Money does grow on trees!

So this is quite the headline, huh? Money grows on trees! Flies in the face of everything you’ve been told in your life. So why am I saying money grows on trees? Partly because I wanted a catchy title for this post, sure. But also because I thought it was a good way to start out a series of posts I want to write about money and how the growth of money enables our economy to grow.

So let’s start out with what money is. For that, I’m going to tell a little story about a little farming village, with a farmer named Farmer Joe. Here’s Farmer Joe, farming his wheat:

FarmerJoe

As you can see, I am not an artist. But no matter: Farmer Joe is farming his wheat. Thing is, he spends so much time caring for his crops that he doesn’t have time to make everything that he needs to survive. So, he trades some of his wheat to other nearby farmers who are also in a similar situation. Enter Farmer Bob:

FarmerBob

Farmer Bob raises pigs. He’d like some wheat, though, so he goes to Farmer Joe and offers to trade a pig for some wheat. Farmer Joe wants a pig, so he’s happy to make the trade.

JoeBobTrade

So now Farmer Joe has a pig to go along with the wheat he’s growing, and Farmer Bob has some wheat to go along with the pigs he’s raising. Everyone is happy, and the trade was easily completed, since both parties has something the other wanted, and they were both willing to give up some of what they had to get what they wanted.

Now we have Blacksmith Bill:

BlacksmithBill

Given that he’s a blacksmith and his trade doesn’t directly provide him with good, he needs to trade for most of the food he needs. So he goes to Farmer Bob and offers to trade a knife to Farmer Bob in exchange for a pig. Farmer Bob’s knife broke recently and couldn’t be repaired, so he’s happy to make the exchange.

BillBobTrade

Bob should probably duck, as it appears that Bill threw that knife at Bob.

Blacksmith Bill also needs wheat, so he goes to Farmer Joe and offers to trade a new scythe to Joe in exchange for some wheat. There’s a problem, though: Farmer Joe’s scythe is perfectly fine, and Joe has no use for another. What’s worse, neither Joe nor Bill have anything else that the other wants.

JoeBillNoTrade

Bill sadly walks away from the red X that magically appeared, disappointed since he needs the wheat to survive.

What could we change in this situation to make both Joe and Bill happy?

There’s a few options. One is to bring in another party and make a three-way trade. It’ll take time to find someone else though, and this solution also doesn’t scale up very well. Twenty-party trades are somewhat difficult to pull off, you know.

Another option is for Farmer Joe to accept some goods from Blacksmith Bill anyway, even though he doesn’t need then, with the idea that he could trade them to other people in the future for other stuff that he does want. This is a little better, but Joe is trusting that he’ll be able to get a fair amount of other stuff for trading Bill’s goods, since Joe won’t know exactly what he’ll get for them until he actually makes a trade.

Here’s another option: money.

Money is simply some set of objects that have a value that is agreed upon by everyone who uses them. While the objects themselves may or may not be useful, everyone who uses them agrees to assign a value to them that is roughly equal to what everyone else does. Therefore, these objects can be used to trade among everyone who uses them.

So back to Farmer Joe and Blacksmith Bill. Blacksmith Bill still doesn’t have any goods that Farmer Joe wants, but he does have some money (let’s say that their money is giant stone discs). Blacksmith Bill offers some money in exchange for some wheat.

JoeBillTradeMoney

Farmer Joe knows that everyone around will accept this money in exchange for the goods they make or grow, so Joe is happy to accept money in exchange for some wheat. After deciding on how much wheat one stone disc is worth, Joe and Bill exchange their items.

JoeBillTradeMoney2

Blacksmith Bill is happy that he has wheat now, and Farmer Joe is happy to have a giant stone disc that, while not useful on its own (unless you think having a giant stone disc in your garden really brings the place together), can be traded to anyone else in the surrounding area for their goods and services.

Thus, we see that money solves the problems that come up with the first two options presented. Money can be held and traded to another party later, which means that each transaction only needs two people. Also, you can be reasonably certain that everyone you deal with accepts money in trades, since everyone in the area has agreed in advance on the value of the objects in use as money.

So that’s money, folks. Money is simply a way to exchange goods and services with others around you that doesn’t require that everyone have something else that the other person wants.

And money does grow on trees! Kinda. Well, stuff that grows on trees can be exchanged for money, anyway. Hey, I thought of the title when I came up with the farm scenario and I wasn’t going to let this opportunity, dumb as it was, pass me by.

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So what’s next for money? Who knows, I haven’t thought that far in advance! But stay tuned for the next post in The Money Saga™!