We take money for granted today and often if you ask someone what economics is about they will tell its about money. Money is an interesting thing if we analyse it further, in fact from economic point of view money its self possesses no value what so ever! In this article I will try to explain what the principal behind money is and how we have come to use it.
The world we live in is full of useful resources that we can use to better our selves (increase our standard of living) but the problem has always been how to divide these through out the population evenly. You see even in the time of the first humans when resources were in abundant supply we had to get at them. This required time and skill and people had to worry about the daily struggles of life. This meant people failed to advance into great empires. At some point in history the human race made a great jump they decided to barter, to trade, and economics began. People first would trade one resource for another, this was known as barter and it meant people could begin to specialise. Specialisation is when individuals can focus on one thing they are good at so that we can all produce more. In the early societies those that were good at farming could farm enough for many people and then others could work on making other goods like weapons, then these could be swapped with each other. There are how ever a number of huge problems with barter. The first problem with barter is that how can people know what one thing is worth, there is no use a farmer spending all his time raising a cow and then getting just a spear for it. The second problem is related to the first problem, there is no division of units, if a cow is worth four and half a spears what use is half a spear! The final main problem is that resources can perish, if a farmer works hard and farms lots of potato’s then wants to save up so if there is a bad season, he can’t or all his potato’s will rot. The solution if a medium of exchange… money.
The first evidence of money is in Mesopotamia around 3000bc, by making everything worth an amount of money people can save money and freer to specialise. Money was clearly a success and by the time of the Roman Empire the roman currency called denarii was being used through out Europe. Why then did I say that money is useless? Money is just a method of exchanging resources with each other; the value is only in what you can buy with the money. All the money in the world is worth all the resources in the world.
By increasing the amount of money the only thing that happens is you decrease the value of everything. If the only thing you could buy with Pounds was Apples and there were only 40 Apples you could buy, then if the amount of pounds in the world was £1000 then 40 Apples would be worth £1000 (1 Apple = £25). If you mint another £1000 then the total number of pounds becomes £2000 this then means if you have all the money in the world the max you can buy is still 40 apples and each apple is now worth half the amount. This is why government CANT print money to make them richer all it will do is devalue the value of their currency or in other words increase prices. A rise in prices is know as inflation and printing lots of money leads to hyperinflation. This method of gaining wealth has been tried again and again in history, Germany in the 1920s, Greece in 1944 and there are many more examples, it always fails.
Money is only ever worth what you can buy with it. There is no use in being a Zimbabwean billionaire.
Written By Jonathan Martin 24/4/10