Prior to the introduction of money, barter was the only way to exchange goods.
Bartering has several problems, most notably timing constraints. If you wish to trade pigs
for wheat, you can only do this when the pigs and wheat are both available at the same time
and place - and without proper storage that may be a very brief time.
Bartering
With a trade standard
like gold, you can sell your pigs at the "best time" and take the gold coins. You can then
use that gold to buy wheat when the harvest comes in. Thus the use of money makes all
commodities become more liquid.
Where trade is common, barter systems usually lead quite rapidly to the emergence of several
key goods with monetary properties. In the early British colony of New South Wales in
Australia, rum emerged quite soon after settlement as the most monetary of goods.
When a nation is without a fiat currency system
it is quite common for the fiat currency of a
neighbouring nation to emerge as the dominant monetary good. In some prisons where
conventional money is prohibited it is quite common for goods such as cigarettes to take
on a monetary quality.
Gold has emerged naturally from the world of barter again and again
to take on a monetary function. It should be noted that the emergence of monetary goods is
not dependent on central authority or government. It is a quite natural market phenomenon.
Commodity money
The first instances of money were objects which were useful for their intrinsic value.
This was known as commodity money and included any commonly-available commodity that has
intrinsic value; historical examples include pigs, rare seashells, whale's teeth, and
(often) cattle. In medieval Iraq, bread was used as an early form of currency.
Even in the industrialised world, in the absence of other types of money, people have
occasionally used commodities such as tobacco as money. This last happened on a wide scale
after World War 2 when cigarettes became used
unofficially in Europe, in parallel with other currencies, for a short time.
Exotic forms of Commodity money
Another example is shell money in the Solomon Islands. Shells are
painstakingly chipped into rough circles, filed down, and threaded onto large necklaces,
which are then used during marriage proposals; for instance, a father may charge twenty
shell money necklaces for his daughter's hand in marriage.
One interesting example of commodity money is the huge limestone coins from the Micronesian
island of Yap, quarried at great peril from a source several hundred miles away. The value of
the coin was determined by its size - the largest of which could range from nine to twelve
feet in diameter and weigh several tons. Displaying a large coin, often outside one's home,
was a considerable status symbol and source of prestige in that society.
Value of Commodity money
Once a commodity becomes used as money, it takes on a value that is often a bit different
from what the commodity is intrinsically worth or useful for. Being able to use something as
money in a society adds an extra use to it, and so adds value to it. This extra use is a
convention of society, and how extensive the use of money is within the society will affect
the value of the monetary commodity.
Although commodity money is real, it should not be
seen as having a fixed value in absolute terms. Its value is still socially determined to a
large extent. A prime example is gold, which has been valued differently by many different
societies, but perhaps none valued it more than those who used it as money. Fluctuations in
the value of commodity money can be strongly influenced by supply and demand whether current
or predicted (i.e. if you know the local gold mine is about to run out of ore, the relative
market value of gold may go up in anticipation of a shortage).
Money can be anything that the parties agree is tradable, but the usability of a particular
sort of money varies widely. Desirable features of a good basis for money include being able
to be stored for long periods of time, dense so it can be carried around easily, and difficult
to find on its own so that it is actually worth something. Again, supply and demand play a key
role in determining value.
Metal as money
Metals like gold and silver have been used as commodity money for thousands of years, being in
the form of metal dust, nuggets, rings, bracelets and assorted pieces. Eventually the Lydians
began coining gold and silver around 650BC.
Gold and silver are both quite soft metals, and coins minted from the pure metals suffer from
wear or deformation in daily use. Fortunately these metals are also easily alloyed with a less
expensive metal, frequently copper, in order to improve the durability of the resulting coins.
Typically alloys of coinage metals, such as sterling silver or 22 carat gold, are used to make
coins more durable. These are alloys of 90% or more pecious metal as alloys of less than 90%
do not improve hardness or durability very much, and so are typically considered to be on the
slippery slope into monetary debasement.
Read in Part II about Standardized coinage and Representative money.
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