The mystery of money

How modern methods of making payments economize the use of money. The role of checks and bank-notes

The enormous edifice of credit

For a long time, it was the habit of writers on the subject of money to picture an imaginary stage of barter which continued for a long period before it became possible to agree to use one particular commodity as the medium of exchange or measure of value, and thus to adopt money.

This view of things, that men invented money in order to rid themselves of the difficulties and inconveniences of barter, belongs, along with much other conjectural history, on the scrap-heap of discredited ideas. Men did not invent money by reasoning about the inconveniences of barter any more than they invented government by reasoning about the inconveniences of some mythical primitive state of anarchy. The use of money, like other human institutions, grew or evolved. Its origins are obscure. It is, nevertheless, fairly certain that at no period in his history has man ever conducted any considerable volume of trade by means of barter. There was a very small gap, perhaps no gap at all, between the beginnings of trade and the origin of money.

Of course, traders dealing with regions where civilization has scarcely appeared may even now find it possible to exchange beads, cheap bright- colored calicoes, knives, mirrors, etc., for goods which are in modern markets vastly more valuable. But the trader, unless he be a trained observer, is likely to disregard the fact that the savages with whom he barters have some crude, primitive monetary system of their own. In fact, it is not at all uncommon for the beads, or other (to them) rarities, which the savage tribe obtains by way of barter from civilized peoples, to become, by reason of their scarcity and desirability, the money, for the time being at least, of the tribe.

A host of different commodities have been used at different times, and by different peoples, as money. If we scrutinize a list of such commodities ever so carefully, we shall find it difficult to see that they have any common characteristics beyond the fact that, for various reasons, the commodities have all had, at a given time and place, an assured market or outlet.

Consider the fact, noted by the great German historian of Rome, Mommsen, as well as by other observers, that the peoples of the early civilizations of the world, like the moderns, almost uniformly selected for use as money commodities that were ornamental rather than useful. This fact calls for explanation, and the explanation may throw some light upon at least one of the mysteries of money. If there is any one clear-cut and fundamental difference between necessary commodities and luxuries, it is that human wants for necessaries are satiable, while the desire for ornaments, as for other goods that minister to the love of distinction and display, is insatiable. Of course, it is not true that normal men place luxuries above necessaries. It is simply true that when one is provided with the necessaries of life, the normal man, in adding to his goods, will increase his stores of luxuries rather than his supplies of necessaries. To use a technical phrase explained in earlier chapters, the demand for ornaments, and consequently the demand for the metals from which ornaments are made, is elastic, while the demand for the necessaries of life is, by comparison, inelastic. There is a surer market and a surer outlet for ornaments and for their materials. Their value is less variable than that of necessaries. Especially is this true in communities with little foreign trade. Wheat might be a drug on the market; but such could never be the case with respect to precious stones or ornaments of gold.