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The Necessity of A Monetary Medium

It is tempting to linger over descriptive accounts of barter economies. However, our main interest in the barter or 'swapping' system is to examine its six main disadvantages and see how these deficiencies led to a monetary economy (see Table 15.1).

There are some situations where it would be possible to manage without money in the usual sense of the term. Money may be defined as anything that is legally acceptable as a medium of exchange. In this sense, coins and notes may be regarded as money, but checks are not money. They only claim money that is in the bank. The check itself is neither legal tender in a full sense, as is the case with notes (where they may be used for payment up to any amount), nor in a limited sense, as are coins (where they are only legal forms of payment for limited amounts).

Table 15.1 The need for a monetary system

Disadvantages of barter
Functions of money
Need for a double coincidence of wants
A medium of exchange
Difficulty of fixing on fair rates of exchange
A unit of account
Not possible to store wealth over a long period
A store of value
Not possible to plan adequately over a period of time
A means of deferred payment
Problems arising because some goods are more
A channel for purchasing power
'valuable' than others necessity to have something
A liquid asset
acceptable for anticipated or potential transactions

The Difficulties of Managing Without Money

It is feasible to imagine a society managing without a medium of exchange, although the inhabitants would require a legal yardstick, or units of account, such as the pound sterling or the dollar. There are at least three ways in which society could manage without money as a medium of exchange:

  1. In a command economy One could conceive of a fully planned collectivist economy, where the State controlled everything. During the Second World War members of HM, forces were clothed, fed, and sheltered by the State; even railway travel was covered by the issue of warrants. It was possible to live at a base camp for a long period without using money, but this necessitated a limited existence and forfeiting the freedom associated with choice.
  2. In 'Utopia' Sir Thomas More in Utopia envisaged a society where the people would go to a large house in the town and take all that they required. But More was too optimistic about human nature the first man would probably have taken everything because human wants are insatiable. More was unaware of the exhaustive range of economic goods that was to become available in a twentieth-century society; his philanthropic ideas were nothing more than medieval fantasies.
  3. In a credit-orientated society Nowadays the majority of payments, in terms of value, are made through the cheque system operated by the clearing banks, but cheques are not money. Would it be possible to extend cheque usage and credit-card systems so that no money changed hands and all debts were settled by ledger transactions? Theoretically, such a system is possible although the administrative cost would make the system too expensive to be worthwhile. It would be possible to draw a cheque or present a credit card, in payment for an 5p bus fare or a box of matches, but the commercial banks' clearing house system would be swamped.

The Origin of Money

Primitive forms of money began to emerge as the number of goods available for barter increased, but it was the development of a society based upon specialization or the division of labour that gave rise to the use of money on a large scale. Adam Smith saw this clearly in The Wealth of Nations, where he stated:

Every prudent man in every period of society. after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner as to have at all times by him... a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry.

But even before industrialization, money became the essential instrument and key invention of commerce. Sir Geoffrey Crowther, in An Outline of Money (Nelson), contends:

Money is one of the most fundamental of all Man's inventions. Every branch of knowledge has its fundamental discovery. In mechanics, it is the wheel, in science fire, in politics the vote. Similarly, in economics, in the whole commercial side of Man's social existence, money is the essential invention on which all the rest is based.

A relatively simple barter system, with 100 goods supplied and demanded, would require the retention of nearly 5000 relative values. The limitations of the human mind make the retention of thousands of relative values impossible, so without the use of money, trade on a large scale would not be possible. How would a potential trader decide the terms of exchange even assuming that A had a surplus of what B required and B's surplus suited A? An enormous amount of time wasted in haggling would still make it difficult to ascertain the value of a sheep in terms of the salt. The person who wished to exchange 'valuable' economic goods would be especially hindered by a system of barter.

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