Before the invention of a medium of exchange (Money), the world had a system called a method of exchange, a system of exchange (Barter). Barter is the oldest method of exchange. In fact, Barter coincided with agriculture stretching as far back as 12,000 years.
Well, what is Barter?
It is a method, by which people would move the value from one person to another. It is still in effect. In barter, you trade commodity with commodity, unlike the monetary system, goods and services with money. It served as a system of exchange for a protracted period of time, basically, up until money was born.
Back in the time, the world had a smaller number of the population, and by the same token, society was small and simple but over time, society became large and complex. With the large society and complexity of it, Barter failed to serve as a system of exchange, hence the birth of Money as the second coming of barter.
As mentioned above, barter is a system of exchange where you directly trade and exchange goods or services for goods or services.
A plain and simple example, If you’ve ever swapped one of your pens with a friend in return for one of their notebook, you have bartered. Bartering is trading services or goods with another person without the involvement of money. This system has undoubtedly been practised since the beginning of the human civilisation. Barter is still in use, but not on a large scale.
This system has been used for millennia since long before the money was invented. It is one of the many long-existing systems. World, today, does not fully rely on it any more yet society does use it once in a while. Recent examples in 1930 during the Great Depression, like in Germany people practised this system due to the hyperinflation.
Over time, society grew bigger and bigger and complex day after day. With a large and complex society, It was not always efficient, effective, possible, practical, and also had no standardized rate of exchange. hence the birth of (Money) Commodity Money.
Apparently, the form of Money has evolved over the millennia — from natural objects (goat, salt) to metallic (gold, silver) to paper to digital versions (debit, credit card).
From Method of exchange/System of trade (The Barter) to (the money) means of exchange, a method of payment, a standard of value, a store of wealth and a unit of account. Difference between Barter and Money; Barter is Method of exchange and Money is Medium of exchange. Period.
Why did Barter fail?
1.Lack of mutual Coincidence of needs:
In Barter, transactions could only occur when two parties wanting to exchange mutual commodities. In the absence of mutual wants, there would be no bartering. In order for Bartering to take place, there should be two parties with mutual needs and wants. That is, Bob must have a thing, Robert needs and vice versa.
2. Divisibility difficulty:
The other obvious difficulty of barter was the divisibility. It is self-evident. Say, if you have a goat and want to trade that goat with 4 kg wheat then obviously, it is too costly to give one goat for 4 kg wheat. Under such circumstances, trade is next to impossible.
3.Lack of a Standard Unit of Account:
The next biggest problem in the barter system was the lack of unit of account. Without a unit of account, Price of no goods and services could be measured and quoted. For instance, two goats for one cow, one horse for two sheep.
A barter economy lacked a standard unit of account in which prices could be measured and quoted. For instance, two sheep for one cow, one horse for two? It does not make any sense, it’s too arbitrary and random.
4. Lack of Store of Value:
Store of value is the big one, In a barter economy, you could only park your value in commodities. Since commodities are soon perishable, they, normally, would not hold up value for a prolonged period of time. With this difficulty, the store of wealth or store of value was exceedingly difficult and without the store of capital, economic progress and human civilisation could not be made.
With these apparent difficulties and issues, an alternative to the barter system, commodity money was introduced.
Supposedly, above 4 difficulties of barter gave birth to Money (Commodity Money). Commodity money is the second coming of the Barter system. It solved all the above issues.
First off, Commodities are any item used and accepted by almost everyone in a society. Few of the earliest forms of commodities included cattle, salt, seashells and so on. Using these items as a medium of exchange eliminated some of the problems of bartering. However, they created problems and difficulties. For instance, they were not portable, durable, fungible and divisible.
Money is anything commonly accepted by people for the exchange of goods and services.
These issues of commodities led to the creation of the coins out of precious metals to use as money. No one knows for sure who first invented such money. but historians believe that metals objects were introduced as money Around 700 B.C., the Lydians were the first to use the coins. The coins were made from electrum, a mixture of silver and gold.
Metallic money is commonly known as gold and silver coins. gold/silver is hands down, durable, divisible, unit of account, and medium of exchange.
But Why and How our ancestors transitioned from Metallic Money to Paper? In the next post.
Thank you
