=Intro bookend=

Hi. 
In this video, we will discuss the nature of money.

Money is all around us. 
When you go to the grocery store to get some food, you trade some money in exchange for it.
When you mow the lawn for your neightbor, you expect to receive money in trade.
When you show up to work and do whatever it is you were hired to do, you want to see some money.

So what is money? How did it come about? Why are you willing to do real actual work in exchange for some pieces of paper with fancy print on them?

We will shed some light on these mysteries right now in this video.

=Learning objectives=

Let's start by discussing our learning objectives for this video.
After this lesson, I hope you will be able to do the following:

* explain the function of money in the ecomony
* briefly describe the history of money progressing from early forms of exchange to representative money

and finally, 

* list the major desirable properties of money

=Before money=

Before we start throwing definitions around, let's talk about what things were like before there was money. 

Imagine 10-15 thousand years ago, in a pre-agricultural society, you are good at making spears, and another person is good at catching fish. You do like to eat fish, though, and the other person does need some spear fixing, so you can come together and trade your services directly. 

Fast forward a few thousand years to an early agricultural society, and you have a person with extra grain trading it in exchange for some extra sheep. This is called "barter", and is hypothesized to be at the beginning of trade. There is no need for money, or keeping track of who created how much value, because you trade goods and services directly. 

=Quiz 1=

Now take a moment and think about this question.

Imagine there's no such thing as money. 
If your asset is a goat, and you want to acquire a cellphone, what problems might you encounter in your quest?

Pause the video and think about it for a minute.

=Coincidence of wants=

Welcome back. You probably thought of the possibility that the phone person might not want a goat just now. That is correct.

The problem with barter is that as the variety of goods and services traded in the economy grows, there will develop the problem called the "coincidence of wants". That is, someone who has some of what you want, may not necessarily want some of what you have. 

=Coincidence of wants (2)=

For example, imagine you have grain, and you want shoes. 
You go to the shoe person, and offer some grain in exchange for shoes. 
But he doesn't happen to need grain at the moment, maybe he needs rope instead. 
So you go to the rope person, and ask to trade rope for grain. 
He doesn't want grain either, but he does want some fish.
You go to the fish person and offer to trade fish for grain. 
This time, you're in luck. So you trade grain for fish, fish for rope, and rope for shoes. Mission accomplished!

You can see that this is not very efficient - there is a lot of friction in this direct barter economy. Trade chains of arbitrary length may be required just to get one thing you want. Once you think about many people each wanting many things, this doesn't scale very well at all.

=Emergence of money=

What has naturally developed is that one or more commodities become generally accepted in exchange for anything of value.

The types of goods that first emerged as generally accepted forms of payments were those that were generally useful and easy to preserve. 

One of the earliest forms of money was obsidian, a type of volcanic glass, and objects crafted from it.  These were commonly used in trade as early as 10 to 12 thousand BCE. Some researchers propose that even earlier stone tools started being used for exchange, 300 to 500 thousand years ago. 

Cattle and measures of grain were used as a medium of exchange from 9 to 6 thousand years BCE. One form of currency, a particular weight of barley called the "sheqel", was used as currency around 3 thousand years BCE in Mesopotamia, and now lends its name to the modern currency of Israel, the shekel. 

Cowry shells and metal bars of gold and silver also developed monetary uses between 2 and 4 thousand years BCE. The earliest known metal coins were created around the 7th century BCE. 

One thing to notice here is the gradual shift from pure "commodity money", stuff that is actually useful for consumption or production in its own right, to more "representative money", stuff that isn't really all that useful by itself, if it were not a medium of exchange. 

Note that if all else fails, you can eat a cow. But cowry shells are basically purely ornamental, and gold and silver are not very good metals to use for tools due to their high malleability, so were mostly used for only ornamental purposes as well.

=Use of money=

The emergence of money was a really exciting historical development. If there's a commonly accepted commodity as a medium of exchange, you do not have to worry about having to find someone who happens to want what you have, but can simply use the medium of exchange as the intermediate step for every trade. Problem solved!

=What is money=

In addition to being a medium of exchange, there are two other broadly recognized major functions of money.

First, it is a unit of account, facilitating the easy measurement of the relative values of things. This also enables you to keep track of how much value you have created for others, as compared to how much value you have consumed.

Whenever you perform a service for someone, like mowing the lawn, babysitting, fixing a leak under the sink, making a chair, cooking a meal, doing some accounting, you are creating value for someone. This gets "recorded" in the global economic ledger by means of the recipient of value giving you some money. 

Just as in the days before money, people would not give you their stuff in exchange for nothing, with no expectation of ever getting anything back, the same applies in the presence of a medium of exchange. Being in possession of some units of money is proof that you have created value at some point in the past.

This brings us to the last function of money, that as a store of value. Once you have created some value and accumulated some units of money, you are not in a hurry to spend it all on getting goods and services. You can spread your spending of these credits over an arbitrarily long period of time, thus "storing" this value for the future. This is where the durability of money is a particularly useful feature.

=Quiz 2=

Time for another quiz.

Take a few minutes and make a list of what you think would be some desirable properties for money to have. 

If you were paying attention, you'd have noticed we have already mentioned one useful property for money, durability. How many others can you think of?

Please pause the video and complete your list before moving on.

=Properties of money=

Welcome back.

I hope you were able to come up with a few of these, and maybe more besides.

Durability is one we have already mentioned. When you plan to use something as money, and receive it in exchange for valuable goods or services, you generally want that money to stick around and not degrade too easily, until you use it in turn to buy something else. For instance, a head of lettuce probably won't make very good money, because it'll will wilt and rot in pretty short order, and nobody will accept it from you as payment for their stuff.

Divisibility is another important property. If your money comes only in large chunks, there would be problems trying to use it for small stuff. 

Portability is desirable so that you can carry some money around with you and use it at will.

Fungibility means that one unit of money is easily substituted for another unit of money. For instance, you generally don't care whether someone gives you this dollar bill or some other dollar bill, when they give you a dollar, because all dollars are the same. If this were not the case, it would introduce significant friction as people haggle over which unit of money is to be transacted.

Scarcity is also important. Money is trusted and used as a medium of exchange because people believe that someone who has money had to have created something of value earlier, so it is a fair exchange. If units of money can easily be created with little effort, this assumption breaks down, and people would not be willing to accept this kind of money in exchange for their stuff.

Recognizability is another nice property. Ideally we would want money to be easily recognizable as money, and easily distinguishable from fake or counterfeit money. 

Finally, value density is pretty nice to have. Your money might be portable and divisible, but if it takes a LOT of it to add up to significant value, so that you have to carry around giant bags of it just to buy some bread, that would be suboptimal. I suppose this is related to portability, but I threw it in here anyway.

This is not necessarily an exhaustive list, but I think it covers the really important stuff.

=Quiz 3=

And here's another quiz.

Take a minute to think which desirable properties of money are missing from Rai stones and cattle.

=Missing features=

Welcome back.

From where I stand, the giant stones are definitely missing portability and divisibility. Fungibility is also missing, since the stones are all of different sizes and sit around in different locations. 

In comparison with the Rai stones, cows are the paragons of portability, since they basically move themselves. They are still missing divisibility and fungibility.

=Additional reading=

And this concludes our talk about the history of money. If you are interested to learn about this topic in greater depth, I recommend this book by Kabir Sehgal.

=Attributions=

All media used in this video is liberally licensed under Creative Commons licenses, which either release the works into the public domain without restrictions, or allow unlimited use subject to attribution and sharing under the same terms.