The Tale of the Golden Coin | Basics

A Journey Through the Fundamentals of Money

Aug 08, 2024

Hello, 👋

The economic system is one of the most important pillars of modern-day human society. We took birth in this system and see it as very basic. We really can’t imagine our world without it. The core of economic system is ‘value’ which is quantified, exchanged and stored using money. I am on a journey to understand money and how it impacts our lives. This first post covers the fundamentals of money in a story format. I am trying this for the first time. I found it quite exciting. I hope you will enjoy it too.

Garvit Sahdev enjoys understanding ideas that shape our world. The Thoughtful Tangle is an initiative to share this journey and experience with his friends who love to do the same. He selects one idea and dives deep into it to understand its basics, relevance, impact and opportunities around it. The thoughtful tangle is special because 👇

📝 One long article per idea. We call it ‘The Basics’.
📝 Multiple unique insights. Separate small articles for special ‘Insights’.
🧑‍🤝‍🧑 Experts perspective. Check out ‘Insiders’

Once upon a time, in a land not too far away, there was a small village called Prosperia. The people of Prosperia lived simple lives, trading goods and services with each other. If someone needed a loaf of bread, they might exchange a basket of apples for it. If someone needed a new pair of shoes, they might trade a woolen blanket. This system of bartering worked well for many years, but as the village grew, it became increasingly complicated.

What is money?

One day, an old traveler arrived in Prosperia with a strange object—a shiny golden coin. He gathered the villagers around and told them about his adventures in distant lands where people no longer bartered. Instead, they used coins like the one he carried.

“This,” he said, holding up the coin, “is money. It’s a medium of exchange, a store of value, and a unit of account.”

The villagers were intrigued. “What do you mean?” asked the baker, scratching his head.

“Let me explain,” the traveler began. “Money is something everyone agrees has value. You can use it to buy and sell anything without having to find someone who wants to trade directly with you. That’s why it’s called a medium of exchange. If you want bread, you give the baker a coin instead of apples. The baker can then use that coin to buy whatever he needs, perhaps a new pair of shoes from the cobbler.”

The villagers nodded in understanding. This system seemed much simpler than bartering.

“Not only that,” the traveler continued, “but money also serves as a store of value. This means you can save it for future use. If you don’t need anything today, you can keep the coin and use it later when you do. Unlike apples or bread, the coin doesn’t spoil or go bad.”

“That’s useful,” said the farmer. “I often have more crops than I need, but I can’t store them forever.”

“Exactly!” the traveler agreed. “And finally, money acts as a unit of account. This means it helps us measure and compare the value of different goods and services. If the baker charges one coin for a loaf of bread and the cobbler charges two coins for a pair of shoes, you know that the shoes are worth twice as much as the bread.”

The villagers were excited by this new concept and decided to adopt money in their village. But the traveler warned them, “Not all money is the same. There are different types, and it’s important to understand them.”

Types of Money

The villagers listened closely as the traveler explained.

“In some places,” he said, “people use commodity money. This is money that has value in itself, like gold or silver. The coin I showed you is an example of commodity money. In other places, they use fiat money. This is money issued by a government and has value because everyone agrees it does. Paper bills and modern coins are fiat money.”

“What about this?” asked a young boy, holding up a mobile with a digital certificate in it.

“That’s digital money, my boy,” the traveler said with a smile. “In some lands, people have started using electronic forms of money. Cryptocurrencies like Bitcoin are a new kind of money that exists only in computers.”

The villagers were amazed by how many types of money existed. But they had another question: “How much money should we have in our village?”

“That’s a great question,” said the traveler. “The amount of money in a place is called the money supply, and it comes in different levels. M0 is the physical money you see—coins and bills. M1 includes M0 plus any money in your bank accounts that you can spend easily. M2 includes M1 plus money in savings accounts, and M3 includes even larger sums, like big deposits that you can’t touch for a long time.”

Working of the Money System

The villagers realized that managing money was more complex than they thought. They wondered how to ensure that their new money system would work well.

“That’s where monetary policy comes in,” the traveler explained. “In some lands, there are wise people who help keep the value of money stable. They control inflation, adjust interest rates, and sometimes buy or sell things to manage how much money is in circulation. They also set reserve requirements, which is how much money banks must keep on hand rather than lend out.”

As the traveler spoke, the villagers imagined a world where their money was carefully managed to ensure prosperity for everyone. They knew they would need to create their own policies to guide their use of money.

But where did the money come from?

“But where did money come from?” asked the blacksmith, curious about its history.

“Ah,” said the traveler, “money has a long and fascinating history. In ancient times, people used all sorts of things like money—cowrie shells, precious metals, and even large stones. Over time, coins made from gold and silver became popular. Then, paper money was introduced, and eventually, governments started issuing fiat currencies. Today, we even have digital money that exists only in cyberspace.”

The villagers were amazed at how money had evolved over time. They realized that it wasn’t just a tool for trade but also a powerful force that had shaped societies throughout history.

But why is money so important?

“But why is money so important?” asked the village elder, who had been quietly listening.

“Money,” the traveler said, “is the lifeblood of an economy. It makes it possible for people to trade goods and services easily, which helps the economy grow. It also allows countries to trade with each other, supports banks and financial institutions, and ultimately influences everyone’s standard of living.”

The villagers now understood that money was more than just a coin or a bill; it was the foundation of their entire economy. They thanked the traveler for his wisdom and began to use money in their village. With money, Prosperia flourished. Trade became easier, people saved for the future, and everyone enjoyed a higher standard of living.

And so, the story of money in Prosperia serves as a reminder of the powerful role that money plays in our lives, from facilitating everyday transactions to shaping the course of history.

______

I hope you liked the story. I am experimenting with the story format with money series. Let me know if you have any feedback. See you next time.

SOMEONE CAN BENEFIT FROM IT

If you find this post helpful, we would be grateful if you could take a moment to share it with others who might benefit from it. Your kindness and support mean a lot to us.

Share The Thoughtful Tangle

DYNAMIC CONTENT

No one knows how deep a rabbit hole can go.

All our posts are regularly updated as soon as new information becomes available. We also keep note of the questions asked by our readers and add their answers to the article. So, stay curious and ask questions in the comments.

ABOUT THE AUTHOR

Hey everyone, I'm Garvit Sahdev 😎. I'm on a mission to gain a deeper understanding of the world, and to develop solutions that can trigger significant global change.

My curiosities span various domains including food, business theories, material science, market size calculations, economics, politics, and sports, etc. 🧐

Professionally, I have a diverse background spanning startups, consulting, policy development, market research, system building, ISO, colour physics, nanomaterial synthesis, textile chemistry, etc. 🐘

Note: Generative AI has been used for writing this piece under the supervision of the author.

Thanks for reading The Thoughtful Tangle! Subscribe to continue reading deeply researched stories about the interesting concepts that shape our world. ❤️

The Thoughtful Tangle