Where does Money come from?
Have you ever been asked, Where does money come from?
This might sound like a stupid question – “where does money come from” – but how many people actually know?
In recent days European and UK national banks have pumped billions of Euros and pounds into the economies to try and stabilise a volatile market. The US is debating whether to spend $700 billion dollars on covering bad housing debts. People are asking why should tax payers pay for the well heeled banking speculators mistakes, and will it be enough! Where does $700 billion come from? Where does one dollar, Pound or Euro come from?
Origins of Money
Money originated soon after the time when the simplest forms of trading began. Once people got the hang of surviving from day to day in a hand to mouth existence, they had a little spare time to themselves. Different people started to specialise in different types of work. So if I could make more than enough animal skin coats for myself and family, and somebody else could catch more fish than they needed, we might give some away to each other. At first this must have been how it worked. Descended from primates who lived in large social groups, we mostly looked after each other by instinct.
Early Humans
As things progressed, early humans who were genetically pretty much identical to ourselves became more efficient at simple farming, making pots and other basic crafts. The opposable thumb left over from gripping tree branches was a big help, as was the ability to form grammatical meaning out of vocal cries.
Surplus and Transport
The extended families grew into tribes and the tribes into larger communities. People wandered further afield and bumped into other settlements, sometimes specialised for a slightly different lifestyle. Rivers and coasts were the super highways along which regular travels could be undertaken and occasional trading relationships were established.
But there was only ever anything to trade as long as people were surviving reasonably well and had some spare capacity to create a surplus of worthwhile products. Without refrigeration, a surplus of fish became a stinking heap after a few days so that was no use. A good pot could be used for preserving foraged food for longer though, so a pot was well worth bartering for if you haven’t got one. But how many animal skins are worth two pots?
The Underlying Calculation of Barter
The calculation would have been based roughly on availability. If community A had produced a surplus of 4 pots since the last trade and commuity B had produced 8 extra animal skins then two skins for one pot would have seemed like a fair trade. As the surpluses grew and the number of parties taking part increased so the bartering became more complicated. One canoe is worth 9 animal skins so if I give you 5 pots you can give me one skin change, which I don’t really need, but I might be able to swap for some particularly tasty berries. In this example the animal skin is being used for its exchange value rather than its intrinsic value, and it’s exchange value is still linked to the amount of time and effort put into catching the animal and processing the skin, including some part of making the tools for hunting and scraping.
Precious Metal Coin Money
The inconvenience of carrying around skins, pots and canoes just for use as small change soon became a burden, so anything just as valuable but smaller and more transportable was preferred. In it’s earliest form, money was made out of precious metals and the value of the coin was related to the weight and value of the silver or gold. That is, to the amount of work involved in finding, mining and refining the precious metals. This worked so well you could set off from Phonoecia (Iraq/Lebanon) and sail across the Med, through the straits of Gibraltar, up past the coast of Gallicia all the way to the West of the British Isles just to collect some tin and drop off a load of grain.
Confidence in the value of metal coins was such that some people were even able to give up farming, boatbuilding, mining and pottery to become full time travellers and traders.
End of Where does money come from part one – more next week..
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Andy Roberts is a writer who initiated DARnet. Catch me on 
Thanks for the info Andy Roberts. Always love reading your blog. Your writing is brilliant and one can always rely on interesting topics.
That’s a wonderful look at money’s history Andy. Thanks for sharing.
Now can you explain where my money GOES?! That’s a mystery I would like to be solved
Though gold and sliver have played important roles historically as the basis of currency, the values of these metals have varied in relation to each other (e.g. in the bimetallic trading sphere of mediaeval Islam) and to the value of other goods. In Africa, in some areas, cowrie shells were used as currency (the Ghanaian currency is still called ‘cedi’ after this), and I presume the key attribute was that you can’t set up a workshop to make cowrie shells, so the relative constancy of supply was a guarantor of the value of the means of exchange.
Goitein’s researches into Geniza records of the Jewish community of mediaeval Cairo reveals a number of interesting twists. Firstly, all kinds of coins were in circulation and the weight and purity of the coin was more important than face value. You could take coins to a money-changer who for a fee would perform the service of weighing the coins, sealing them in a purse and providing a certificate attesting to the value, so the purse could be used in a transaction. Also, a gold dinar or silver dirham had ridiculously more purchasing power than one could spend on a trip to the grocer’s, so most families bought on credit and settled at the end of the month.
This source reveals also the growth of the use of credit and accountancy rather than hard cash. In the 9th century one could pay for goods in China with a cheque (the origin is Arabic: sakk) drawn on a bank in Baghdad, and a traveller attests to an account in a West African trading station being settled with a cheque for 40,000 dinars. The cheques in the Cairo Geniza records are remarkably similar to our own.
I have a booklet about this subject which can be found at moneymyths.org.uk/pdf/WhereDoesMoneyComeFrom.pdf. I think you might find it interesting.