The history of money
Before the invention of money or before money came into existence, trading was done by a complex system called the Barter Trade (Trade by Barter). Under the barter trade system, goods were directly exchanged with other goods. So for example, if you needed tomatoes and you had onions, you had to look for someone who not only needed onions but had tomatoes so that you two could make the exchange. This was how complex trade by barter was. The problem of looking for someone who had what you wanted and wanted what you had is what is referred to as the “double coincidence of wants”. This was indeed a very big problem that the people of the olden days had to live with on a daily basis.
Problems of trade by barter
- The problem of double coincidence of wants: The biggest problem associated with trade by barter was that exchange could only take place when one party had the same thing the other party wanted, and vice versa. For example, if two people, Tom and John want to make an exchange, then Tom must have something that John wants and John must have something that Tom wants. But the moment Tom doesn’t have what John wants then exchange can never take place. That is how barter works. With barter, it is always difficult for the double of wants to coincide, thereby making trading extremely difficult and sometimes impossible.
- The problem of wealth storage: The problem of storing one’s wealth was also another major problem people faced under the barter system. Under the barter system, it was very difficult for one to store his or her wealth simply because of the fact that most of the commodities involved in trading are perishable. For example, animals cannot be stored for a long time since they can die. Fruits and vegetables such as tomatoes, cabbages, oranges, etc cannot also be stored for a very long time since they are highly perishable and can go bad easily. This made it quite difficult storing and accumulating wealth.
- Difficulty of divisibility: Because of the indivisibility of some commodities, trading was often extremely difficult under the barter system. For example, if John has a bottle of wine and wants a pound of meat from Tom who has an indivisible commodity like a cow, it will of course be very difficult for trading to occur since Tom is going to find it extremely difficult or rather impossible to divide his cow into smaller pieces in order to exchange a piece with John’s bottle of wine. The only way he can do that is by slaughtering his cow, which is a very unreasonable thing to do considering the fact that having given John a small piece of the meat in exchange for the bottle of wine, the rest of the cow will be wasted.
- The problem of evaluating commodities being exchanged: Another big problem associated with barter is the common problem of coming to an agreement over the exchange value. Before the advent of money, the people of the olden days always found it problematic agreeing on exactly how much or how many of a particular commodity should be exchanged for another commodity. For example, how many baskets of tomatoes should be exchanged for a cow? Do you see the problem here?
- The problem of transporting one’s wealth: Because of the heavy and bulky nature of commodities, our ancestors always found it extremely difficult transporting their wealth from one place to another – especially in cases when they had to travel long distances. How does one carry bags of maize, millet, etc in addition to livestock and other perishable items during a long journey? It can be really difficult.
In addition to all the things mentioned above, trade by barter wasted a lot of time since before you could trade, you needed to not only find someone who wanted what you had but who also had what you wanted. Life was indeed quite difficult in the olden days in terms of trading.
Fortunately for the world, money was eventually invented to solve the problems of barter trade. But really, what is money? And how has money solved the problems of trade by barter?
What is money?
Money can be simply defined as anything that is generally acceptable by the people of a society in payment for goods and services bought or in settlement of debts. Simply put, anything that is generally acceptable as a means of exchange is money.
The most important requirement for something to have in order to qualify as money is that it should be generally acceptable. This means that no matter how precious or valuable a thing is, if it is not generally acceptable by the people of a community as a means of exchange, then we cannot consider that thing to be money.
Why money was invented
In order to surmount all the problems associated with trade by barter a range of valuable objects were introduced to be used as a means of exchange. Some of these objects included beads, cowries, skin hides, etc. These objects worked quite well as money since their preciousness and scarcity made many people willingly accept them in exchange for whatever item they had. But gradually because of their problems with portability, divisibility, portability, etc some of these items were abandoned for precious metals such as silver and gold. These precious metals were more convenient to use to effect correct payment than items such as skin hides or even beads because they possessed one of the most important qualities of good money which is scarcity. But even these precious metals were soon abandoned for proper money (coins). Precious metals had to be abandoned since trading with them required traders to constantly carry scales to weigh the metals in order to effect correct payment.
How money solved problems of barter trade
The introduction of money solved the following major problems of barter trade:
- Money solves the problem of double coincidence of wants: Since money is generally accepted as a medium of exchange, anybody is willing to accept money in exchange of goods. As a result of this, you don’t need to find someone who has what you want and who wants what you have in order to make an exchange.
- Money solves the problem of indivisibility: Since money is divisible and has several denominations, the problem of indivisibility which plagued the trade by barter system exists no more.
- Money solves the problem of transporting wealth: Since money is extremely portable, it solves the problem of transporting one’s wealth. This means that a person can convert all his or her wealth into money and easily transport it from one place to another.
- Money solves the problem of saving: Since money is not perishable or very bulky, it is very easy for one to save or store his or her wealth for future use.
Besides all the things mentioned above, money also makes it extremely easier and less time consuming when engaging in trade with others.
myvenn (author) from Ghana on December 06, 2015:
Thanks. And yes money is the root of all evil yet it solves a lot of problems!!!
Reynold Jay from Saginaw, Michigan on December 06, 2015:
I like money. Yep-- it solves a lot of problems. Well done