Historic Barter
Traditional barter was the precursor of both fiat and commodity backed money and involved the direct exchange of goods or services for one another.
Aside from the obvious issue of fair trade (ensuring that the items being swapped both have the same value), barter has other problems such timing restraints and quantity restrictions. If you wish to trade corn for fish you can only do this if corn is in season. If you wish to trade a tonne of corn for a tonne of fish you have to ensure that you need a tonne of fish before you carry out the trade.
If the trade takes place now when corn is not readily available, or you are unable to use all of the fish now, then an “IOU” or intermediary resource is needed. This intermediate commodity can then be used to buy fish when they are needed. Thus the use of money makes all commodities become more liquid. When such an intermediary is introduced this becomes the basis of a commodity currency – money backed by a multilateral barter agreement between all participants.
Examples of early currency of a similar type appear throughout history:
- In ancient China tea leaves were compressed into “bricks”
- In medieval times Iraqis used bread
- At various stages in history Russians used compressed cheese
- Through the colonial era when gold was rare commodity money was present in the form of gunpowder, musket balls, corn and hemp.
- The East African Masai used a currency made of miniature iron spears fastened together in the form of a necklace
- Today, cigarettes are seen traded in prisons and social-settings whilst in the remote parts of Columbia coca (or cocaine) is used in lieu of a nationally issued currency.
Since payment by commodity generally provides a useful good, commodity money is similar to barter, but is distinguishable from it in having a single recognized unit of exchange.
Each of these items was desirable in their own right and was inter-tradable with other items which the holder of the currency might desire to acquire.
One of the (many) stumbling blocks of this type of money is that not everyone in the community may desire the resource.
Imagine, for a moment, trying to read a financial statement that had listed assets such as: cash $5,000; 14 boxes of oranges; 25 boxes of apples; 1000 board feet of lumber; 3 acres of land; and, 8 machines. A first question that might pop into your mind is: “How in the world do I add these assets into one another?”
It is immediately clear that for financial statements to be meaningful, amounts of dissimilar items must be stated in similar units. Money becomes the obvious choice of “similar units”. By converting
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