The Need for Money

04 Jun The Need for Money

[Note from the author: This post was originally published in 2012 on a blog entitled “Further to Freedom.” This blog was an attempt of mine to communicate some of the complexities of economics in an accessible, easy-to-understand way. The blog was organized by ‘Levels’, which I thought would help readers to select articles which better corresponded to their level of economic understanding. I had originally envisioned this as a collaborative project and wanted to bring in a handful of others to contribute articles. That vision never materialized, but the time I committed writing and working on the project gave me a deeper understanding of the topics, and I’m still happy to share the work. This particular article was categorized ‘Level 1’.]

Imagine you’re a cobbler—-you make and repair shoes.  One day you take a stroll into town and come across a cafe.  You immediately smell the perfectly roasted coffee beans and you watch as the barista drafts a large mug of the brew.  “I think I’ll have some coffee,” you say to yourself, and you enter the cafe.  As you approach the  register, however, you are confronted with a problem—-how will you pay for the coffee?  As a cobbler, your shoes are certainly more costly than a single mug of coffee.  Perhaps your shoes could be traded for twenty mugs of coffee; but what will you do with twenty mugs of coffee?  Of course, you could offer 1/20th of your shoes for the single mug of coffee; but what will the barista do with 1/20th of a sneaker?  And what if the barista already owns enough shoes?

In this situation we are confronted with two problems: volume of exchange (how much of an item to trade) and medium of exchange (what item to trade).  The volume of coffees the cobbler will receive (20!) for his new shoes is undesirable to him—-he will probably not engage in the trade.  Likewise, if the barista already owns enough shoes, the medium of exchange is undesirable, causing him, also, to not accept the trade.  This way of doing business is called barter or direct exchange.  Because barter requires each party to coincidentally desire exactly the item and quantity of items the other person has, the market is very limited.  If the cobbler has only shoes to trade, he will probably not find many businesses to trade with.

Very quickly we observe the need for a more universal medium of exchange.  Suppose the cobbler and the barista have an agreement that a mug of coffee can be purchased for two polished acorns.  The cobbler can sell his shoes to a customer for 20 acorns and then purchase the mug of coffee for two acorns, having 18 acorns left over.  The cobbler can now fairly purchase an item that he desires (coffee) and not have to trade an entire shoe’s worth for it.

Now consider the way this use of acorns frees up each individual to progress in his or her own ‘art’ or ‘craft’.  If the cobbler didn’t have acorns with which to purchase the coffee he would need to find another way to get his daily coffee fix.  Perhaps he can grow tomatoes and trade the tomatoes for his morning coffee.  Such a trade might be more fair for each party—one tomato for one mug of coffee; but growing tomatoes means time spent away from his art of shoe-making.  Again, he can even grow his own coffee plant, roast the beans, grind them, and brew coffee for his family; but coffee production is time-consuming, indeed, and would take the cobbler out of his shop for a very long time.  The polished acorns allows the cobbler to work consistent hours in his shop streamlining his shoe-making process and developing higher-quality methods.  Because of the cobbler’s advances in shoe-making, he is actually benefitting the barista, who will receive a higher quality, or perhaps cheaper, product the next time she purchases shoes.  Said another way, the acorns—money—frees each market participant to progress in his own trade while benefitting from the progress of others.

This form of trade is called indirect exchange.  An indirect exchange uses a medium other than the trade items as a ‘middle man’ for exchange (in this case, acorns.)  Various and sundry items have been used through the ages for indirect exchange—beads, shells, tobacco, grain, and cows.  Anything can become a medium of exchange as long as all the traders agree on it.  Of course various mediums are naturally more suitable for exchange than others, but that will be left for another article.

As we have seen, money is more than a necessary part of human society—it actually benefits each individual.  Money frees each person to pursue and excel in whichever trade he or she prefers.

There is more to discuss about money, however.  For most societies acorns are not a suitable medium of exchange.  To learn more about the benefits and problems of acorns and other monies, read the article titled, “Different Monies”.