Human Science

Role of Money in Development

870pages on
this wiki
Add New Page
Talk0 Share

You are invited to create new articles, add new sections to this article, raise questions or comments on the discussion page or project/portal Forum page, or send feedback by email to

With the rise of large commercial urban centers, the principle instrument for development shifted from physical matter to social institution -- from arable land to money. Money has been the single greatest organizational invention of the past five thousand years. The emergence of money as a preeminent social institution vividly illustrates the central role of organization in the process of social development.

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.

Money had a transforming effect on society equivalent in magnitude to that brought about by the emergence of urban communities. It helped liberate society from the strict confines of the land and the retarding influences of tradition, spurring the evolution from the physical to the vital stage of social development. Before money, land was the principle productive resource and source of wealth. Those who controlled the land controlled the wealth of society. The hereditary transmission of property rights during the feudal period left little incentive for individual initiative and little room for individual advancement. During the Middle Ages, European society actually reverted for a time to barter before money returned and gained ascendance. The return of money and the rise of commerce in European society coincided with the demise of the agrarian based feudal system. Money gradually replaced heredity not only as a source of wealth, but as a source of social power and privilege as well. The moneyed commercial classes became increasingly influential, creating the backdrop for the emergence of democratic values and forms of government a few centuries later. Money freed the individual from servitude to the soil. A person could earn money and use it to purchase whatever was required for personal sustenance and also utilize it as capital to earn a living. It impersonalized and democratized transactions, empowering the possessor with economic voting power that drastically reduced discrimination based on class and status. Money increased the individual’s freedom of choice and gave greater scope for the development of individual talents and potentials.

Social organizations that spur development at one stage tend to ossify and die out later on, as hunting tribes, guilds, East India companies and colonial empires, feudal and monarchical institutions have in the past. Some institutions exhibit the capacity to evolve along with society, adapting and changing to match the character of the times. Money has exhibited this capacity to evolve with the times. Sharing the characteristics of this physical stage of development, early money was itself a physical commodity, grain, gold or silver. Only gradually did representative forms of money appear, but these too were full-bodied commodity money, convertible at any time into the commodity that they represented. During the vital stage, more symbolic forms of money such as certificates of deposit, bank notes, checks, letters of credit, bonds and other forms of negotiable securities came into prominence. The complete separation of money from its physical roots came at a much later stage of social development with the appearance of fiat money that does not have a commodity value and cannot be redeemed for a commodity.

Money as an Organization

Money plays a crucial role in development. Money is the product of organization. In earlier societies, land was the principal form of wealth. The productivity of the land was the primary resource for development and that productivity depended on the organization of society for agricultural production. The growth of commerce depended on creation of more liquid forms of wealth that could be moved and traded for precious goods. Money replaced land as the principal form of wealth. But money by itself has no inherent value and cannot produce or develop anything. Money depends for its productive power on organization. The creation and operation of a money economy depended from the beginning upon the establishment of governmental organizations that could issue new forms of money, financial organizations that would honor, store and transfer it, and commercial organizations that would accept it in exchange for goods and services.

Money not only depends on organization; it is itself an organization. Money is a commodity such as gold or an officially issued coin or paper note that is legally established as an exchangeable equivalent of other commodities and is used as a measure of their comparative values on the market. It is an abstract unit of account in terms of which the value of goods, services and obligations can be measured. The systems of exchange, valuation, issuance and conversion of one form of money into another constitute elements of that organization. The value of money depends directly on the level of this organization. The more developed it becomes, the greater the productive power of money.

Money is often regarded as a unique social institution, but actually it derives its productive power from characteristics, which it shares in common with other forms of social organization. Like other organizations, the development of money has occurred on the foundation of four types of organized infrastructures. In early times, a physical infrastructure of towns, ports, and roads provided the necessary conditions to stimulate the growth of commercial transactions based on money. A social infrastructure was also necessary to support the evolution of money from a commodity into a symbol. An essential requirement was for a stable government to issue and redeem the symbol for the underlying commodity. The development of money coincided with the emergence of nation states that possessed the stability and continuity necessary to stand surety for symbolic forms of money. In addition, the development of banking, stock exchanges, legislative, judicial and administrative infrastructures became essential supports for the growing use of money. In modern times, the role of money has been expanded enormously by the development of complex mental infrastructures consisting of an intricate web of technology, organization and information. Systems for international banking, telecommunications, and computerized financial transactions serve as essential infrastructure for the rapid movement of money around the world.

