When you were young, you probably swapped or traded items with friends. Any- thing from toys to sweets, Pokemon cards to soccer stickers. Younger you probably did not realise at the time that this instinctive behavioural practice of bartering is an inherent, universally inspired practice which has been around for centuries.
Our predecessors may have swapped grains and cowrie seeds, but historic bartering led to the creation of the formal banking system and, most importantly, cash.
The practice of bartering
Bartering, which dates back to 6000 BC, was originally introduced by Mesopot- amia tribes, though the practice was later adopted by Phoenicians. They “bartered goods to those located in various other cities across oceans”, thus demonstrating early examples of this now universal custom.
But how did bartering work back then? Picture this: you need a bag of wheat. You don’t have any in your store cupboard, and you buy some because cash hasn’t been invented yet. What do you do? You knock on neighbours doors asking if they can spare some wheat. Your neighbour might then say they do indeed have some wheat, but they could really do with some eggs. So you trade 6 eggs for your neighbours’ bag of wheat. Sounds great, until you realise you need some milk, but the only neighbour in the village willing to trade a pale of milk with you is asking for a live chicken in return...
Bartering may have been an inherent practice, but the process wasn’t always fair!
Bartering and the beginning of cash
The scenario we described wasn’t too far from the reality of the bartering mar- ket. The system grew from a need vs. want economy. The farmer who was able to produce wheat would undoubtedly need something from the furniture maker, and so on. While that might sound idyllic, the unofficial market eventually stumbled across a problem; public perception.
Depending on what people deemed as valuable, bartering could be done fairly or used by opportunists to make a profit. As we demonstrated in our scenario when your neighbour realises milk is perceived to be high in value, the bartering process could get out of hand and the trade could quickly escalate from a fair deal to a wildly unfair one. And that wasn’t the only issue.
The problem with perishables
Perception of value was one of two problems within the informal market as many bartering practices saw perishables and livestock exchanged for goods and services. The issue with using these items for trading was that they would lose their value over a period of time or, in the case of live animals, sometimes prove to be more costly to hold than they were worth.
With perishable goods decreasing in value by the day, and livestock costing the owner in feed, people looked to alternative solutions. From cowrie shells, beads, and sacks of grains, a variety of options were used around the world to represent a form of currency. However, with these readily available items, the system was open to abuse. All a local had to do in areas trading in cowrie shells to increase their ownership of shells was to simply swim to another island to find more shells. Read more
Thus, with this conundrum, a group of people came together to propose a new material which was too rare to be sourced, that could represent money and could not be easily sought after. They settled on using gold.
The creation of coins
As gold was hard to mine, could be carried around, and melted to size, it fit the bill as a representation of currency. With gold holding value in communities, coins were created in denominations based on their weight. The weightier the coin, the more it was worth:
With the creation of gold coins, soon followed the adoption of banks and a formal market. With either ruling monarchs or early governmental bodies put in place controlling fairness, gold coins quickly became established as tender around the world.
Running low on gold? Turn to paper!
While gold proved to be a popular alternative to other forms of payment, it presented its own issues: it was limited. As economies grew in Europe, the continent realised that their gold stores could be easily depleted in a time of crisis or if gold sources became scarce. Therefore, banknotes were considered as an alternative. The paper money offered a formal representation of the worth of gold without having to use the precious metal in exchange of goods.
But, as always with forms of tender, there was an issue: how can people trust that the paper banknotes were worth their promise in gold? The recognition that paper representations of money needed to guarantee its worth in gold led to the establishment of national banks. Why? Because paper money, or banknotes, would be more likely to be trusted if they were backed by government reserves.
The humble banknote, today, is commonplace in societies around the world thanks to the ability to mass-produce them. This was evidenced during the period of WWI when England turned to neighbouring Scotland’s banknotes to ease a potential gold crisis. Though most importantly, this ability has fuelled their popularity around the world in periods of crisis, like today during the midst of the coronavirus pandemic.
Cash today: tangibility and an inspired practice
Our historic relationship with bartering and trading goods shows that we have a universal, inherent need for tangible forms of payment to process exchanges. In today’s day and age, especially in the western world, the threat of a cashless society is looming. This poses the question: will we return to ancient transaction methods if we lose cash from our everyday lives? And how about that first scenario, could we see that repeated when power outages mean we cannot shop for our everyday essentials?
In communities without cash, like prison systems, other items are used for bartering purposes, like cigarettes as the famous Radford study, “The Economic Organization of a POW Camp”, revealed. This shows we return to bartering in the absence of cash.
Cash poses a tangible form of comfort for many and has allowed us to move on from ancient practices as it satisfies an inherent, universal need.