What Is Money? Part 3

In our first two posts we unpacked the profound influence money has on our lives, explained the basic functions money serves, and introduced the concept of barter.  Today we’ll pick back up with the important role barter played in the evolution of money and the transition from barter to commodity money.

Bartering - directly exchanging goods and services based on mutual need - served as a natural precursor to more complex economic systems. Direct trading between parties encouraged people to develop expertise in a specific area. That specialization of labor, while still limited, led to higher-quality goods, as well as more efficient production. 

This newfound prosperity would lead to increased “cross-border” trading, incentivizing new relationships with neighboring communities. It’s difficult to overstate the impact these developments had on the growth of civilization.  

🤷🏻‍♂️The Need for Something New

For all of the prosperity bartering created, its limitations were quickly reached as societies grew. Barter’s biggest drawback was its dependence on the double coincidence of wants: 

“the double coincidence of wants occurs when two parties each have something the other wants, and they agree on the value of these items, making an exchange possible.”

As the economy grows in complexity, this direct trade of value for value becomes more and more difficult. Societies needed a versatile way to exchange value - one that was not dependent on the simultaneous alignment of wants or needs.  It would be simpler if the participants in the economy had a thing that could be easily held and used in exchange for the goods and services they need. 

And this is the beginning of money as we know it.

💰The Beginning Of Money:

As we saw in part 2, in order for a thing to serve as money it needs to serve at least 3 functions:  1) Medium of exchange 2) Unit of account 3) Store of value. 

You can read more about these functions here (link to What Is Money Pt 2).

This thing, whatever it would be, needed to make life and trade simpler.  In much of Africa, Asia and the Middle East, cowrie shells began to be used, becoming one of the earliest forms of commodity money. In Northern Africa, glass beads were prized for centuries and would become a medium of exchange, allowing trade to dramatically increase across countries and continents. 

Interestingly, as late as the 1600’s wampum shells were considered legal tender among native Americans and early European settlers. By 1660 they lost their status as legal tender as more and more British gold and silver coinage found its way to American shores. 

Whether sea shells, glass beads, or some other commodity, they had to have the following characteristics, which would enable them to be used for money:

Desirability:  The item had to be desirable on some level. Shells and beads had smooth, shiny surfaces and distinctive oval shapes which were visually attractive. They were prized as ornaments and symbols of status. Both the shells and beads were easily woven into clothes and fabrics to serve as decorations or adornment. 

Durability:  Able to withstand frequent handling without wearing down, the item had to be well-suited for use in everyday transactions. They also needed to be non-perishable, unlike fruits, vegetables or livestock. Being durable and long lasting would make them a more ideal store of value. Shells and beads would often be worn, carried and traded so they needed to withstand daily use and abuse.

Portability:  Small and lightweight, cowrie shells and glass beads were easy to carry, making them more practical for trade than bulky commodities like livestock or grain. An item that was able to be moved over long distances efficiently was of great value when trading across borders. 

Scarcity:  The item needed to be limited in supply, difficult to counterfeit, and hold their value over time. While naturally found in coastal regions, the shells were valuable throughout West Africa, Asia and the Middle East because they were not readily accessible. Glass beads had been produced in North Africa for centuries, and were desirable in other parts of Africa, Asia and Europe that were farther away. Both items were regularly used for everything from purchasing goods and services to paying taxes.

Neutrality:  The items needed to be valued, yet not consumed or used, like wheat or tools. Up to this point, trade occurred when each party had something the other wanted, and we planned to use them. Money would become something we do not consume or use up, but exchanged for the items we desired. 

Unfortunately, while significantly more advanced than barter economies, early commodity monies also had limitations. Shells became less valuable as trade routes expanded and they were more easily acquired. European traders began mass-producing beads and flooded African markets, robbing the money of its scarcity. This form of inflation destroys a money’s perceived value, eventually leading to its failure. 

Barter was the solution to the limitations of individual production. Early forms of commodity money paved the way for societies to trade at a scale that was previously inconceivable, advancing civilization exponentially. These early economies were so successful at growing societies they would eventually become obsolete. 

⚡Money Is A Technology

Hopefully you’re beginning to see a theme: money is a technology that, if successful, will eventually lead to its own replacement.  

This is a feature of technology, not a bug. Here’s a simple example: LPs made music available on demand. Cassette tapes made music so portable you could listen in your car. CDs made cassettes obsolete by greatly improving sound quality and providing quick access to your favorite songs through digital files. MP3s erased demand for CDs by dematerializing music and allowing for vast collections to be carried around in your pocket and sent from device to device over the air. And now apps have removed the need for an MP3 player as you can stream nearly all of recorded history anywhere, anytime on your phone. 

Technological innovation is part of a healthy society, and money is a form of  technology. We’re just not taught to think of it this way. Like any technology, innovation will lead to new and better forms, which allow for new and better forms.

The journey from barter to early commodity money reveals a fascinating pattern of human ingenuity. Each step in this evolution addressed the limitations of its predecessor, showcasing money as a dynamic technology responding to societal needs. The transition from cowrie shells and glass beads to more standardized forms of currency highlights an important truth: successful monetary systems inevitably pave the way for their own successors.

This cyclical progression reminds us that the concept of money is far from static. It continues to evolve, driven by the ever-changing demands of expanding trade networks and growing economies. The story of money is, in essence, the story of human progress – a testament to our ability to create, adapt, and innovate in the face of economic challenges.

In our next installment, we'll explore how these early forms of commodity money led to the development of metallic currencies, setting the stage for the modern financial systems we know today.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.