Do you think that money you use in today’s economy has inherent value?
Confused?
The money derives its value from the nation controlling it and people’s mutual agreement that “This piece of paper holds value and I can buy products or services in exchange for it.” If there were a time machine that could take us back to the pre-historic period where money was not a concept, then people of that time would laugh at us carrying that piece of paper and terming it as junk.
In our last article, we learned the three functions of any currency. In today’s article, we will progress a bit towards the barter system and how money came into the picture.
So what is this Barter system?
Indeed, you must have studied the Barter system in your primary schools but, maybe, the concept might have got rust. Let me help with dusting off the rust.
The barter system is reportedly the earliest form of trading activity among humans. The trading activity was nothing but involved exchanges of goods or services without an intermediary medium of exchange.
Everything was fine until the exchange system was limited to a small community or economy. With growing needs, people started transacting with people far away from their local communities. However, as the needs of people gradually evolved and got bigger, problems in various forms began erupting.
These were the few problems that the people faced during those transactions:
- Double coincidence of wants:
Here is an excerpt of the Wikipedia page that defines it:(Please refer to Wikipedia page if you want to explore more)
The coincidence of wants (often known as double coincidence of wants) is an economic phenomenon where two parties each hold an item the other wants, so they exchange these items directly without any monetary medium. Double coincidence of wants means that both parties have to agree to sell and buy each commodity.
However, I will try to make it easy for you with an example.
Suppose I want to sell a laptop to you in exchange for your motorcycle, and we agreed mutually for that time because our needs matched. Thus the transaction was completed.
Now suppose, I have used motorcycle and I don’t want it anymore, and I want to sell it.
Can I assure myself that I will find a buyer who will need that motorcycle?
Because unless the other buyer’s need is my motorcycle, and my needs match with his supposed selling item, I really cannot make the transaction. There is significant uncertainty in such multiple transactions.
- Transportability:
Similarly, transportability was also a concern. As I mentioned earlier, with time, people started transacting outside their community. So whenever people had to transact multiple items, transportability was the main issue.
How?
Suppose, I want to sell a few bullock carts to you in exchange for your big, heavy machines. It was a hassle for each party to transport such oversized items.
- Divisibility:
As the items were traded, the wholeness of the item without divisibility was problematic. So, it was impossible to exchange in lower denominations.
- Fungibility:
Every item traded in such time was unique and not identical, unlike our Indian rupee or USD. If you have 1 USD and I have 1 USD, it has the same value.
- Durability:
The durability of those traded items was also a concern for the parties. Once the transaction is completed, if something happens to the exchanged product, that item will eventually lose its value because it cannot be used for the transaction.
For now, we will wrap up this article. The following article will explore Primitive money and how the Coinage system came into the picture.
Interesting fact:
In 1642, tobacco was made legal tender in Virginia, and it remained for almost two centuries. But it was not a barter system but a primitive form of money, which we will cover in the next article.
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