Money is an agreed upon, identifiable object of value that acts as a medium of exchange. It’s invaluable for people seeking to exchange goods, services, debts, gifts, and trades. Before money, bartering products and services served as a necessary substitute. Thus, an ancient barter might involve one milk-producing goat for ten animal skins. So how did society move beyond bartering to embrace the Federal Reserve and traditional banks? Listed below are some of the issues that bartering presents:
No Coincidence of Wants
The development of money became necessary when humans evolved as a society and began consuming a wider variety of goods and services. However, bartering goods always tended to create intractable problems. Buyers and sellers did not always agree on the values of their products- one man might think a milking goat was as good as a lifetime of animal skins. The man offering animal skins, knowing the intensity of his labor involves smoothing, tanning and curing the animal skins, disagrees. Mistrust between the trading parties might even lead to arguments or worse.
Varying opinion about a product’s value even came to cause wars. For bartering to work, the man with the milking goat must coincidentally need the animal hides offered by the leather vendor. Maybe the man with the goat needs a weapon and not a new outfit. Perhaps the leather salesmen are hungry for a steak – and doesn’t like milk. This dilemma is what William Stanley Jevons named “The coincidence of wants” in his revered work entitled Money and the Mechanism of Exchange.
No Standard Unit of Account
The only way to resolve such disagreements was to create a medium of exchange that represented units of value. Therein lies the birth of money, as an item that could be counted by all parties to have an agreed upon value. Implementing money meant that if the man with the goat wanted to buy some animal hides, he would be required to produce a substantial amount of funds for the animal hides vendor. The animal hides vendor would accept cash and not a goat for payment. The man with the goat would be less likely to become angry since he would have the personal freedom to choose to purchase the animal hides using money or to say “No, thank you.”
Thus, by serving as a standard unit of account, the money helped to measure the values of different goods, easing the ability for trade to commence.
Suppose the animal hides vendor finds out that his hides are as valuable as gold. Unfortunately, he soon realizes that all he has to trade for food is his animal hides. He might consider cutting the animal hide in half, but it will lose much of its utility and worth if he does so. The vendor’s reluctance to cut up his hides creates a hindrance to the growth of trade. By stifling the subdivision of goods, barter economies present a less-than-convenient way to exchange such goods.
Likewise, the production of large goods for bartering is somewhat costly and infeasible. A carpenter who has the technical skill to be a shipbuilder will have little incentive to pursue such a craft in a barter economy. Of course, he would be willing to exchange a seaworthy ship with someone who has enough goods equal to one. However, the shipbuilder is merely in pursuit of the food, clothing, and other products he consumes on a daily basis. This product imbalance makes it very difficult to find a buyer.
A currency system could replace bartering if everyone agreed to a set value. When primitive societies discovered how convenient such a system was, it quickly took hold. Of course, our financial tools have significantly advanced since then. Nonetheless, when the opportunity strikes to change the system for the better presents itself (as with blockchain technology), those who have the will to do so follow.