Why we need money? Story of economic exchange.

Imagine there are only two guys in this world whose name is Ali and Ahmed. Ali have $10 and Ahmed have a banana. One day Ali got hungry. So he went outside to get some bananas. He was looking around and he found Ahmed who have a banana. After discussion, Ahmed agreed to exchange the banana with $10. Ali gave his $10 to Ahmed and took the banana.

This is a normal exchange by using money. What we see here is that one person owning something another person value. And the other person has money to exchange it with.

Now if Ali goes home and eats the banana, it will be gone. Now in our world there is Ali, Ahmed and his $10 note. In this situation, there will be no exchange. Even if one of them want something. Let’s say now Ahmed became hungry. He has money but there is no food. If Ali becomes hungry he doesn’t have money and also there is no food available.

In this situation the money is useless. Why? Because as you can see money is not what Ali or Ahmed need. Money is a tool that helps them get what they really want by exchanging one with the other. So, the job of money is exchange. If money cannot do this job, it is useless.

Ahmed is hungry. Even though he has money, it doesn’t help him get any food. Also Ali don’t have food. No one has any food. Since the only thing Ahmed has is $10, neither he can eat it nor can he exchange it with Ali for some food. That’s why money became useless.

Before they use money as a tool for exchanging the banana. So, what they really need is not money. When people say ‘I want money’ they are confused or just keeping things simple. What they really want is the item they can exchange with money.

New Story

Let’s turn around the story. Let’s say Ali bought the banana and went home and instead of eating the banana he made a smoothie and kept it in the fridge. On the next day Ahmed got hungry and then he started looking for some drinks. He passed by Ali’s house and he saw some banana smoothie. Ali says he will give the smoothie but in exchange with the $10 he gave before. Ahmed agreed and gave the $10 to Ali and then he took the smoothies. Now, what happened? The $10 Ali has previously given to Ahmed now came back to Ali again.

So now Ali has $10. Ahmed don’t have any money. In both situations, each person used the same $10 to exchange. Ali used the $10 to get banana from Ahmed. Later Ahmed used that same $10 to get smoothies from Ali. So the $10 is going from one hand to the other. This is how money circulates in the society.

When we look at the situation now, in this situation if Ahmed ($0.0) wants something he will not be able to get it. If he goes hungry again what he will do? Maybe Ali still has a glass of smoothie left. But also the money is with Ali. Ahmed doesn’t have money. So in this situation even if Ahmed gets hungry he will not be able to get food or drink.

Let’s make the picture a little bit bigger. We will add a fisherman.

Imagine on the next day Ahmed want a Fish. Now the fisherman have many fish but Ahmed doesn’t have anything the fisherman wants. So now this became a problem.

Ahmed also doesn’t have the $10. He has given it to Ali. He doesn’t have the banana also because he made a smoothie and gave it to Ali. Now he doesn’t have anything. What he can do now?

There are two things he can do. One is to speak with fisherman and then find out what he wants. So let’s say he went to fisherman‘s house and then he found out fisherman likes mango. Now if Ahmed can get some mango to the fisherman he can get some fish by exchanging it. Let’s say he has a mango tree. He picks some mangoes and then went to meet the fisherman. They both exchanged one with the other. This is barter system.

The second way is Ahmed to go and speak to Ali and find out what are the things he wants.

Let’s say he wants a pineapple, fish or table. He is willing to give $10 if anyone bring is any of those items.

Let’s say Ahmed brought him a table from his house and gave to Ali in return for $10. Now Ahmed has the $10 and Ali got what he wanted. But still, Ahmed didn’t get what. He wants a fish. So he goes to the fisherman and exchanges the $10 with a fish.

Now in this situation, Ali has a table, the fisherman has $10, Ahmed has a fish. Now everyone got what they wanted. Fishermen can’t eat the money but he kept it because in case, he might need to exchange it for something else which has the value of $10. Thinking this way he kept the $10 for the future. Here Fisherman is storing the value for future. The money works like a fridge where the value of fish is frozen so that he can use it in the future.

As you can see from here, money is not the thing they actually want. But money is what enables them to get what they want. This is where the money comes into the picture.

Revisions:
Original 26-07-20
correction 27-07-20
Correction 31-07-20