Which came first: governments or money?
The answer, of course, is money.
Money appeared before governments did.
Money doesn’t need government to survive, but governments sure as hell need money. Which is why governments, as soon as they could, took it upon themselves to create both money, and the fiction that money must be a creation of government.
But money appeared before governments did, in the form of precious metals.
Why did both silver and gold become money? The answer, as Keith Weiner explains, goes back to the reason we use money in the first place:
Money solves a problem called the coincidence of wants. For example, suppose the maker of leather moccasins is hungry. He can only trade directly with the fisherman when the fisherman happens to need a new pair of shoes. Barter is extremely inefficient and therefore limited.
Instead of directly trading shoes for fish, the shoemaker exchanges his shoes for salt, and then trades that salt for the fish he wants to eat. Indirect trade makes it possible for the shoemaker to trade with the fisherman, as both can agree on using salt. Unfortunately, this leads to a new problem. Using an intermediate good adds an extra trade to every transaction, and there is a frictional loss inherent in every trade (see my article for a full explanation).
Marketability is a measure of the amount of this loss, which is different for each good. The more marketable the good, the less the loss one incurs. For example, food is more marketable than footwear. Salt is more marketable than food. Gold is more marketable than salt.
Avoiding losses is a powerful motivation to use the more marketable good in preference to the less marketable. This is why everyone is motivated to find the one good with the least loss. Gold is the most marketable good, the best money.
So if gold is the best, then why is silver also money? Read Keith’s short article to find out: