obtain two chickens, a basket of corn, two sharpened stones and a small hut with the intention of exchanging them for a cow.

There were other people willing to exchange two chickens, a basket of corn, two sharpened stones and a hut but Naha wasn’t willing to exchange the entire cow for only one of those items. Clearly, Naha couldn’t split the cow in small chunks and hope they would accept them. They wanted a living cow, not a chunk of cow.

This is yet another problem barter has. In many cases, it is not possible to divide an item in smaller pieces and retain its value. A cow could be chopped off, but its pieces would be far less valuable than a living cow. This is assuming somebody would want a chunk of cow instead of a living cow in the first place.

 

Profit and loss

Another problem with bartering is that it is impossible to determine wealth-wise how a person is doing. Let’s say that a person started with a bag of apples, two chickens and a sword. Through trading, this person obtained a pig, two lumps of salt and a bag of corn. Is this person better or worse off after the trades? This information is impossible to know. For a business, this is critical. It is necessary to know if the business is generating a profit or a loss.

 

A BETTER SOLUTION IS FOUND

The problems of indirect exchange and indivisibility have an obvious solution: find something that it is divisible and that most people want. In or previous example Naha could not chop the cow in small chunks, but what Naha could do is to exchange the cow for a brick of salt, chop the salt in small pieces and trade those small pieces for two chickens, a basket of corn, two sharpened stones and a small hut. In this way, he could trade with different people to get the things he needed and at the same time preserve the value of the cow.

The trick for this to work was to select something else that everybody wanted, that it was divisible and in short supply. Economists define this as highly marketable.

  • It had to be something that everybody wanted, otherwise he would risk other people not wanting it.
  • It had to be divisible to be able to trade with different people and at the same time, negotiate for the amount to be exchanged.
  • It had to be in short supply so that people would not be able to get it easily and hence it would retain its value.

This something (e.g. salt) worked as an intermediary for the transaction: cow for two chickens, a basket of corn, two sharpened stones and a small hut. Naha did not really want salt but it facilitated getting him what he wanted.

As this stuff was desired by other people and therefore acceptable by other people and its advantages were obvious, people began to accept it for exchange. It allowed them to exchange perishable stuff now, before it spoiled and to store the salt for later exchange. In our example, they were able to store this salt because its value would not change much over time because it was in short supply.

This intermediate stuff has another name: money.

Note: please see the Glossary if you are unfamiliar with certain words.

Continue to Real money for a real economy - Part 2

 

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