What Is Money?
Why money exists at all, what people used before it, and why a piece of paper can be worth something.
Hatchlings · Ages 5–6
Money is just a way of swapping things.
A long, long time ago there was no money at all. If you had apples and you wanted a fish, you had to find someone with a fish who happened to want apples. That's quite hard!
So people invented money. Now you can swap your apples for coins, and swap those coins for a fish whenever you like. Coins are like a promise you can carry in your pocket.
Money can be coins, or paper notes, or just a tap of a card. It all does the same job.
Try this: Find some coins and lay them out from smallest to biggest. Now check what each one is worth. Is the biggest coin always worth the most?
Fledglings · Ages 7–8
Money only works because everybody agrees it does.
Before money existed, people swapped things directly. It works perfectly well right up until the awkward moment: you've got a basket of apples, you want a fish, and the person with the fish doesn't like apples.
Now you're stuck. You have to find somebody who wants apples and has something the fish-owner wants. One simple swap suddenly needs three people.
Money fixed that. It's something everyone agrees to accept, so you can sell apples to anyone and buy fish from anyone. It doesn't much matter what it's made of: people have used shells, salt, beads, metal discs and paper.
That's the strange bit. A £10 note isn't worth £10 because of the paper. It's worth £10 because everyone agrees it is. If everybody woke up tomorrow and stopped agreeing, it would just be a rectangle.
These days a lot of money isn't even something you can hold. When a grown-up taps a card, no coins go anywhere. A computer simply changes two numbers.
Try this: Invent your own money for your house. What would it be made of? And the tricky part: how would you stop someone just making more of it?
High Flyers · Ages 9–10
Money is a shared invention that does three jobs at once.
Imagine there's no money at all. You keep chickens, and you want a new pair of boots. So you find the bootmaker, who unfortunately has plenty of chickens already, and would really rather have a haircut. Now you need a third person: a hairdresser who happens to want chickens. One simple purchase has become a puzzle.
Swapping goods directly like this has one central problem, and it has a wonderful name: the double coincidence of wants. For a trade to happen, both people must want what the other has, at the same moment. That's rare, which makes direct swapping slow, and puts a hard ceiling on how complicated a society's trading can get.
Money removes the puzzle by doing three jobs at once:
- A way to swap. Everyone accepts it, so you never need a perfect match. Sell chickens to anyone, buy boots from anyone.
- A way to store. Sell your chickens today and buy the boots next winter: the value waits for you.
- A way to measure. It puts boots, chickens and haircuts on a single scale, so you can compare them.
Money doesn't need to be valuable in itself. What it needs is for people to trust it, and for it to be hard to get hold of lots more. Anything that suddenly becomes easy to collect stops working as money.
Modern money is mostly numbers on computers, backed by trust in a country's government and central bank rather than by anything you could hold in your hand.
Try this: Try arranging a swap at home. Offer to do something for someone, in exchange for something they'll do for you. The catch is that they have to want what you're offering. If they don't, you'll need a third person: someone who wants your side of the deal, and has something the first person wants.
How many people did you have to involve before everyone was happy? That tangle is exactly the problem money was invented to solve.
What's next
The next zone in Money World is Earning It: where money actually comes from, and the surprising number of ways people get it.