eli5, how does a society transition from a bartering system to a centralized currency?


I remember learning about bartering in some elementary school, but it didn’t occur to me to ask until now. How the heck does a society collectively agree that “mm yes these metal circles equate to cows”? Does the government just give everyone 100 shmeckles and let supply and demand cover the rest?

In: 2

Instead of trying to barter, I dunno, clothing for cows, you barter your clothing for *silver*, and then your silver for cows.

Then the transition to coins is pretty simple – it’s just a pre-measured-out specific amount of silver.

This I think is the disconnect for you – until *very very recently* in human history, “these metal circles” didn’t represent some vague idea of “value” in the *abstract* – they had value because they were *literally* worth their weight in silver (or gold or copper), because that’s what a coin ***was*** – a specific amount of silver or gold or copper, measured by weight.

There never was a society with a bartering system. We haven’t been able to find any evidence of a society which used bartering instead of money. Instead, smaller scale societies which hadn’t yet devised some medium of exchange used a system of reciprocal gifting.

So I give you 10 spears, now you owe me. Later on, I need a cow, so you give me your spare cow. We all know that a cow is worth more than 10 spears, so now I owe you. I hold a big feast and invite your family, and now we’re even. Then you need some arrowheads, so I give you some. And so on.

It works like this.

First, you have a small economy. If you want a bushel of wheat you can trade eggs for it.

However, what if the other person doesn’t want eggs? Well, you might ask what they do want, then find someone willing to give you that for eggs.

As the economy grows, this becomes less and less workable. However, along comes some item that everyone sees as valuable, such as copper, silver, or gold. So, in the above scenario, I would instead sell my eggs for whatever valuable metal I could get, then use that valuable metal to buy whatever I want. The person receiving the metal may not want eggs or even the metal, but the metal is easily used to buy what they do want.

The metal is usable almost anywhere to buy almost anything, it is compact, and it won’t rot or be eaten by rats or grow old and die.

Now, some people start cheating. They take advantage of the fact that almost no metal is truly pure, and they begin mixing in inferior metals, such as adding copper to gold. This allows them to, for example, take 10 oz of gold, melt it down, add one oz of copper, and end up with 11 oz of “gold”.

So, people who wanted their gold to be accepted had a seal of approval placed on their gold using a stamp. “The backer of this stamp, often the government, declares that this is one oz of a mixture of 90% gold and 10% copper or better’.

But simple stamps are easy to fake, and you can just shave off some gold from a lump, even if it has the king’s face on it. So, they created coins. Harder to fake, and harder to just shave gold off of.

Eventually, governments and banks started printing pieces of paper that were promissory notes. “If you bring this piece of paper into Bank X, Bank X will give you one oz of gold”. Governments mostly took this over eventually.

In the end, a “gold” standard showed a number of flaws. Two big ones were that you had to have a lot of gold sitting around doing nothing but backing the money, and another was that gold prices fluctuated wildly at times, making the value of your money bob up and down.

Gold prices were set by international markets, and the government couldn’t control them. This caused so many problems that most nations slowly started switching to, “We will print pieces of paper backed by our good name and our good fiscal policy”. This allowed governments to, for example, use their fiscal policy to influence things like inflation, which was out of the hands of the government if the value was defined as “x amount of gold”.

This is roughly how we went from trading eggs for a bushel of wheat to using a central currency written on paper backed by “nothing”.

Edited for grammar error.

It doesn’t really matter if barter or something else came before. What you need to know is this: as soon as the number of transactions taking place becomes non-trivial, you need some medium in between to express the value of goods and services exchanged.

It’s just a level of abstraction. That level of abstraction isn’t needed in pre-civilization. As soon as you have civilization you need it.

As most people have trouble dealing in straight abstractions, the first money was coins, and the worth of those coins was whatever they were made of. Thus, copper for the smallest transactions, silver for the intermediate, and gold for the big, wholesale-level ones. Since the fall of the gold standard it’s entirely abstract though, which is good. It’s too much trouble to have to get someone to decide whether that shiny thing you’re offering up really is gold/silver/copper or just colored that way. (Old cash registers had a marble slab in front where you could hit a coin to see if it rang. Slugs didn’t ring.) Modern money represents a value, and the various governments have come up with ways of insuring it’s “real” that are far more convenient. Mostly these days people just do everything digitally, via credit/debit cards and accounts, so even the need for cash is slowly fading.

Well, imagine a world where chickens are currency. You have some chickens and I have some cows. You want my cows and I want your chickens, but we can’t agree on how many chickens it takes to get a cow. So we argue and argue until we’re both exhausted and still have no deal.

Then, one day, someone comes along with a bright idea. They say, “Let’s make these shiny little rocks the currency instead of chickens!” And we all look at each other and think, “Sure, why not?”

So we start using the shiny little rocks to buy and sell things, and pretty soon, everyone is using them. They’re easy to carry around and they don’t spoil like chickens do. Plus, they’re shiny and pretty to look at, so we feel good about having them.

Eventually, the shiny rocks become so popular that the government decides to get involved. They start making their own shiny rocks and telling everyone that these are the only ones that are worth anything.

And that’s how we transition from a bartering system to a centralized currency. All it takes is a little creativity and a lot of shiny rocks.