Money: Introduction

Trade and exchange are almost as old as the human species. We have, for example, archaeological evidence that flint blades and arrowheads were traded from modern Switzerland, where a distinctive form of flint is found, as far as eastern Siberia and southern Africa. But this trade was almost certainly by barter, that is, the direct exchange of one kind of good for another. In North America before 1700, widespread trade was carried on by a native American nation that was to give its name to the Canadian capital. In their own language, "Ottawa" means "he buys." And the Ottawa people bought, and sold, over a large part of North America, but, again, by barter.

It is difficult to imagine the trade of a modern society being carried on by barter. As Adam Smith wrote,

"Observe the accommodation of the most common artificer or day-labourer in a civilised and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation. ... without the assistance and co-operation of many thousands, the very meanest person in a civilised country could not be provided, ..." As a consequence, "In order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to ... have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry. "

That commodity is money. Money enables us to exchange our own specialized products or services much more easily for the products and services of the thousands or millions of others we rely on for the goods and services we consume. Without a system of monetary exchange, it is hard to imagine that modern production, with extensive division of labor and collaboration and high labor productivity, could exist at all.

Accordingly, in this chapter we explore modern monetary systems. We will first spend a bit of time on the history of money, and the evolution of modern monetary systems, and then on the workings of the modern systems. As always, we will focus mostly on the American system, but many of the principles will be applicable in other countries, and we shall try to indicate the ways in which the American system is unique.

Definition