The Invention of Money
Coursera: A Brief History of Humankind
by Dr. Yuval Noah Harari
Personal Lecture Notes from Lesson #8: The Direction of History
(These are personal summaries and paraphrasings of some of the major points of the lectures that I felt to be important. They are not meant to be comprehensive records nor intended to be reproductions of copyright materials. I encourage you to participate in the course for better understanding. All ideas and examples are by Dr. Harari.)
If we see the over-all trend in human history, we can see that it has been heading in the direction of global unification. The prospects of such unification emerge for the first time in the first millennium BC with 3 potentially universal orders:
1) Economic order
2) Political (Imperial) order
3) Religious order
This lecture is about the emergence of the economic order, or the invention of money.
In hunter-gatherer societies and agricultural societies, humans lived in economically self-contained units with some barter exhange in-between different units. Within units, people did things for each others based on personal relationships and a system of favors. With the development of cities, professionals devoted to specialized tasks (such as shoe-makers or doctors) emerged. Villages started specializing in agricultural products, given its climate and geography. This necessitated a more complex and different kind of economy, which the barter system couldn't provide.
The creation of money was the creation of a new imagined reality. Money doesn't depend on coins or bank notes. 90% of current money in the world exists as bits inside computers; it is electronic data. As long as people are willing to exchange goods and services for transferring bits of data between computers, it works. Money enables people to determine the relative value of all the goods and services in the market. Money is a universal medium of exchange. It is the most efficient and universal system of mutual trust.
Money is based on two basic principles:
1) Universal convertibility (it can convert any type of good or service into another kind of good or service)
2) Universal trust (two complete strangers can agree on using the same money)
Barley money in Sumeria in 3000 BC is the first type of money that we know of. Its unit was the selo, and there were standardized bowls to measure selo. In ancient Mesopotamia, around 2500 BC, silver shekels emerged as currency. These weren't coins but rather specified the weight of silver, around 8 grams of silver. Lumps of silver were used as currency, and their weight had to be measured before each exchange. Silver shekel had no inherent value, unlike barely, which could be eaten. First coins in history were developed in 640 BC by King Elliotus of the Kingdom of Lydia in the region of western Turkey. Each coin had engraved on it its value and the mark of the king as a sign of authority. Counterfeiting money from thereon became an act of impersonating the king or the government, which is an act of subversion. Political authority, therefore, gives people trust in money.
Eventually gold and silver became the universal money. Once trade begins to connect two areas, the forces of supply and demand tend to equalize the prices of all the goods that can be transported between the two areas. This applies to money as well. The mere fact that one group of people values something highly (say gold) that another group doesn't value much, can make the other group value it highly as well, because they can sell that gold to first group of people with huge profits, eventually leading to an equalization of value of gold between the two groups.
"In truth, money is the climax, the apogee of human tolerance. There is nothing more tolerant it the world than money. Money is far more open-minded than any religion, than any state, than any cultural code, than any social habits. Money is the only trust system that humans created in history that can bridge almost all cultural gaps and it does not discriminate on the basis of religion or gender or race or age or anything else." (Dr. Harari)
(For prior posts covering this course, see the label A Brief History of Humankind)