Econ 101 part 1

Economics is sometimes called "the dismal science". It is not dismal nor is it hard to understand. Economics can be made to look hard or boring but that is the job of government paid school teachers.

We are in a depression at present in the USA. It is called a "recession" because the word "depression" which was used for most of our history is so scary to the modern man given "the great depression" that we are afraid to use the word anymore. We are also seeing prices rise and that hurts everyone, but it hurts the poor the most --- and I have experience with that. We wonder what causes these things. Before answering that large question one must first start with some basics and the first one is --- “money”. So, what in the world is this thing called money? Why do we even need it? Have not many people called money the “root of all evil”?

People, once upon a time, would barter to obtain the goods and services they needed. That is, two individuals each possessing a good or service the other needed would enter into an agreement to trade their goods. It was not always simple even with just two people, consider if you had a horse and I had a dozen eggs --- that does not seem to be a fair trade most of the time. This form of barter does not provide the transferability and divisibility that makes for efficient trading. Another example is the one if you have cows but need apples. Then you need to find someone who has apples and the desire for your beef. What if you find someone who has the need for beef but no apples and can only offer you used shoes? To make the trade now the two of you need to go find a third party, or more people, who want to trade to see if something can be worked out. This is very confusing and inefficient.

What if people wanted salt and you had extra salt? You could barter for needed goods by offering some of your salt for whatever you needed. If you want to get just enough beef the week from the farmer in town, the two of you could decided on a fair exchange rate between salt and pounds of beef. This works if the farmer thinks that many other people (who have things he needs) also value the salt and will also take it in trade.

In the “new world” colonialists used beaver pelts, tobacco, whiskey, dried corn, and other items as currency for transactions. These commodities were chosen for many reasons. These commodities were widely desired and easy to trade with, but just as importantly they were also durable, portable and easily stored. Tomatoes are the fruit of the gods, but they go bad so fast that one could not use the delicious tomato as a trading commodity.

Since these commodities were used to trade for goods and services, one could say that these commodities formed the basis for exchanges. Heck, one could even say that they were a "medium of exchange"! That, by the way, is how most experts define the word “money”. What would be the best commodity to be used as money? One needs to look for the most tradeable good. It needs to not deteriorate for long time periods. The commodity chosen needs to be easy to carry around and store.

What did the ancient world decide to use for money? Gold and silver. Both metals last a long, long time and don't rust away like iron. Both metals have value in the arts and in the jewelry trade. Both items are in a fairly sort supply so that the law of supply and demand does not diminish the value of either for the most part. (see Spain for a historical exception)

Gold and silver do have problems. How much do you have in your sack? How to weigh it? How pure is that “gold” anyway? Gold dust is easy to divide up and that helps a bit, but it is still a pain to have to weigh out gold every time you buy a darned happy meal at the fast-food joint. (did they have those in the ancient world?)

Next time, we will look to see what the ancient world did to work around the problems of gold and silver.