Red-Blooded Risk: The Secret History of Wall Street

What Money Does

Getting back to the Stone Age, the low quality of available money is a severe restriction on specialization. Households or small groups have to make almost all essentials for themselves. No one can afford to devote all his resources to, say, making pottery, because he can't count on buying all the materials he needs or on selling the pots for all the necessities of life. One villager might devote a portion of his time to making pots—doing all aspects of the job from gathering materials to decorating the final product—without a large investment in specialized equipment. He might trade pots for stone axes, tanned leather, wooden beams, and other useful things produced by other part-time specialists. But no one will develop the expertise of the true professional, and no activity will capture the full economy of large-scale production. Exchange will remain a small part of total economic activity.

This point is commonly made in economics texts. But there is an even more important one that is usually missed. Without good money there will be far less innovation—not because people don't have the resources to devote to research, but because risk cannot be managed. Money does not just make exchange and specialization easier; it makes constraints and goals the same. Our Neolithic potter's constraints were the amount of available resources, including time, clay, paint, tools, and devices for shaping and firing pots. His goal was to increase his household's consumption and capital ...