The emergence of money also required the development of a sophisticated psychological infrastructure in society. The progression from physical to symbolic forms of money involved a huge leap of faith for early physical man still struggling, against the direct evidence of his senses, with the concept that a round earth revolved around the sun. It must have required an irresistible urge for accomplishment and great spirit of adventure to forego the security of pure commodity money for pieces of paper and promises of redemption. The magnitude of that psychological leap is evidenced by the persistent preference of some Asian populations today for the certitude of gold in an age where much higher returns and greater security are offered by symbolic forms of money. The development of money required that people accept record keeping and systematic functioning as a way of life and have sufficient trust to deposit their funds with others. Money has long since passed from the stage of organization to that of an ubiquitous global, social institution that derives support from many organizations but does not depend on any for its existence.

As an organization, the power of money is based on authority. The value and productive power of money depends directly on the perceived strength of the issuing government and the authority conceded to it by the population. This authority has an economic aspect, its capacity to maintain fiscal discipline, to collect taxes, to prevent counterfeiting. It also has a wider political and social aspect. The value of money issued depends on the perceived strength and stability of the government, the military strength and stability of the country and its relationship with other nations, and its capacity to enforce rule of law among its citizens. Authority and trust are complementary forces. Ultimately the strength of a currency depends on the extent to which it gains the trust and confidence of society, which today means the global financial community. Remove this trust and confidence, as occurred during the US banking crisis of the Great Depression or during the recent financial crisis in Asia, and the entire monetary system is threatened with collapse. The ultimate foundation that gives force and effectiveness to this greatest of social institutions is not hard-core physical assets but an intangible human value.

As an organization, money also derives power from the systems of which it is constituted and through which it acts. The value and productivity of money is directly proportionate to the quality of systems for minting, storage, accounting, transfer, exchange, savings, borrowing, investment, credit and information flows. It is indirectly proportionate to systems for administrative decision-making and enforcement, trade, manufacturing, R&D, transport, telecommunications, education and training. The productivity of money depends upon the velocity with which it circulates through these systems. Each system contributes directly or indirectly to determine the overall speed of circulation, which increases with each advance in social development. The establishment of a sophisticated global communications system now enables hundreds of billions of dollars to flow back and forth around the world on a daily basis in search of higher rates of return.

Organizations derive their power from the complexity of the activities to which they relate and the breadth of activities with which they are integrated. As the complexity of the interconnections between the synaptic junctions in the human brain determines the degree of intellectual capacity, the intricate interrelations forged between activities determine the degree of social development. Money has a powerful catalytic effect on development arising from its capacity to relate to, integrate with and energize virtually every other activity in society. Not only every variety of product and service, but also every variety of social activity has come to be valued in monetary terms. Late during the monarchical period, aristocratic titles became available to wealthy merchants for a price. Education, the traditional mark of the nobility, opened up to all with the money to acquire it. Marriage, civil claims and personal injury suits, civil and criminal judgments, tithes for religious salvation, political election and appointment, copyrights, patents, knowledge, information and even artistic inspiration have been translated into monetary terms and stimulated in their own development by the development of money. Although this characteristic of complexity and integration is most apparent with regard to money, every social institution has a similar type of impact on existing social activities. Thus, the creation of a national organization of highways or a national system of education promotes national defense, agriculture, industry, trade, tourism, recreation, education, immigration, publishing, and so forth.

The ultimate determinants of the power of social organization are the values of society. The institution of money has been so deeply accepted and internalized by every society in modern times that it would appear to have assumed the status of an ultimate value in itself. The constitutional and legal framework of the nation state provides protection for all types of property rights. Monetary incentives are utilized everywhere to encourage higher levels of individual productivity and group performance. Brushing aside hereditary claims for social status, society accords the greatest respect to those individuals, organizations and nations that have amassed the most wealth. But this apparent preeminence of the money value is misleading. The remarkable creativity and productivity of money is itself based on a bedrock of other social values without which it could not produce anything of worth. The value of money depends directly on all the values that support its functioning as an organization. These include physical values such as accuracy, orderliness, punctuality, regularity and efficiency; organizational values such as discipline, standardization, systematic functioning, communication, coordination and integration; and psychological values such as trust, integrity, harmony and creativity. Take away these intangible but priceless social accomplishments and the value of money quickly vanishes into obscure symbolism. Money is a tremendously productive social organization, but like every social organization it depends on an incorporeal human foundation for its existence.

The ultimate foundation for the value of money is not material wealth but the value of human beings. Money has grown in its power and productivity not because society has accorded it ultimate value, but because it has become an instrument and medium for fulfilling human aspirations and elevating people. The more society has come to recognize the inherent value and potential of the human being, the more productive the individual, society and money have become. Money has served as a symbol of the infinite potential for human accomplishment. As such it has released enormous energy, creativity and initiative in society. But the ultimate source of that unlimited creative energy is the individual and the society, not money.

Ad blocker interference detected!

Wikia is a free-to-use site that makes money from advertising. We have a modified experience for viewers using ad blockers

Wikia is not accessible if you’ve made further modifications. Remove the custom ad blocker rule(s) and the page will load as expected.

Also on Fandom

Random Wiki