What is ‘money’?
Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are as a medium of exchange, a unit of account, and store of value.
Evolution of Money: ‘Double Coincidence of Wants’
There was a time when money did not exist. If ‘A’ wanted to buy something but ‘B’ did not have it, but ‘C’ wanted ‘A’’s goods while ‘B’ needed ‘C’’s produce (and so on) then through a complicated series of exchanges over time, everyone could get what they wanted. However, this was dependent on too many factors and took a lot of time.
This sort of problem is prevalent in any society that relies on barter, and is referred to as the problem of a “double coincidence of wants” – situation where 2 people each happen to want what the other person has. ‘A’ solved the issue by indirect exchange – he had to trade with a 3rd party for an item he did not want, and then trade that item for the product he did want.
This process of indirect exchange can be very inconvenient. In the course of his day-to-day bartering, ‘A’ may find one day that people tend to prefer ‘honey’ in trade to other items. He begins trading his own goods and services for honey. ‘A’ does this, not because he likes honey, but because he knows that honey can be more readily traded for what he does want, than what he could obtain by directly bartering with his own goods and services.
This sets up a positive feedback loop. Increased use of honey in barter, causes ‘A’ and others to begin trading their goods and services for honey, not because they like honey, but because they know that the honey can be readily traded for what they do want.
This causes even more people still to being trading and bartering for honey, until finally ‘A’s whole community is bartering and trading, not for what they do want, but for honey. They then take the honey and trade for what they do want.
This problem overall is caused by the improbability of the wants, needs or events that cause or motivate a transaction occurring at the same time and the same place.
In-kind transactions have several problems, most notably timing constraints. If you wish to trade fruit for what, you an only do this when the fruit and wheat are both available at the same time and place (and only if someone wishes to trade wheat for fruit). That may be a very brief time, or never. With money, you can sell your fruit when it is ripe and take the money. You can then use the money to buy wheat when the wheat harvest comes in. Thus the use of money makes all commodities more liquid.
Because of the severe cost imposed by the coincidence of wants in an in-kind economy, money tends to emerge naturally as some form of commodity money.
Earlier times, anything ranging from rice to cotton to food products like honey could serve as a medium of exchange.
Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are as a medium of exchange, a unit of account, and store of value.
Evolution of Money: ‘Double Coincidence of Wants’
There was a time when money did not exist. If ‘A’ wanted to buy something but ‘B’ did not have it, but ‘C’ wanted ‘A’’s goods while ‘B’ needed ‘C’’s produce (and so on) then through a complicated series of exchanges over time, everyone could get what they wanted. However, this was dependent on too many factors and took a lot of time.
This sort of problem is prevalent in any society that relies on barter, and is referred to as the problem of a “double coincidence of wants” – situation where 2 people each happen to want what the other person has. ‘A’ solved the issue by indirect exchange – he had to trade with a 3rd party for an item he did not want, and then trade that item for the product he did want.
This process of indirect exchange can be very inconvenient. In the course of his day-to-day bartering, ‘A’ may find one day that people tend to prefer ‘honey’ in trade to other items. He begins trading his own goods and services for honey. ‘A’ does this, not because he likes honey, but because he knows that honey can be more readily traded for what he does want, than what he could obtain by directly bartering with his own goods and services.
This sets up a positive feedback loop. Increased use of honey in barter, causes ‘A’ and others to begin trading their goods and services for honey, not because they like honey, but because they know that the honey can be readily traded for what they do want.
This causes even more people still to being trading and bartering for honey, until finally ‘A’s whole community is bartering and trading, not for what they do want, but for honey. They then take the honey and trade for what they do want.
This problem overall is caused by the improbability of the wants, needs or events that cause or motivate a transaction occurring at the same time and the same place.
In-kind transactions have several problems, most notably timing constraints. If you wish to trade fruit for what, you an only do this when the fruit and wheat are both available at the same time and place (and only if someone wishes to trade wheat for fruit). That may be a very brief time, or never. With money, you can sell your fruit when it is ripe and take the money. You can then use the money to buy wheat when the wheat harvest comes in. Thus the use of money makes all commodities more liquid.
Because of the severe cost imposed by the coincidence of wants in an in-kind economy, money tends to emerge naturally as some form of commodity money.
Earlier times, anything ranging from rice to cotton to food products like honey could serve as a medium of exchange.
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