The Story of Money: From a Barter System to a Money System. - Page 2

Originally Posted by mrsamsonite

I enjoy reading topics on economics. The topic of how barter system economies evolved to money system economies is interesting.

In a barter systems, people exchange goods or services directly for other goods or services that they need or want. When trading in this system people look for others that have a "double coincidence of wants" (you have what the other person wants and the other person has what you want). For example, you have apples and want oranges, the other person has oranges and wants apples. So, you trade apples for oranges, making it a smooth transaction. The problem with a barter system was that you wouldn't always find a person that had a "double coincidence of wants". So, lets go back to the example but, this time you have apples and want oranges and the other person (person "A") has oranges but, want potatoes. In this case you wouldn't be able to trade directly with person "A". You would first have to go to person "B" to buy the potatoes and then go to person "A" to trade the oranges for the potatoes. Sometimes you would have to trade with 3,4,5 or even more people to get the item that you need to trade for the item that you want.

Over time people realized that some goods were more trade-able than other goods. For example, people noticed that salt was trade-able 80% of the time. So, people knew that the majority of the time when they traded with salt they would be able to get what they wanted. People started to buy salt regardless if they needed it or not, because it was highly trade-able. Overtime salt began to be more and more trade-able until it was 100% trade-able. At this time salt was considered to be a currency. A currency can be defined as having all of the following characteristics: 1. a medium of exchange, 2. used to repay debt, 3. used for the purchase of goods and services, 4. and is widely accepted. There has been many types of currencies over the years such as gold, salt, and even cigarettes in prisons.

In addition to salt, gold has been a currency in many places. Instead of carrying around gold everywhere people went, they would store the gold in a secure location and get a voucher saying how much they have. When they would buy something they would go to the storage place and pickup their gold and then transfer it to the sellers storage place. Then the seller would get a new voucher saying what the new amount was in storage. After awhile people would realize that it is easier to just trade the voucher and not move the gold from one storage place to another. So, instead of cashing in the vouchers and moving the gold, people started to just trade vouchers and the vouchers began to function as currency. This would be a paper currency backed by gold. If the backing by the gold is removed then the paper money is then called a fiat currency.

Well that is the condensed version of the story. And it is important to note that governments arent the ones that create currency, it is buyers and sellers that have created currency through the desire to make life easier. It is something that just came about and wasnt planned. Cool topic.

It's indeed a good story. Live and let live.