What concerns us the most as human beings? What do we think about the most? How to choose a present for our parents? Where to go for a holiday? Choosing the right apartment or a place to live? Buying a car?
There is something that connects all these questions.
A tool that makes them all possible. It so happens that in our modern society we call this tool “money”.
Either we find the right answer based on what the tool allows us (in other words, how much money we have), or, if we can, mend the tool for the result that we want. In other words, we make more money.
There aren’t many people in the world, who don’t deal with financial questions on a daily basis. And there are some who connect their lives with finances through the profession of their choice.
So, this series of articles will explore two important topics.
- What is money in my understanding.
- What is the current financial system, how it works and what problems it solves.
I will try to avoid cliches and well known-facts. My goal here is to give the most unbiased understanding of the role that money plays in the world and how the financial system affects our lives.
The History of Money
As Wikipedia tells us, the first money was invented long before commodity-market relations. It also tells us that money is either a metal or a paper entity that is used to measure the value of something when buying or selling.
However, at the very beginning of the history of finance, different people could use beans or shells to exchange one product for another.
They needed some kind of a generally accepted equivalent to, say, exchange wool for grain.
But while it was possible to use a certain item as an equivalent of exchange within one village, it probably wouldn’t be accepted in a different settlement as a means of payment for the same wool.
Many historians like to skip the period of non-metallic money and focus on the emergence of minted money. There are a number of reasons for this. Firstly there is more data about minted money, secondly, there are fewer dark spots.
I propose the opposite. Let’s look at the period of semi-natural exchange in greater detail. After all, this is when the financial history begins.
We have already briefly touched the topic of exchanging wool for grain. In this case, abstract farmers used the third commodity to unify the exchange — let’s say they used pebbles. This type of exchange is called cross-exchange. It means that the would use the third value to determine the value of the item they intended to exchange or item they intended to receive. Why am I focusing on? Simple, it communicates that the basic function of money is determining value.
The Basic Function Of Money Is Determining Value
Let’s jump forward in time a bit to the modern-day and ask a simple question. What is money? Paradoxically, despite the fact that people use money every day, most don’t know what it is. Furthermore, even financiers and economists don’t’ have a unified understanding of the nature of money. All because money is a very ambiguous substance.
The First Definition
The definitions often depend on the concept of the origin of money. The first definition is that money was invented as a result of an agreement between people who realized that intermediaries are needed to move values in the exchange turnover.
Not a totally correct concept in my opinion. Take one village that has a market for example. Every merchant or artisan already comes with their own goods, therefore he or she does not need an intermediary to move the product.
The Second Definition
Money was invested as a result of the evolutionary process, which, regardless of people’s will, led to certain objects being identified and taking a role as an intermediary in an exchange act.
Similarly, the concept is not entirely right. Money is not a natural phenomenon. Seeing as their nature is artificial, the lack of people’s will seems questionable. After all, there is no such thing as Money in nature.
So where does this leave us?
Does this mean that both concepts are wrong? Not necessarily. Rather, there is some rationality in each of the two concepts. Is money the result of an agreement? It’s a stretch, but yes. Did some items stand out and became intermediaries for exchange? Yes, at a certain point of development they absolutely did.
Another reason why it is so difficult to obtain a single definition of money is the diversity of their properties and functions. For example, money has exchange value (that is the cross rate for commodity exchange that we talked about above) and consumer value (the material property of a product). Moreover, both of these properties are artificial in nature and are in most cases the result of a social contract. Nowadays, this result is often expressed in monstrous constructions.
Let’s consider an example:
The cost of eBay stock at the time of writing was $34.46. There are several inner arrangements in this statement:
- A company’s share or security gives the right to own a share of the company. For example, if you own 1 out of 100 total shares, you own 1\100 of the company. Depending on the type of share it gives you ownership or the right to receive dividends.
- The NASDAQ Exchange by the decision of a supervisor is the platform of turnover (trading) of shares. It determines the equilibrium value of the share.
- The value of the share is listed in US dollars
- If you want to buy a share in your national currency, it will be converted in accordance with multiple exchange rates that depend on the method of your connection to the trading platform.
In conclusion, on the one hand, we have a very simple statement — the value of Ebay’s share at the time of writing is $ 4.46. On the other hand, the statement implies compliance with multiple complicated agreements.
How does this example relate to money?
It has a direct relationship. The difference between a farmer who raises crops or breeds sheep and a large corporation such as eBay is simply in the number and complexity of arrangements. At a time when people could get by with natural exchange, they didn’t have a concept of “financial world”, since the understanding of money was very arbitrary.
In fairness, the topic of finance became relevant relatively recently — with the appearance of first banks — active players in the financial market, who came about much later after the invention of money.
A financial market is nothing more than a market in which money is a commodity.
Fun fact about the history of finance: The first banks were invented in the Middle East. The forefathers of banks were merchants who exchanged various coins behind the scene on markets where different goods from multiple countries were traded.
Summary Of The First Chapter
As a summary, I would like to highlight the following: money is of maternity nature, it is necessary for the convenience of exchanging goods for other goods or services (the result of which was the division of labor).
In addition, money has functions: exchange (value determination), storage, savings, transfer. It is important for us to understand that the result of our work is the amount of money to which we have agreed. In different countries and states, the same work will be evaluated differently because the result of the agreement is not always the same.
Therefore, performing the same work in different places, we can get obtain different results in the end form of goods or services that we receive. This is one of the most important points that we need to grasp if we are to understand how the financial world works.