Money

Before the invention of modern money, people bartered, exchanged cattle and shells, and used many varieties of coins.

  • Grades: 3–5

More than 2,000 years ago the Romans were using metal coins similar to those we use today. Many of these early coins were made in the temple of the goddess Juno, or Moneta. It is from the name "Moneta" that we get our word "money."

In most places throughout the world people are familiar with some form of what we call money. Yet, in spite of the fact that it is so widely known, money is very difficult to define. A London banker and the chief of an African tribe have widely different ideas of what money is.

Many people think of money as currency — metal coins and paper bills. But money is not simply currency — a United States nickel or dollar bill, a Mexican peso, a Canadian dollar, a French franc, an Italian lira, or a Russian ruble. Money is whatever people agree to use in exchange for goods and services.

Money serves people's purposes in several ways. Bakers, for example, cannot live on just the bread they bake. In today's society, they have to sell their bread to other people so that they can get the money they need to buy life's necessities. In this way, money is serving as a medium of exchange.

Because the baker knows how much money a loaf of bread will bring, money can do something else. It tells the baker how much work it takes to buy a new oven. Both the bread and the oven have their own price. So, money helps the baker decide whether he or she can afford a new oven by using it to bake and sell more bread. In this way, money is serving as a standard of value.

Finally, money can be saved. The baker can hardly set aside a couple of loaves of bread every day until they can be taken down the street to trade for a television set. Even if the television store were willing to take bread as payment, the loaves would be moldy by the time the baker had enough saved up. But the baker can set aside a little money every day. In this way, money serves as a store of value.

History of Money

Down through its long and fascinating history, money has undergone many changes. Long before people thought of making metal coins or paper bills, they needed some way to acquire the things they wanted.

Barter

In early societies, money was unknown, and people relied on a simple system of exchange. Perhaps a good hunter had more animal skins than he could use. His neighbor, a good fisherman, might have too many fish but needed furs to protect his children from the cold. Both soon realized that their problems could be easily solved by exchanging what they did not need, their surplus, for what they did need.

This method of exchanging something not needed for something that is needed is called barter. The word comes from the Italian barattare and the French barater, which mean "to trade."

On the American frontier, a merchant might let a settler have an ax in return for a sack of wheat. The merchant might then trade the wheat to a miller who would make it into flour. The flour might then be traded to a trapper for animal skins.

Barter is still used today — not only by individuals, but also by corporations. An airline might let people from a fuel company fly on its planes in return for jet fuel. Since the airline probably has a few empty seats on its flights anyway, such a deal could be a significant saving for the airline.

But barter has disadvantages. If the settler on the American frontier had carried his sack of wheat to the merchant just after 40 other settlers had been there, the merchant might have decided that he no longer needed any wheat. That would mean that the settler would not have gotten his ax.

When labor and services became more specialized in growing societies, barter no longer satisfied the demands of payment. A new system of exchange had to be found.

Early Forms of Money

As societies developed, people turned to many different things in the search for a convenient medium of exchange, or money. One of the earliest forms of money was cattle. The richest person was the one who owned the most livestock. Cattle were called capitale, and from that Latin word we get our word "capital," meaning "wealth."

But this new method, too, had many drawbacks. A cow or a sheep must be fed and cared for. Some animals are fat and some are lean. A person who wanted to sell something might believe that it was worth much more than one cow. The buyer might not be willing to part with two. A cow and a half was certainly not a practical solution. Difficulties arose over exact values.

The use of cattle as a standard means of exchange decreased when people began to trade with people who lived far away. Again a new medium had to be found. Soon such things as grain and salt came into use. Both of these commodities had certain advantages. They could be weighed exactly. They could be stored in the holds of ships and transported easily. Salt, especially, was fairly scarce, an important quality for something used as a means of exchange. So widespread did the use of salt become that Roman soldiers were sometimes paid in salt. And it is from salarium, the Latin word for "salt money," that our own word "salary" comes. We still speak of people as not being worth their salt if they do not do their jobs well.

In early societies around the world, many different objects and products were used as money. The use of colored beads and ornaments was common. After Europeans came to North America, some Indian people began using shell beads, called wampum, as money. (The name "wampum" was taken from the word wampumpeag, meaning "string of white beads.") Cowrie shells were used in many areas, including China, India, and Africa.

People on the American frontier used various articles as money. Among these articles were gunpowder, tobacco, and nails, which were in short supply on the frontier. Today, smaller nails are still classified as two-penny nails, for example, and larger nails may be called ten-penny nails. These names are a remnant of the days when nails were used as money.

Coins

The more complex societies became, the less satisfactory livestock and other early media of exchange became. In the search for a better way of trading, people turned to metal. At first they used crude lumps of copper, iron, gold, or silver as money. Decorative metal ornaments became highly valued.

