This series of articles intends to discuss the history of money from simple barter systems to modern day fiat currency. This article will discuss barter systems.
Barter Systems
On the nature of money, Aristotle noted that every object has two uses, the first purpose being the original purpose for which the object was designed and the second purpose being selling or bartering the object.
Barter is a system in which goods or services are exchanged directly, without using money. The exchange is immediate (as compared to a gift economy, where items are given without an agreement for immediate or even future exchange) and typically involves two parties, though it may have an intermediary.
Barter systems can be found prior to the development of a monetary system, in parallel to a monetary system (in small quantities) in a developed economy, or during times of economic instability such as hyperinflation. The ability to use a barter system during an economic crises is one of the main benefits of the system, namely, it can be used during times when people cannot simply store enough money in order for a transaction to occur (such as hyperinflation seen in Germany and Zimbabwe). In addition, as barter does not require payment in money, if there are any issues as to the ability of a party in a trade to make a payment in money, a barter transaction could be used. Unfortunately, and unsurprisingly, there are some substantial disadvantages to a barter system.
Using the barter transaction of a car as an example, the following are some of the disadvantages of a barter system:
- Difficultly in storing wealth:
- How can you store 1,000 or 10,000 cars easily and efficiently?
- Indivisibility of goods:
- How can you barter for ¼ of a car? Which ¼ do you exchange for?
- Lack of standards for deferred payments:
- If you are late to deliver your car to a trade, do you owe another car on delivery?
- Absence of any common measure of value :
- Which metrics can you use to decide which car is better? Do the metrics change depending on the individual, or are they an absolute standard?
- The need to have what the other wants and vice versa:
- If you are trading a car for a cow, is there someone that has a cow and wants a car?
While not without their issues, barter systems are still in use even in the modern era. For example, the International Reciprocal Trade Association promotes bartering among companies, and through subsidiary clearinghouse corporations, facilitated over 8.6 million barter transactions in 2013! Even modern financial products such as interest rate or credit derivative swaps are in some ways a barter transaction, as they do imply a direct exchange based on an underlying credit event, or interest rate, although the exchange is typically resolved with money.
The Emergence of Money
Although the deficiencies in a barter transaction may themselves explain the emergence of money, no past or present society has been shown to directly transform from barter to money, or use only a pure barter system without money. As a result, alternatives hypothesis have argued that money emerged as the result of debt being created between parties which required the concept of a future payment of a specific amount of something, such as an IOU (not possible under a barter transaction which requires immediate payment). In future articles, we will discuss the emergence of money in more detail.
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