October 1, 2019 Note: A discussion of why I was so wrong in this article can be found here.
When people think of money, they normally think of the paper in their wallets or the coins in a piggybank. It’s much more than that—money is a medium of exchange that is expected to hold value by the people who use it. It is superior to bartering since trading money, which has taken the forms of commodities such as gold and salt, does not require finding a trading partner who is looking for exactly what you’re selling and vice versa. The money is a convenient intermediary that significantly opens the possibility of many more trading partners.
The aforementioned gold is used in largescale economies and is virtually accepted by everyone. But money develops on smaller scales, such as when Tide detergent was used in the drug trade.
And the use of a good as money can develop on an even smaller scale—a much smaller scale. Consider the smallest scale possible: two people. Take the case of my brother and me. We’ll often help each other with work around our houses or give each other things like tools or equipment that we don’t use or need anymore. We’re usually not interested in charging each other, but we both like to show appreciation for the time, effort, and stuff the other gives.
We both like beer and have very similar tastes, so we started giving each other beer as a “thank you” for things that we gave to or did for each other. Sometimes it was a beer or two after doing the work, sometimes it was buying a beer at a bar, or sometimes it was a six pack or even a case. It even turned into us saying, “Just pick up some beer for me the next time you buy some” instead of exchanging US dollars.
A bottle of a popular volume domestic beer is certainly not worth the same as an imported Belgian tripel, and neither of us would ever attempt to equate the two, so even adding the complexities of styles and tastes doesn’t harm the exchanges. Somehow it all works out. And while this may be a cute little allegory for money, it actually does work out. Beer has a long shelf life if you store it correctly and plenty of people find value in it.
It checks out as money.
So what’s the point in telling you this? While it is nice to be able to talk about beer here, more importantly, it helps to pull back the veil of mystery of money and show that the development of money happens organically. No central planning is required.
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