It is difficult to say just when the first metal coins were used. Some historians believe that the Chinese were using miniature metal knives and spades as money as early as 1000 B.C. A few examples of coins made of electrum, a natural alloy of gold and silver, have been found. They were made by the Lydians of Asia Minor about 700 B.C. The Greeks had a silver coin called a drachma; the Roman denarius was a common silver coin during the period of the Empire.

It took many hundreds of years for coins to replace barter and primitive forms of money. As the use of coins increased, their output came to be controlled by the ruler of a country. Governments began to regulate the production of all coins, and it became a crime for individuals to make counterfeits, or imitations, of those issued by authority.

A great step forward in the development of money came with the widespread use of coins in the late Middle Ages. Metals were stamped by the issuing authority and fashioned in uniform weights. People could determine how many coins were required to pay for a particular object or service.

The advantages of coins were many. Coins made it possible for people to trade in a standardized way. They had a set value. They came in various denominations, and prices could be set with some precision. Early coins were made from precious metals, such as gold and silver, which were valuable in their own right and gave people a feeling of wealth.

Paper Money

Paper money came into general use only about three centuries ago. However, some forms of it were known hundreds of years earlier. Many historians believe that the Chinese were printing paper money as early as the 900'sA.D. The Italian explorer Marco Polo saw paper money in China in the 1200's. But it was not commonly used until the 1600's, when international trade was expanding at a rapid rate.

In many nations paper money was strongly distrusted when it was first introduced. It was often difficult to accept the idea that the new form of money stood for something real. Eventually, however, people's confidence increased. Paper currency is now standard in every civilized country in the world.

One advantage of paper money is that it is cheaper to make. Another is that it is easier to carry around in large quantities. But advantages can also create problems. The production of coins was dependent on limited supplies of gold and silver. Paper currency can be produced in virtually unlimited quantities. The danger is that creation of too much money will push prices up because if people have more money to spend, they will be willing to spend more of it on a particular object.

At first, governments tried to limit the creation of paper money by requiring that the paper money be backed by gold or silver. In the United States, for example, a dollar once entitled the holder to exchange the dollar bill for a set amount of gold. This gold standard assured that new dollars could be created no faster than the government was able to increase the amount of gold in its vaults. But governments decided that letting the production of gold and silver mines determine the amount of money in circulation was too artificial. At times, the amount of money increased too fast. At other times the amount of money grew too slowly. Most countries stopped using the gold standard in the 1930's. By 1972 the nations of the world abandoned the final remnants of the gold standard.

Money Today

In the United States today, the amount of money in circulation is controlled by the Federal Reserve System. The Federal Reserve was set up by Congress in 1913. Its purpose is to assure that business gets enough money to expand and to create new jobs. But the Federal Reserve must be careful that new money is not put in circulation so fast that it only pushes prices up. The Federal Reserve controls the amount of money in circulation through its control over banks. In fact, the Federal Reserve is called a central bank.

The Federal Reserve controls the amount of money in circulation in two ways. First, it sets the amount of reserves a bank must hold. Lowering the amount required to be held in reserve, for example, increases the amount of money banks can lend. Second, the Federal Reserve buys and sells government securities (bonds). When the Federal Reserve buys government securities, the money goes into the bank accounts of the companies that sold the securities. There, the banks can use the money to make new loans. When the Federal Reserve sells government securities, the money flows out of the banks and into the Federal Reserve. When it is in the Federal Reserve, people cannot use the money for spending.

In a modern society, actual currency — coins and bills — represents a small part of the money in existence. Most money is simply a bookkeeping entry in a bank, representing the value of the goods a merchant has sold or the value of a job a worker has done to earn a paycheck. The money can be moved from one account to another by a check, which is a written order from an account holder telling his or her bank to transfer the money to the person or business named in the check. Transfers of money can also be ordered electronically. By passing a plastic card through a special machine that "reads" a coded magnetic tape on the card, a shopper can pay for purchases in a store. The signals picked up from the card are transferred to the banks electronically, where the money is moved from the shopper's account to the merchant's account.

The electronic system is a variation on the credit card system. With a credit card, the bank is actually lending its customer money to make purchases. The merchant sends the slip signed by the customer to the bank, the bank pays the merchant, and the customer eventually pays the bank.

Today's system of handling money is far removed from barter, nails, or salt. In the United States, the government decrees that people must accept dollars as payment for debts. In technical terms, the dollar is legal tender. It is up to individuals to determine how many dollars — how much money — they will demand as payment for goods or work. Ultimately, the value of money depends on the goods people produce and the work that they do.

Reviewed by G. David Wallace
Author, Money Basics

  • Subjects:
    Money, Communities and Ways of Life, Economics, Goods and Services, Markets and Trade
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