The History of Bartering and Money
By
James Harvey Stout (deceased). This material is now in the public
domain. The complete collection of Mr. Stout's writing is now at
http://stout.mybravenet.com/public_html/h/
>
Jump to the following topics:
- Throughout
the centuries, money has become more abstract.
- Bartering
is in its third cycle in the United States.
- The history
of money -- step by step.
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.