Money or Barter?

By Derek Beese

What is money? That is a stupid question you might think. Everyone knows what it is. It’s those pieces of paper and those metal coins that we all use to buy what we need or want. Ye-e-es, but what makes that piece of paper whether it is Dollars, Pounds, Euro, Yen or any currency you wish to name, worth anything at all? It is after all just a piece of paper – very pretty but just paper. It has no scarcity value because there are trillions of them all precisely the same and the same thing goes for the coinage.

So, I ask again, what is money? It is important that we understand because we all use it every day!

To explain, the story must start many thousands of years ago, before man invented this thing called money. When early man saw that another man had something that he wanted he had two ways to acquire that thing (say some food). Method one – bash him over the head with a jolly heavy club and steal it, or method two – give him some thing that he will find useful by way of exchange. The latter is the most satisfactory because that way both parties go away happy and there is always the chance to do the same thing again in the future. He has made a friend, not an enemy. The latter method is barter and is where goods of any nature which are of relatively equal value to the owners can be exchanged to the satisfaction of both parties. The goods can also be services, such as: I will dig your vegetable patch if I can have an agreed amount of the veg. grown.

Barter is a very good system for trading and served the people worldwide for a very long time. For thousands of years it was the sole method of doing friendly trade and has survived right into the present time. It is still widely used. For example, two gardeners one of whom grows superb potatoes and the other who grows marvellous soft fruits frequently will exchange produce at harvest time to their mutual benefit. It is also used for much larger transactions.

But – and there is often a ‘but’ – the system has its limitations! As bigger industry developed the exchange items became and frequently are, totally unbalanced. Let’s say that a man who has a thriving business producing garden spades wants to obtain a Jaguar car. Does he go to the car manufacturer and say – your car is worth £40,000 and my spades are worth £1 so I will give you 40,000 spades for one of your cars. I leave you to imagine the answer!

So barter had to be extended somehow and the method developed was to create a middleman who acted as an intermediary to enable the two parties to do the deal. Initially these were business people who would say (in the spades example), “I will take your spades and trade them on to someone else but I cannot pay you for them immediately so I will give you a note promising to pay you at an agreed time in the future”. This middleman had to be someone (or a business) that was trusted by everyone and had total integrity so that other people( in this case the Jaguar manufacturer) would accept his promissory note in payment and was then able to use it himself to pay for goods to carry on his business. This transfer from person to person (or business to business) carried on until the due date for payment when the note was presented to the originating middleman and payment was made, thereby settling the debts of everyone who had traded the note.

Ah, you will say, but what if the middleman had bartered the spades for some other product that the end promissory note holder did not want, – the system would all fall down. Correct. So a product which had universal acceptance and an accepted standard value common to everyone had to be found so that final payment would be in this product and would be accepted by all together with its value. That product was Gold because it was so scarce and everyone valued it, supported by the second most valued metal Silver. The standard unit of gold was subdivided into smaller units which became silver coins and could be passed from person to person very easily.

That is why in the UK the more valuable coins are silver coloured (they are no longer made of pure silver) and in the USA they had the Silver Dollar. The number of silver coins making up the gold basic unit was evaluated by weight, each coin having a precise weight of pure silver depending upon its value. In the UK a one shilling coin was exactly half the weight of a two shilling coin, and if you collected together one pound weight of the silver coins it was worth one gold basic unit. Hence the Pound of Sterling Silver or the Pound Sterling.

The middlemen over time evolved away from dealing in product and dealt only in what had become known as money and became what we now know as Banks. They still perform the same function today and are the organisations that oil the wheels of business. The notes that they issued were centralised in virtually all countries of the world into the nationalized banks of each country. For example look closely at a Bank of England £5 note and it says, Bank of England, I promise to pay the bearer on demand the sum of five pounds. But this is no longer five pounds weight of sterling silver because the link between all currencies of the world and gold was terminated during the World War 2 for very pragmatic reasons. The backing for the promissory note has now become the government of the country issuing that note. So the value of any currency is now wholly dependant upon the financial stability and the integrity of the government of that country.

Now, one other development grew out of the creation of money. It was found that not only was it ideal for settling financial debts but it also created a means of security. If a person or business receiving money could put some of this aside he/she/it had a recognized store of wealth which was acceptable to all people across the globe. This could not be done with barter. Hence money became dual purpose:

To buy things made or produced by others and to settle debts.
To provide security for those who could same some of it and have it available to meet unexpected adversity.

Item 2 is commonly called saving and is something that all people should do, each according to his or her circumstances.