When we’re out to buy something, chances are we’ll need to pay for it and that the payment will be done in one of the forms of money. In fact it’s probably quite difficult to get by in the economy without money, as ‘legal tender’ in any of its forms. The convenience afforded by a standardized unit of value as a medium of exchange and the ability to store it is difficult to compete with in our market economy as a means to allocate goods. But something like money which permeates society doesn’t just appear in place overnight, which raises the question how did people do business before the adoption of the economy and where did money even come from?
The most common conception is that before people invent money there was only trade by barter, for example “I’ll give you three pencils for your ruler.” Then eventually someone smartened up and realised instead of going around and looking for people who want something that you have and have something you want, it would be an better idea to trade your goods for something with recognized value such as gold or silver, and eventually this developed into coin money. Even later still, with all this money stored people figured out that they can ‘sell’ the use of the money to those who needed it now and get it back later, the ‘price’ being the interest. This resulted in the creation of credit cards and debt, which is also an integral part of the modern economy.
While it makes a coherent story, if we take time to think about it you can see a few problems with this theory. According to economic anthropologist David Graeber, we’re assuming that ‘a bunch of Neolithic farmers in a village somewhere…will be engaging in transactions only through the spot trade.’ This brings up the problem of the ‘double coincidence of wants’, essentially stressing the high impracticality of the bartering system as a consistent method for allocating goods. In fact what anthropologists have found was that when neighbouring farmers in a village do engage in trade they did so via arrangements that looked like this: you would get pails of milk from him now in exchange for wheat and barley when harvest season comes. In effect, a system of credits and debits.
If you trace the history of written records back you will find that it was invented in ancient Mesopotamia, its main use and probable motivation for its development is for keeping accounts as reported by the economist Glyn Davies in his book ‘A History of Money from Ancient Times to the Present Day.’ What Glyn found was that by the time the written records start there was already a complex system of money, accounts and credits set in place all before the creation of coin money.
In ancient times many things have been tried as the standard medium of exchange in order to fill the role of money, the biggest problem being getting everyone to accept the value of whatever it is that you were using, be it shells, knives, metal ingots or bushels of wheat. This changed with the rise of large empires the ancient world. To conquer vast swaths of land requires a great many legions of soldiers and not everyone was happy to risk their lives out of patriotism.
Thus there was the need to devise a method of paying the troops: issue all of them with standardized pieces of gold and silver. While taxes did exist before coinage, now they play a central role in forcing everyone to adopt coins as a method for making payment to the government instead of say five cows or twenty chickens. This way cash, in the form of coins begins to take its hold on the economy and has continued to do so wherever there is a government. Citizens, at least in ancient times would have seen the value of having a stable government taking care of invading barbarians so they can go about their business. Not that they could have resisted armed soldiers showing up demanding some of their produce in exchange for coins.
Going through history barter as a way of organising exchange seems only to occur whenever people lose faith in the government’s ability to back the currency. This is observed in many cases when disaster shocks the economy, and can be seen in the various hyper-inflation cases in the 20th century with pre-Nazi Germany being the most obvious example with devastating consequences, and more recently when Russia defaulted at the turn of the millennium. Even now in the EU there have been reports of ‘barter exchanges’ going up in places worst affected by the debt crisis such as villages in Spain, with people being forced into trading goods without the use of cash simply because there isn’t any to go around.
In short: instead of bartering until people realised its inefficiencies and came up with money, bartering is generally as a last resort when an existing cash economy breaks down. Our ancestors, having come up with the credits and debt as a way of organising exchange markets, are probably far more resourceful than we give them credit for.