I'm Shrijith Venkatrama, the founder of Hexmos. Presently, I am building LiveAPI, a super-convenient engineering productivity tool. LiveAPI processes your code repositories at scale and automatically produces beautiful API docs in minutes.

As I build LiveAPI, I am also making an effort to learn about various economic matters.

In this post, I explain the origins of currency or money, as presented by one of the foremost economic thinkers, Adam Smith.

The Commercial Society

Adam Smith introduces the idea of a commercial society. In this society, everyone must become a little bit of a trader—without exception.

The reason for this is that, as the division of labor increases, individuals produce surplus goods that must be traded for other goods they need or want.

Since no individual is fully self-sufficient due to the division of labor, there must be sufficient give-and-take with others in the economy.

A society driven by such an economy of traders is what can be called a commercial society.

Currency: What (Almost) Everyone Wants

At the dawn of the division of labor, give-and-take transactions could sometimes become awkward and complicated.

For instance, I might have grains to offer and want clothes in return. But the person I’m transacting with might want grain but can only offer cattle in return.

In such a transaction, the receiver gets what they want, whereas the giver doesn't (immediately).

One can imagine how taxing such a system could be to execute on a day-to-day basis.

The intermediate solution to this problem was to try to accumulate items that almost everyone wanted.

Historically, for example, cattle held significant value due to their versatility in sustaining human existence.

Thus, in the very beginning, the currency of exchange was cattle (e.g., "an armor may cost 9 oxen").

Other popular currencies in use throughout history included:

• Salt
• Dried cod
• Tobacco
• Sugar
• Leather

An Advancement - Settling on Metals

Eventually, people recognized the problems with using various commodities as currency. Metal emerged as an alternative for the following reasons:

1. Metals don’t spoil.
2. They can be divided into pieces.
3. They can be melted and reformed.
4. Iron, copper, silver, and gold are available in sufficient quantities.

Initially, people used metal bars as currency. The number and weight of the bars denoted buying power. However, this system had drawbacks:

• The hassle of weighing
• Testing for purity

Metal + Marks = Coins

To avoid the hassle of weighing and testing, more advanced societies adopted the idea of coins.

The earliest coins were marked with inscriptions indicating their weight and purity.

Over time, governments realized that the underlying metal content was less important than the symbols and numbers on the coins. They reduced the expensive metal content while retaining the markings, cutting costs.

These simplifications enabled the expansion of commercial society.

The Relative "Value" of Goods

When determining the relative "value" of goods, there are two perspectives:

1. Value in Use: How useful something is.
2. Value in Exchange: How much other stuff you can get for it.

For example, water is incredibly useful in existential terms but is not seen as highly valuable in trade. In contrast, diamonds, which are not very useful, can be traded for many other goods.

Thus, tradeable value determines the real price of things in a commercial society.

More About Prices in Upcoming Posts

There are many factors that make up the real price of goods.

Over time, prices rise and fall, often deviating from their natural prices.

We’ll delve deeper into how prices work in upcoming posts.