History of Barter

The History of Barter

Throughout the centuries, money has become more abstract. This evolution has carried us from a direct, personal trade of goods and services to an abstract system which is far removed from its roots. This chapter will show those changes -- and their dangers.

Bartering is in its third cycle in the United States. Before we go back to the beginning of money, let's look briefly at the history of money in the U.S. (More details are given later in the chapter.)

The colonial era. During the 17th and 18th centuries, money was scarce, so the colonists relied primarily on bartering, with commodities such as beaver pelts, corn, musket balls, nails, tobacco, and deer skins (from which we get our modern slang, "buck," meaning "dollar"). Colonists also used the money of other cultures -- the Native Americans' wampum, (which consisted of beads made from shells), and the coins of foreign countries.
The Great Depression. During the1930s, money was scarce. People established barter groups like The Unemployed Citizens League of Denver (with 34,000 members) and the National Development Association.
The early 1980s. During a long recession, bartering regained popularity; it was featured in many magazine articles and many new books. Hundreds of barter clubs were created throughout the nation. More companies learned about the the advertising industry's "trade-outs," and international commerce's "countertrade," and the other possibilities for bartering in business.

The history of money -- step by step. Please note the theme of this story: as our money has evolved, it has become increasingly abstracted from a basis in the tangible value of usable goods and services.

Direct barter. In the beginning of mankind, there was, obviously, no money. People traded items which had a practical value: food items (e.g., cattle, fishes), decorative items (e.g., gold, shells), apparel (e.g., furs, cloth), tools, weapons, etc. However, in direct trades, both parties must have what the other person wants. For example, the cavewoman possessed blackberries, which the caveman craved, and he had the arrowheads which she needed. However, if he wanted berries, but she didn't want his arrowheads, then no trade could occur.
"Media of value." For example, a man might have traded his handcrafted spear for a pile of corn (even though he didn't like corn) just because he knew that he could then trade the corn to a woman for some animal skins (which he wanted). These trades were a step toward the idea of abstract money; the objects weren't valued for themselves, but for what they could get.
Standard media of value. Gradually, particular commodities began to be treated as the standards against which we would determine the value of other items; for example, there might have been a "wampum standard" (analogous to a "gold standard" in modern society). To help people to understand this abstraction of value, these early forms of money were practical items; for example, the gold could be used either as a medium of exchange or it could be melted into jewelry. We can still see this type of correlation, in our terminology:

Salary. This word originates in the Latin word, "sal," from which we derive the words "salt" and "salary." Salt was used to pay the wages of Roman soldiers; today, we might say that an employee is "not worth his salt."
Pecuniary. This word originates in the word, "pekus," which refers to oxen. (Webster's Dictionary defines "pecuniary" as "taking the form of or consisting of money." )
Capital. This word originates in a word which means "cattle." (We have the same derivation for the word "chattel," which refers generally to personal property.)
Wealth. In the Chinese language, almost every word related to "wealth" is a sign for a shell (which has been form of money in many societies).

Metal as a standard of value. Metal was more practical than other forms of primitive money: it had a practical value (for use in jewelry, etc.); it was small enough to transport in one's pocket (unlike, say, an equally valuable horse); it did not die like cattle; it was durable (i.e., it did not decay or break). By 2500 BC, the Egyptians were "spending" copper rings like money; Babylonia had a well-developed barter system based on barley and uncoined silver hundreds of years before coins were adopted.
Metal in early coins. Unfortunately, gold dust, gold objects, and other metals had to be weighed each time they were "spent." To avoid that task, people began to shape the metals into standardized sizes to establish fixed values; this was the beginning of the use of coins. However, people were unaccustomed to coins, so some of them were given names and shapes which referred directly to tangible objects:

The names of coins. For example, even today, we refer to the weight of the metal in words such as lira, ruble, shekel, drachma, mark, and pound; the "pound" was originally worth one pound of sterling silver.
The shapes of coins. For example, the ancient Egyptians traded with sheep; therefore, when they began to use gold as money, they fashioned the gold into the shape of small sheep. In China, the people had been using metal tools as standards of exchange; eventually, they started to make miniaturized bronze tools to be used as a type of coin.

