The Necessity of A Monetary Medium

It is tempting to linger over descriptive accounts of barter economies. However, our main interest in the barter or 'swapping' system is to examine its six main disadvantages and see how these deficiencies led to a monetary economy (see Table 15.1).

There are some situations where it would be possible to manage without money in the usual sense of the term. Money may be defined as anything that is legally acceptable as a medium of exchange. In this sense, coins and notes may be regarded as money, but checks are not money. They only claim money that is in the bank. The check itself is neither legal tender in a full sense, as is the case with notes (where they may be used for payment up to any amount), nor in a limited sense, as are coins (where they are only legal forms of payment for limited amounts).

Table 15.1 The need for a monetary system

The Difficulties of Managing Without Money

It is feasible to imagine a society managing without a medium of exchange, although the inhabitants would require a legal yardstick, or units of account, such as the pound sterling or the dollar. There are at least three ways in which society could manage without money as a medium of exchange:

The Origin of Money

Primitive forms of money began to emerge as the number of goods available for barter increased, but it was the development of a society based upon specialization or the division of labour that gave rise to the use of money on a large scale. Adam Smith saw this clearly in The Wealth of Nations, where he stated:

Every prudent man in every period of society. after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner as to have at all times by him... a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry.

But even before industrialization, money became the essential instrument and key invention of commerce. Sir Geoffrey Crowther, in An Outline of Money (Nelson), contends:

Money is one of the most fundamental of all Man's inventions. Every branch of knowledge has its fundamental discovery. In mechanics, it is the wheel, in science fire, in politics the vote. Similarly, in economics, in the whole commercial side of Man's social existence, money is the essential invention on which all the rest is based.

A relatively simple barter system, with 100 goods supplied and demanded, would require the retention of nearly 5000 relative values. The limitations of the human mind make the retention of thousands of relative values impossible, so without the use of money, trade on a large scale would not be possible. How would a potential trader decide the terms of exchange even assuming that A had a surplus of what B required and B's surplus suited A? An enormous amount of time wasted in haggling would still make it difficult to ascertain the value of a sheep in terms of the salt. The person who wished to exchange 'valuable' economic goods would be especially hindered by a system of barter.