The creation of money was made possible and spurred by the generation of food surpluses. One of the earliest forms of money was the receipt issued for grain deposits at government warehouses in ancient Babylon, which gradually became transferable to third parties. The capacity of early farmers to produce more food than was required for consumption by the family naturally prompted them to trade their surplus for other goods or services. As
long as these exchanges were conducted by means of
barter, they were severely limited both in volume and
speed. Barter
exchange required the double coincidence of a buyer and seller both wanting what the other possessed in surplus. It also involved a very complicated form of valuation, since every type of commodity would have a different price depending on the goods or service for which it was to be exchanged. Direct barter involving 1000 different commodities would require 500,000 rates of exchange. Barter
transactions worked best within a narrow geographical area due to the physical difficulties of transporting
products over long distances. The perishable nature of many products also limited barter exchanges. Producers had no incentive to produce more than they were confident of either consuming or exchanging with other consumers during the period before a product deteriorated.
The use of money spread gradually from one country to another by a process of imitation similar to the manner in which ideas, technologies and other social institutions are transmitted from one place to another and bear fruit wherever the soil is sufficiently prepared. The adoption of money in place of barter had a tremendously liberating and expansive impact on early society. As urbanization
increased the number, size and speed of transactions by bringing many more people into proximity, money increased the number, size, speed, and efficiency of transactions even over long distances. The capacity to convert the fruits of one’s labor into money meant that those fruits could be stored indefinitely, overcoming the limitations of time and providing an incentive for people to exert themselves much harder and longer than if what they produced must be consumed immediately. The capacity to convert physical goods into portable money overcame the limitations imposed by space. Whereas products could be transported long distances only at considerable cost and difficulty, money could be moved quickly and inexpensively, making possible trade over much larger geographic areas. Money also provided a common standard for valuation of all products and services, thereby vastly reducing the complexity of exchange rates. By eliminating the necessity of the double coincidence required for barter trade, money made it possible for a much larger number of transactions to be completed. At the same time, its ease of movement and accounting enormously increased the speed of commercial transactions
. The increasing volume and speed of transactions made possible by money combined with the increasing size and density of urban populations had an exponential impact on the development of society.