Standardization of coins. Coins were probably invented independently in China, India, and in a nation called Lydia, which is now a part of Turkey. Around 600 BC, those Lydian coins were bean-shaped nuggets made of a mixture of silver and gold; a stamped design on the coins indicated that they were, indeed, coins of uniform size. No longer did people in that country have to weigh their metals to determine the value. When other nations heard about this new standard for commerce, they developed coins of their own -- like the early Roman coins, which were made of silver, copper, or gold. Although coins were an abstraction of value, the metal still had a practical value of its own; for example, the gold coins could be melted down and made into a necklace. However, the abstraction of value permitted abuse: when people became accustomed to using coins, the kings who owned the mints began to reduce the proportion of precious metal in each coin. This trick, known as "debasement," would create more money for the king by putting more coins into circulation -- but it would reduce the coins' value and cause inflation. (In a "standard" coin, the face value of the coin is worth as much as the metal in it; in a ''token" coin, the metal is worth less than the face value. The U.S., and most other modern countries, issue nothing but token coins. An estimate in the mid-1970s said that the raw materials in a U.S. quarter were worth only half a cent.)
Paper money. In a huge leap toward the further abstraction of money, paper money was introduced in China around 600 AD. Marco Polo, who visited China in the 1200s, explained, apparently with a feeling of awe, "All [the Chinese emperor's] subjects receive [paper money] without hesitation because, wherever their business may call them, they can dispose of it again in the purchase of merchandise they may require."
Goldsmith's receipts. Despite Marco Polo's discovery of paper money in China, Europeans did not immediately embrace the concept. Not until the 1600s did they begin to use a simple form of paper money. During that century, many London merchants would deposit their gold in the secure storage rooms of the city's goldsmiths for safekeeping; the goldsmiths would give receipts for the deposits. As more goldsmiths began to issue these paper receipts, it became possible to take a receipt to any smith and cash it in, even if this smith wasn't the smith who originally wrote the receipt. Eventually, people were using the receipts among themselves, trading them for goods and services. People grew accustomed to this paper currency, and they began to trust its value. However, this is not much of an abstraction, because the receipts could be cashed in for gold, which had a "real" value.
Fractional reserves. The goldsmiths (like modern-day bankers) began to lend their depositors' gold. This lending had implications: At any one time, there would not be enough gold to cover all of those deposit slips. (A smith might keep only a tiny percentage of the metal in stock at any moment.) If all of the depositors had wanted to take out their gold at once, a smith would have been unable to comply. Thus, the slips were not worth the gold which they represented; they were worth only as much as the smith's promise to redeem them -- but that promise could not be honored if too many withdrawals occurred at once.
Fiat currency. Eventually paper money became popular, and so it was printed by governments -- but the money was usually not "backed" by anything tangible (like the gold in a goldsmith's vault). In the colonial United States, this "fiat" (unbacked) currency was printed freely by the federal government -- and it was also printed legally by states (such as New Jersey with its 15-shilling notes) and by individuals (such as Ben Franklin). Because the paper money had no basis in real value, inflation occurred to the point where the money was worthless. After that bad experience, the U.S. government stopped printing paper money. People returned to barter (and to banks' promissory notes); in fact, the 1810 census showed that the average income of U.S. citizens was only $2 per person. In the 1860s, the U.S. began to print money again, to pay for the Civil War; however, by the end of the war, this fiat currency had inflated such that $300 in paper money was worth only about $100. Not trusting this currency, many people hoarded their coins -- and they bartered. By 1880, the U.S. made a step backward toward a stable economy, by backing its currency with gold (and allowing people to cash in their currency for that gold). The monetary system returned to a foundation on the real substance of gold, rather than on the empty metaphor of a fiat paper note.
The end of the gold standard. During World War I, the U.S. government abandoned its gold standard, in order to pay for the war with unbacked money. Inflation went wild with all prices (except for the fixed price of gold). In 1933 the "gold standard" was officially killed in the U.S.; the government stopped minting gold coins, and people could no longer own that metal except in jewelry and coin collections. Production of silver dollars ceased two years later. Later, during the second World War, many national governments were supplementing their gold holdings with U.S. dollars; ironically, at a time when the dollar had lost its gold backing and was being crippled by the inflation of the wartime economy, other nations were turning to it for stability. The story of money's evolution suddenly became more serious, as those nations based their economies on a dollar which was not solidly based itself. Eventually the dollars overseas were worth more than all of the gold in our treasury. Like depositors who are afraid their bank might fail, some of those nations in the late 1950s began to trade in their dollar reserves for gold. This was a step backward toward a reliance upon gold instead of the paper symbol. As huge amounts of gold were traded away from U.S. reserves, some U.S. economists began to worry about this loss. The private gold market price rose above the "official" price of $35 per ounce. (Silver was in trouble, too; the silver content of coins became worth more than the coins themselves, so the U.S. Treasury stopped minting silver coins in 1965.) As the private market price of gold continued to elevate, more countries demanded gold in exchange for the U.S. dollars which they had hoarded. Finally, in 1971, U.S. President Richard Nixon said that the dollar could no longer be redeemed for gold. Since that time, the dollar has been "an I.O.U. nothing" (according to former Federal Reserve Bank vice president John Exter). Or, as writer George Simpson said, "The whole system is based more or less on confidence in the stability and economic strength of the U.S.A. and the Treasury's ability to come up with the cash. If all together, we decided to convert our savings and checking accounts into money, the whole system would come tumbling down and everyone would be broke." However, there is one bright spot: The U.S. government legalized the private ownership of gold in the mid-1970s, allowing citizens to possess a time-tested medium of value and exchange.
Electronic money. Now, much of our money is so abstract that its only physical reality is in the form of electrons -- in the electronic processes of our online banking, credit cards, internet commerce, automatic teller machines, electronic funds transfers, etc.