If you have long wanted to learn more about how the economy works or how money works, then our comprehensive article today is for you. In addition, we will consider the structure and function of cryptocurrencies and blockchain, as well as analyze their significance and effectiveness in the modern financial structure of the world.
Part 1. Types of money
Money is undoubtedly one of the most important cornerstones of modern civilization. For millennia, they served as a kind of language of value, facilitating exchange between people and allowing them to store the product of their labor.
In a broad sense, money is something that is universally accepted to pay for goods and services. Different societies have invented many types of money – so many that it is difficult to accurately classify them.
In this article, we will differentiate between commodity, representation and fiat money.
Before the money: barter
illustration different nations exchange goods barter money
Image source: BitNews
Barter is the exchange of one product or service for another. Interestingly, this can be observed in other contexts of life. Different types of plants and animals enter into tacit agreements – symbiotic relationships – where both parties benefit from each other’s actions. For example, acacia trees provide food and shelter for ants in exchange for protection from parasites. Zebras and rhinos get rid of ticks, allowing buffalo starlings to hatch them.
Of course, humans have a different, more complex concept of value than the aforementioned species. Long before the advent of money as we know it, we understood that you can exchange your goods for someone else’s.
Everything is extremely simple here. Let’s say you have a raincoat, and your neighbor has apples. She is cold and you are hungry. You give her a cloak in exchange for 20 apples. You both got what you wanted in exchange for what you had.
Unfortunately, things are not always that simple. You may want more apples later, but your new cloak will last your neighbor for several years. She may not want to trade with you again when you need it. In turn, she may not be lucky if she needs gasoline, but the owner of the gas station is allergic to apples and therefore will not accept them.
This phenomenon is known in economics as the coincidence of needs. Barter works well if you have something your counterparty needs and vice versa. But if the parties do not need each other’s goods, then the exchange will not take place.
Commodity resources are understood as raw materials that are somehow useful (we can say that they have their own value). Many things fall under this definition, from metals like gold, silver and copper to foods like wheat, coffee and rice.
Farmers in Haiti
Consequently, commodity money is commodity resources used as money. You are unlikely to be able to pay with oil at the nearest store, but there are many examples in history when useful raw materials served as currency.
For example, in Virginia, tobacco was declared legal tender in the 17th century. As Nick Szabo recounts in his influential article “The History of Money,” the American Indians used wampum (shellfish beads) and cowrie shells as a medium of exchange. Like tobacco in Virginia, this commodity has also been considered the legal tender for decades.
At first glance, trade and the use of commodity resources may not seem too different from a barter economy. After all, if you have a book and you are selling it for rice, isn’t that the same as discussed above?
In a functional sense, yes, but commodity money acts as a medium of exchange. In this scenario, you would expect rice to be widely accepted as a way to pay for goods and services. Therefore, unlike a barter economy, where some goods and services are exchanged for others, rice will be an attractive medium of exchange in different transactions.