Part I of “Why Do We Have Money?” started with the question but went in another direction.  In order to figure out why we have money the author (that’s me) first explored a time when money wasn’t needed.  As efficiency and commerce entered into the game a barter society was created.  Through many generations the need developed to actually have a clerk manage everyone’s assets.  But it was still too complicated for one person to manage as everyone was trading corn for apples.  The clerk came up with a solution, and that’s where we left off yesterday.

The clerk has a great idea that will carry his community out of the world of barter and into the world of finance.  If you’ll remember yesterday our handyman built a barn for the dairy farmer.  The farmer in return payed him in milk over time.  Well that got too complicated as the handyman kept trading with the butter guy.  Instead the clerk re-arranged the deal.  Now the dairy farmer will make regular contributions to the depository, and the clerk will issue notes to the handyman that can be used at the depository.  So now the handyman can stroll up to the depository and exchange the notes for whatever products he needs for his family or business.

Since the handyman has been busy doing these types of deals all over town for the farmers, he’s acquired quite a stash of notes.  Instead of going down to the depository to exchange them for goods, sometimes he’ll just exchange a few notes with the tomato farmer because he can actually get a few more tomatoes straight from the farmer than if he had to go to the depository.

After all of these transaction the community has become a thriving economy, with many different people like the handyman working on this loan/note model for the community.  So many notes are floating around, that sometimes the borrowers will pay their debts with notes rather than in their product.  Before long people start to worry about where to store all their notes.  Again the clerk comes up with a genius solution.  Since the townfolk are trading their product for notes outside of the depository, they could keep their notes safe at the depository.

Now the clerk is only managing the notes of different values.  After a while, the dairy farmer approaches the clerk with a proposition.  The farmer needs a bigger barn now and the handyman would prefer to be paid up front.  So instead of paying the depository in milk, the farmer borrowed some of the notes to give to the handyman.  The farmer will be able to produce more milk, which he’ll sell to the community for notes that he can pay back to the clerk.

We’ve just witnessed the birth of a currency and banking in almost the exact same way many societies created their financial system.  While we did it in just a few generations, it took thousands of years for banking to become what we know it as.  Money developed out of necessity.  Every aspect of our life is improved from the establishment of standards.  Look what the bar code did for retail.  Can you imagine how hard it would be if every product had a different type of identifying mark?  Systems couldn’t efficiently track the movement of goods.  You couldn’t even have Wal-Mart.  The standardization of road construction after WWII allowed for the interstate highway system to be developed.  This increased the efficiency of travel.  We have money because its the standardization of commerce.  The standardization of commerce increases the efficiency in our economy.

That’s enough of why we have money. Next Monday and Tuesday I’ll talk about the future of money.

Related posts:

1. Why Do We Have Money? Part I
2. Will We Ever Not Have Money?
3. The Future of Money
4. Weakon 152: How Insurance Companies Make Money
5. 6 Lessons Star Wars Can Teach You About Money

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