Money & Doctors: From Bartering to Currency

     So now we have a standard system of money.  Money is a medium of exchange for goods and services.  And a precious metal in the form of a coin serves as that medium.  The coin becomes a store of value.

     With a system of money in place, Jane now values her blood-letting services at 10 Drachmas--10 of those silver coins.  A new barber comes to town and sets up shop down the street.  He charges 15 Drachmas for the same blood-letting services.   However, Jane attracts more business because she’s cheaper.  She could raise her price to 14 Drachmas and make more money doing the same amount of work and still be cheaper than that good-for-nothing competing barber.  However, her business drops since the other guy afterwards sneakily drops his price to 13.  Jane then drops her price to 12 to compete with the competitive little snot.  There comes a time where a point of equilibrium eventually is reached, where each cannot charge too little such that it becomes unprofitable for either to provide the service, nor can they charge too high since fewer people couldn’t afford their services and we won’t attract business at all.  Prices go up and down until an equilibrium price is reached. 

     The price eventually reaches an equilibrium of, let’s say, 12 Drachmas.  People are willing to pay this price for either Jane or her competitor, assuming we are relatively equal in skill and bedside-manner.  This is competition and is healthy for business, since it benefits both the consumer (buyer) and the provider (seller) of goods and services.  And then the insurance companies and government get involved and really mess things up, but that’s altogether another story. 

     Likewise, the goat sellers set their prices and the potato people the same, and all this is based upon a universal system of coinage

     So how did paper money arise?  It is believed to have been invented in China in the 7th century A.D.  In keeping with our flawed historical little story, let’s assume that one day a guy named Jack owes Jane 12 Drachmas for her bloodletting services.  But he doesn’t have the actual Drachma silver coins, so he writes Jane a Note or IOU, which literally means “I Owe You.”  This note essentially is an official document promising to pay 12 Drachmas in the future.   We call it a “12-Drachma Note.” 

     But Jane needs to buy bread and beer for her family (and her new goat, who loves stale bread and flat beer) so she goes to the Bread & Beer Barn.  Since Jane doesn’t have the actual cash, she shows her 12-Drachma Note to the Bread & Beer vendor and says, “Hey Bud, Jack owes me 12 Drachmas but the bum didn’t have the coins, so he gave me this note instead.  So can I buy 12 Drachmas worth of bread and beer and you later get the dozen Drachmas from that deadbeat Jack?”  The vendor, Bud, says “yes” since he wants to make a sale.  Otherwise, Jane can walk away to his competitor, Brie, at the Cheese and Wine Shack and she’ll gladly take the note, because Brie’s a budding entrepreneur and has been itching to put Bud out of business. 

     Later, Bud uses this same 12-Drachma note to buy some yeast from Candace at the Candida Center to make more bread and beer.  He heard an army of knights are coming to town and those guys spend money like drunken fools.  He needs to prepare and bake a ton of bread and brew barrels upon barrels of beer so he can sell it to those thirsty, hungry knights.

     You see how this works?  Notes circulate as currency.  This allows people to do business where they otherwise could not.  In this example, the different buyers and sellers were all able to engage in trade more freely and quickly, creating win-win situations.  Notes also could be written for much larger amounts.  This was convenient since the notes replaced huge sums of coins.  As you can imagine, a 10,000 Drachma note is far easier and less cumbersome to carry for trade, compared to lugging around bags of coins of the same value. 

     Later, the government takes over, regulates and prints more of these notes that circulate as money.  There was a time years ago where our U.S. paper currency read, “Legal tender for all debts public and private and redeemable for lawful money at the US Treasury”, which in those days was gold or silver (the latter were called “silver certificates”).  These were still IOUs—documents stating something is owed to the holder of that paper note.  Our paper money no longer says that but rather: “Legal tender for all debts public and private.”  So the paper currency in itself has intrinsic value but with nothing to back it up.  Governments around the world have done the same for the most part. 

     Therefore, money is redefined as any item or record of verifiable value that is widely accepted as payment for goods or services.  Money in this form becomes more ubiquitous and allows for far greater and quicker transactions. 

©Randall S. Fong, M.D.

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