To understand money, one first must first understand that human beings have always been incentivized to participate in exchange. If humans could not, or did not, trade, the majority of people would die young: whether by starvation, disease, or exposure to the elements.

The survivors would be left with an extremely low standard of living; not a world any of us would want to live in. This means that exchange is a necessary condition, not only of our economy, but of human flourishing.

Origins of Money

Before there was money, there was barter (also known as direct exchange) – a system in which every good is traded directly against every other good.

A small island economy could function this way: a couple of coconuts traded for fishing line, or a bushel of bananas in exchange for bamboo with which to build a shelter.

As Tho Bishop from the Mises Institute illustrates, imagine that a farmer wants to buy a pair of boots, so he visits the town cobbler and tries to trade a dozen eggs in exchange. However, the cobbler in town doesn't want eggs. The cobbler might want beef, but the farmer isn't willing to slaughter his cow for boots.

A trade where both parties are happy is now difficult. It's easy to see how unmanageable this system is as populations grow, and as needs and wants expand.