Teaching My 15-Year Old Son About Money Part 1

I’m not surprised that MONEY is not a subject in school.  I think people might be upset if they were educated on what money REALLY is.

Here’s how I recently explained money to my 15 year-old son.

IN THE BEGINNING…

Imagine that we live in a town where there is no money as you know it today.

Everyone has items they produce that they barter for items produced by others.

You have pigs.  I have eggs.  We trade.

As time has passed we have found ways to do INDIRECT trades.

For example, let’s say I’m a teacher.  Farmer Brown has some bacon I’d like to have. However, farmer Brown has no children for me to teach so he chooses not to barter with me on teaching.  He does, however, like to barter for timber because he needs to make repairs on his barn and has no wood on his property.

I happen to know the Smiths have tons of timber on their property AND they have 4 children that need an education.  So I barter my teaching services for some of their timber.  I then take the timber to Farmer Brown and barter for my bacon.

This indirect barter is the start of money.

As time goes on let’s say that the one commodity that everyone uses most often for exchange becomes bacon.  Bacon becomes the highest valued commodity and hence becomes MONEY.

It has a real value on its own. It also has value as a commodity to exchange for other goods and services.

That’s how money comes about.  It doesn’t matter whether the commodity is sea shells, pork bellies, eggs, butter, gold, silver, spices or whatever.

The market makes this happen.  It is not dictated by a government or ruler.  For example, look at any prison in the world and you’ll find COMMODITIES become money – cigarrettes, tins of sardines, stamps, or whatever has the most value in exchanges. The prison does not dictate what becomes money – the market within the prison does.

Invariably the commodity that becomes money often is easily DIVISIBLE, PORTABLE and has a decent shelf life.  The reasons for this are simple.  If houses became money, for example, they would be impossible to chop up to make payment to someone else.  If butter, which is easily divisible, were to become money, there would be obvious portablitiy issues.

So most often PRECIOUS METALS are the commodities that become money.  They are portable, divisible and do not easily deteriorate.

ENTER THE BANKERS

So let’s go back to our town scenario.

There is huge demand for bacon and pork in our little town and it has become the exchange commodity – the money – our town uses.

My teaching business has done well over the years and my freezer is full of piggy savings that I haven’t immediately used.  In fact, it’s overflowing.

Tom Jones has a huge warehouse in town and he has placed in the warehouse rows and rows of commercial freezer units.  He is trustworthy and I’ve known him for years.  I offer to pay Tom a monthly fee in bacon to store my extra pork.  In return, Tom gives me a RECEIPT for the pork I have placed in his warehouse.

The receipt I have gives me the authority to come to the warehouse during buisness hours and get any amount of my pork ON DEMAND.

Eventually everyone in the town keeps their pork at the warehouse.  It’s convenient, it’s safe and the life of the pork is extended.

Rather than me going to the warehouse to get 10 lbs of pork to pay Dick for the new chair he made me I give Dick one of the receipts I have for a 100 lbs of pork and in exchange he gives me the chair he made and one of his warehouse receipts for 90 lbs of pork.  This is convenient.  I exchange paper receipts and items rather than making the trip to the warehouse for every purchase I want to make.

It should be noted that Dick and I are not confused.  We don’t think the piece of paper that the receipt is written on is worth anything of value.  The receipt only has value to us by the fact that we know we can take the receipt to the warehouse and receive pork – the real value.  Heck, we don’t even have “faith” in the paper.  We have faith that Tom at the warehouse will give us the amount of pork on the receipt.  There is no faith in the paper itself but in Tom and his warehouse holding the real commodity.

Eventually we end up calling the demoniations of the paper receipts POUNDS.  We do this because the receipts are redemable – ON DEMAND – for POUNDS of pork from the warehouse.

This use of paper receipts, for convenience sake, is our town’s paper money – always redeemable in the real commodity – pork.

NEXT INSTALLMENT: RESERVES, LOANS and FRACTIONAL RESERVES