Which one of the two was a more important invention in our history: the wheel, or money? Many will say the wheel but our friend Jinny feels that money has been a far more important invention. Our whole civilization today runs on money. In fact, you can’t buy a wheel without money. But Johnny is sceptical. Today, our friends are discussing how money makes our life simple.
Jinny: Hello Johnny! I see you lost in your own thoughts. What’s the matter?
Johnny: Well Jinny, I was just wondering what would happen if, one fine morning, we wake up to find out that all our stock of money has vanished and we are back to the golden ages when there used to be no money and consequently no fight for money. Imagine how many problems we can solve simply by removing money from our lives. What do you say?
Jinny: Do you realize that you can’t even have a proper breakfast if there is no money? You should try to visualize how the whole world will work without money.
Johnny: What would be the problem if there is no money?
Jinny: Let’s take a look. You get up one fine morning and find that your newspaper vendor has not delivered Mint, and you are curious as to why that happened. You think that he must have been sleeping late in the winter morning. Your milkman has left a note saying that you should get your own cow if you want to have milk and you are wondering whether he was drunk while writing that note. You have no bread or eggs, and so you proceed to the market to buy them. There you find the milkman and egg seller frantically looking for a buyer. You bring out money from your pocket and ask the egg seller to give you dozen eggs. But he gives you a puzzled look and fails to recognize the money in your hands. The egg seller, milkman and all the other people have stopped using money as a medium of exchange from this morning. The whole world is now working on what is known as a barter system. You wonder how you will purchase eggs, milk and all the other things if people are not ready to exchange their goods with your money.
Johnny: So how will I survive in such a system?
Jinny: Let’s understand how the barter system works. In a barter system, people directly exchange their goods and services with other goods and services, and money does not have a role as a medium of exchange. It means that your egg seller will exchange his eggs only with those goods and services that he wants. Suppose he wants to get a haircut; then he will give his eggs only to a barber. He will not exchange his eggs with you because you can’t provide him a haircut.
Johnny: But I can surely teach him economics that I have learnt from you.
Jinny: Then you need to find someone who is ready to learn economics in exchange for giving you eggs. The entire barter system works on what is known as a double coincidence of wants. The first coincidence is that you locate someone who wants to sell his eggs. The second coincidence is that the egg seller also wants to learn economics in exchange for his eggs. If the egg seller wants to get a haircut, he will not give his eggs to you. This is one among many other problems that you face in a system of barter trade.
Johnny: Tell me, how could the idea of money have come into the minds of people?
Jinny: Well, necessity is the mother of all inventions. Your egg seller realizes that he can’t keep on waiting for a barber who needs eggs. Instead, he exchanges the eggs for something that is in great demand. It could be anything, right from a pair of shoes made by a local cobbler to precious metals, such as gold. The egg seller exchanges his goods for a pair of shoes not because he himself needs them, but because the shoes are in great demand, and he thinks that it would be easy to locate a barber who needs them. The barber also agrees to take the shoes in exchange, even when he himself does not require them, because he thinks he can exchange shoes easily for something else that he actually requires.
In this manner, a pair of shoes, much like anything else, could well serve as a generally accepted medium of exchange, which we call money.
However, people would have realized that it is much easier to keep something like gold as a medium of exchange, rather than a pair of shoes made by the cobbler. Gold, unlike shoes, is more durable, and is in more demand than its supply. This is how I think the use of metals like gold and silver as a medium of exchange might have started. I will tell you next week how paper money came into existence over the ages.
Johnny: Thanks Jinny. It would be interesting to know what makes paper money smarter than gold and silver.
What: In a barter system of trade, money does not serve as a medium of exchange.
How: The barter system works on direct exchange of goods and services between the buyer and seller.
Why: The barter system is cumbersome because it is difficult for sellers and buyers to locate each other at the same time.
Shailaja and Manoj K. Singh have important day jobs with an important bank. But Jinny and Johnny have plenty of time for your suggestions and ideas for their weekly chat. You can write to both of them at email@example.com