More on Money

My description of my invention of money was of course fictional. However, it was probably not far from what really happened.  One part that is likely not correct is that one individual, me, would not have the economic clout, or the credibility for a large community to trust as a backer for clay disks worth a whole chicken.  The role was fulfilled by the government, probably a king at the time.  A king or government would have had enough wealth to actually trade for anything the community would bring, and therefore give actual value to the clay disks.

As economies grew, and trade expanded the problem arose of how to trade with other groups who had other clay disks.  Other kings clay disks were not trusted (remember the clay disks are worthless, unless people agree that they are not) because the backer is so far away.  The solution was a more universal currency, one that had actual value.  Most commonly this was salt.  Salt was valuable to all groups of people, and was easy to transport.  You could take a load of salt to another kingdom and bring back cedar wood. In these trades the traders had to agree individually the exchange rate of salt to cedar.  The clay disks were irrelevant.

Another problem, clay disks were pretty easy to make yourself, or counterfeit. The issue with counterfeiting is linked to the money supply. You may be tempted to think that if the disks are worthless, and their only value is linked to the agreed value, there really shouldn’t be a problem.  You would be correct for very small amounts of increase in money supply, but as the increase becomes larger, inflation occurs. Remember that in my story, the clay disks were agreed to be worth one chicken.  So for the currency to have real value, there can not be more disks than chickens.  If suddenly there were twice as many disks as chickens, then suddenly each chicken will now cost 2 disks.  The village has just experienced inflation.  In the case of counterfeiting, for everyone except the counterfeiter, the currency is still just as hard to earn, so the chickens become more expensive.

If someone other than the king makes extra disk, it is counterfeiting, but if the king makes more it is something else, but the effects are the same. Inflation.

Bitcoin was invented to try to address these issues.