So you’ve created a fictional world, complete with countries, regions, cultures, and peoples. Now you’re writing a scene in which your characters are in a market, buying some magical artifacts. They ask the price of the artifact, and the proprietor of the shop says “certainly, that’ll be 1,000 ___…” Uh oh. You forgot to create a currency for your fictional world. You try to think of a fancy name on the spot, like the drachma, ziggurat, kelsak, or quirmdraggle. Should you make the coins triangular, rhomboid, or just boring old circles? What metal are the coins made of? Are they even metal? You've read The Way of Kings and you kind of like Brandon Sanderson’s currency made of glass-coated gemstone chips…but is that realistic?
Well, we at World Builders Anonymous are here to help. Here’s everything you need to know about money and currency…well, at least enough to write your first draft.
What is money? It seems like a basic question, but you’d be surprised how many people don’t quite understand exactly what this thing called money actually is.
Money is a means of exchange. That’s it. It doesn’t have to be metal or paper. At certain times in history, things like tobacco, grain, shells, and even whiskey have served as monies. Money is something people want to obtain not for its own direct use, but rather its indirect use in another exchange later on down the line. For example, you don’t accept dollar bills in exchange for something you sell because you want to stuff your jacket with the paper as insulation. Rather, you want the dollar bills because you know other people will accept them in exchange for other things you want.
In economic terms, this is called indirect exchange. This is a highly useful economic phenomenon that serves many purposes, perhaps most notably in solving a problem economists call the double coincidence of wants. For example, say you need some shoes. In a society without money, you’d have to trade the cobbler something they value more than the pair of shoes they’ve made. But let’s say the cobbler wants something that you don’t have, something like a kangaroo. How are you supposed to get a kangaroo in order to trade it for some shoes? Well, you have to go to the kangaroo rancher and trade him something he wants. You can see how this would get very complicated and time consuming very quickly. Complex economies and lengthy capital structures are all but impossible in this sort of direct exchange system.
That’s where money comes in. Money originates when people realize that a certain commodity, which is already in some demand for its direct use, is valued very highly. “already in some demand for its direct use” is an important statement there. Imagine you suddenly decided that a pretty rock you found on the ground is now this magical thing you have decided to call “money.” You take your pretty rock to the store and offer it in exchange for a loaf of bread. Well, the shopkeeper doesn’t see money in your hand; they see a pretty rock. Perhaps its beauty has some small value to them, but certainly not enough to give up a loaf of bread they could sell for something actually useful. This is why monetary commodities tend to be things that have already been in demand for their own practical use, like gold in its use in jewelry/industrial applications. A commodity turns into money when people start to demand this commodity in exchange for other goods instead of its own direct use because they know that this commodity will be reliably in demand by other people with whom they wish to trade. Historically, as mentioned above, this has happened with all sorts of commodities, but none so frequently as precious metals like gold and silver.
Why do these materials make such good monies that they have tended to win out over all other goods?
Well, that leads us to one of the main questions we must ask ourselves when creating a currency for our fictional world: what makes a good money?
There are several properties that an optimally useful monetary commodity must possess.
Divisibility/Homogeneity - The commodity must be relatively easily divisible, and very similar to other units of the commodity. It’s pretty hard to make change when trading a cow for a cart. Neither of those things maintains its utility very well when divided into smaller parts. Likewise, each part of a cow or a tractor, even if you did split them up, would be very different from the other parts, and probably wouldn’t be regarded as similar to the other parts by a trader. Cows in particular are all very different from one another, and one cow certainly isn’t guaranteed to be as valuable as any other cow. Gold and silver are great in both of these aspects; they are easily divisible, or able to be cast/pressed into different shapes or sizes. Any given unit of these metals, or their alloys, is practically the same as any other unit of a given purity.
Portability - Money must be portable. We see again why cows don’t make great money. Sure, they can walk, but they certainly can’t fit in your pocket, and they generally require a specialized laborer to move them from one place to another. You may have heard of this sort of laborer, colloquially referred to as a “cowboy.” Gold and silver are pretty good on this front. Sure, gold in particular is a pretty heavy metal, but generally, the quantity is so small that weight doesn’t factor into the equation. This brings us to…
Scarcity - This may seem counterintuitive. Money must be scarce. Not so scarce that it’s hard to come by of course, but scare enough to carry a decent amount of value in a small, portable package. Pebbles, for instance, are extremely easy to come by. One could easily become a pebble millionaire by simply going into the back yard and sifting dirt. But because pebbles are uber-abundant, anyone else could easily do the same thing, and then why would they want to accept even more pebbles in exchange for much scarcer goods, like playstations, cars, or even swords? You’d need so many pebbles to pay for even a loaf of bread that you’d have to carry them in a dump truck or three. This is precisely what happened in places like Germany, Zimbabwe, and Venezuela with their actual currencies at various periods of hyperinflation. But because precious metals are a relatively scarce resource, requiring an arduous mining process to obtain (for the most part), it maintains a relatively high value in small amounts that are easily tradable and usable. This is one of the criteria that metals like iron do not meet. Iron is far too abundant to be a practical monetary metal.
Durability - In order to best function as money, a commodity must last long enough in a usable form to be saved for future trades. This is why thing like metals, dry goods, alcohol, and shells have become forms of money over the ages. This is another criteria that iron does not meet, as it is far more perishable and prone to corrosion and rust than gold, which essentially never corrodes and retains its form for hundreds or even thousands of years. However, you might point out that gold is a relatively soft metal, prone to more damage and wear than other, harder metals. This is true, and is the reason why gold coins were often made of gold alloys, mixtures with other metals, rather than pure gold.
Distinct appearance/qualities - Gold, and to a lesser extent silver, has a distinct appearance that is very difficult to replicate. With all metals or alloys of a given purity, the density of the material is a widely known constant, making it possible to check the purity by weighing the metal. This is why scales were often used in pre-industrial settings to check the quantity of money in large exchanges. It is very easy to check if coins of a given size are made of gold or some other material that has been simply coated in gold.
With this in mind, why might something like diamonds make for a pretty ineffective money? Well, they’re certainly scarce enough to be valuable in small, portable quantities (though not as scarce as you might think…but that’s a story for another time). They’re also possibly the most durable things in nature. However, they fail on several other fronts. They vary quite widely in quality and appearance, and are one of the hardest things in nature to divide into smaller parts.
So if you’re thinking about making a wholly unique currency for your world, ask yourself how it stacks up to the criteria mentioned above. It might be ok if it fails some of them, particularly if it is a time of upheaval and instability. In such times, precious metals are sometimes scarce and other less ideal commodities are used as money. Honestly though, if your story is taking place in a stable empire, kingdom, or other large, relativley stable society…if you’re realistic, they’re probably just going to use good old gold, silver, and maybe copper/bronze coinage.
That’s all for now. Maybe some day I’ll write a part two, which would of course have to deal with what happens when governments get their hands on money. Coin clipping, practiced by kings and emperors since time immemorial, inflation, fiat currency, bimetalism with fixed exchange rates; there are a wide variety of fascinating topics to deal with when you enter more complex economies with centralized states that inevitably take over the money supply and invariably manipulate for their own interest.