Yesterday we
looked at how supply and demand should always be in balance. That is, as long as we hold everything else
in the equation equal, and consider only supply and demand, no other factors —
no ifs, ands, or buts. Everything else being
equal, supply and demand will always be in balance, with everyone producing as
much as he or she consumes, and consuming as much as he or she produces.
What happens,
however, if you produce something at a different time than someone else
produces the thing that you want? For
instance, suppose you grow eggplant in the summer, while your prospective
trading partner cuts ice in winter?
Well, if stored
properly, ice can last up to a year, even through the hottest days of
summer. Eggplant, however, is only
available a relatively short time, not all year round the way ice can be. What do you do if you want ice, but the
eggplant crop hasn’t come in yet?
People faced this
problem from the beginning of human society.
A hunter needed a spear, but couldn’t pay for it until he used the spear
to kill something for lunch with a bit extra to trade for the spear. A merchant
needed salt to trade for copper, but wouldn’t have the salt until he got the copper
to trade for the salt.
What did people
do? They invented “contracts.” You give me what I want now, or at some
specified date in the future, and I will give you what you want now, or at some
specified date in the future. We can
both start with nothing, and end up with something.
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| Literature? No, probably a ledger. |
Most people think
that all the documents surviving from the ancient world are great works of
literature. They’re not. By far, the vast bulk of writings from the
ancient world (and today, for that matter) are contracts — money, for money and
credit are the same thing in different forms, and all money is a contract, just
as all contracts are money.
Obviously, by
using a contract document instead of the actual goods, people can do a lot more
a lot easier than they did before. For
example, if there are six things in an economy, but no standard of value to
measure them, do you know how many prices there are in that economy?
Not six, as there
would be if everything was measured in terms of dollars or drachma, but
seven-hundred and twenty different prices, e.g.,
a cow could be 100 chickens, three pigs, half a horse, fifteen bushels of
wheat, or six gallons of whiskey. All
the different ways to have a price in terms of just those six things adds up to
720, not 6. (You can do this yourself
for any number of items, n, by calculating “n!” or “n factorial,” which is
n(n-1)(n-2)(n-3) . . . (n-[n-1]). 6! = 6
x 5 x 4 x 3 x 2 x 1, or 720.)
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| Æs Signatum, Sacred Bronze Money, with Ox |
It’s much easier (as many societies
discovered long, long ago) to value everything in terms of one item, usually a
draft animal, because they provided power.
Some of today’s financial terms, in fact, come from old Latin words
referring to cattle, the chief form of wealth aside from land in the ancient
world, e.g., pecus (pecuniary) is an
archaic word for cattle, while caput (capital) refers to the head of a cow. We still count livestock by “the head,” e.g., “How many head o’ cow critters
you-all carrying on yore range, Pardner?”
By having a piece of
parchment, papyrus, notched stick, clay tablet, or what have you, as a
negotiable contract, and if it was denominated in a common unit of value, life
became much easier. You could store up
your demand instead of having to store actual goods . . . as long as the
contract you accepted was good when you went to redeem it, or other people
would take it in trade until it matured.
Everything else being equal,
then, by using contracts instead of the actual goods, it became possible to
even things out a bit, and to be able to make production and consumption
balance, even if they didn’t necessarily happen at the same time.
That, however, brings in
another problem, which we’ll look at tomorrow.
#30#
