Was Money invented to solve the problem of "a double coincidence of wants"?
What came first Bartering or money? The unlikely story of the origination of money.
Note: Did you read my first post on What is Money? If you haven’t, do so first before reading this one!
Have you ever wondered how money originated? I certainly never did till I started reading about it. We already know that good money should be a “Medium of Exchange”, a “Unit of Account” and maybe even a “Store of Value”. Without money, something else had to take up these roles for humans to survive in tribes and communities. The popular belief is that early humans depended on the barter system, so let’s try and explore this theory with the aid of a fictional village (humour me).
FROM BARTER TO MONEY - AN UNTOLD STORY
Thousands of years ago, our ancestors lived in peace and harmony before the advent of political parties or dynastic rulers. Man discovered agriculture and could finally settle down. Stable tribes were starting to form. There was the genuine possibility of being based in one location for a long time.
In one of these tribes lived a man named Bill (fictional character). He was a farmer and grew wheat in a small patch of land close to his village. He lived with his wife and two sons, happy together. They needed to work diligently to take care of the fields. The work was backbreaking, and they couldn’t take too many breaks. But, they were so effective at producing wheat that the village depended on them to deliver grain to feed the villagers.
Bill was fortunate that Sam, his neighbour, was more than willing to exchange a daily supply of Goat’s milk for a sack of wheat every month. Chris, the weaver, was happy to stitch Bill’s family clothes for the winter in exchange for two wheat bags. Bill was so famous that travelling traders would make it a point to visit his village and exchange some of their wear for the wheat that his family produced. It was hard work, but the family always had plenty to eat, clothes to wear and a house over their head.
Over time, Bill realised that wheat production depended on many factors like weather, pests, availability of water, etc. So he always made it a point to store a portion of his produce for future requirements and trade.
His tribe, too, learned from him and ensured they saved some of their non-perishable produce for lean months.
Unfortunately, neither Bill nor anyone else in his tribe could have predicted the drought and extreme heat that would plague his village for over three years. Each year, the unrelenting drought ate away at the reserves of the tribe until it became impossible to barter for food and other necessities. Some of the tribe’s people travelled far and wide searching for food, but they couldn’t abandon their homes and had to return.
Fortunately, when everything seemed to be lost, it finally started to rain, and the life-giving rain was all that the village needed to get back on its feet. Bill eventually grew wheat, and the rest of the tribe soon managed to build up reserves and started bartering for goods and services again. But the experience was so traumatic that Bill and the other village elders decided that they could no longer depend on bartering to survive. They chose to identify a non-perishable resource as a common standard that would assign value to the various goods and services offered by the villagers and travelling traders. They learnt how many other tribes had resorted to using Cowrie Sheels (first known money) as a token and decided to adopt its use. They would need a name for this token. After more deliberation, they decided to call it MONEY.
The adoption and use of money solved many of the critical problems they had faced with the bartering system, like finding someone who needs their produce at the right time and agreeing on the terms. This particular problem has a name, “the double coincidence of wants”, and was a vital issue within the tribe. They also didn’t have to maintain a regular inventory of their products for barter. They could travel to other tribes and buy goods and services without carrying their produce. Life was great, and everyone lived happily ever after.
IT IS HIGHLY UNLIKELY THAT THIS IS WHAT HAPPENED.
It is more likely that bartering in the truest sense of the action rarely happened. So how did the money come into existence? The theory that I find more convincing is that, from the time Homosapiens started living in groups or communities, there has been some form of exchange or sale of goods and services. But rather than barter, it was based on mutual trust and understanding. Since the communities or villages were so small, everyone knew each other. It would make sense that you wouldn’t cheat your neighbour for fear of alienation or ex-communication from your tribe. The world wasn’t a safe place for people, and the last thing you wanted was to get kicked out of your tribe!
So how would such a society work? Let’s reframe Bill’s story and try to get a better understanding.
As you know by now, Bill and his family worked extremely hard to produce a lot of wheat that could feed his tribe. When his neighbour Sam wanted some grain for his family, he would ask Bill for some. Unfortunately, Sam had to slaughter his Goat as it was old. It would take another month before he could start milking his Goat kid. Sam promised him some milk next month, they agreed, and Bill gave Sam the grain he wanted.
Bill wanted some clothes for his family, but Chris, the weaver, wasn’t looking to buy wheat, as he was on a gluten-free diet. Chris wanted Goat’s milk, so Bill promised to give him Goat’s milk when he got some from Sam. They agreed on the quantities, shook hands, and Chris promptly got around to making new winder clothes for Bill’s family.
Over many years, the tribe grew in number. The needs and wants of each family and individual also started to grow. It was increasingly difficult to track what was promised or agreed. They even had to expel a few members of the tribe for not following through with the agreements. Bill, Sam and the other elders in the tribe finally decided to appoint the oldest wisest member of the tribe, Bills Uncle Ted as the keeper of the ledger. Whenever there was a trade based on an agreement, Ted would record it in the master ledger. They resolved all disputes and conflicts based on the entries made in the register. This system worked very well until the log got so big to manage that they needed another option. When simple records wouldn’t suffice to track the transactions, a universally accepted local token, the Crowie Shell, was introduced to help simplify trade. And they created MONEY!
I find it fascinating that debits and credits in a ledger existed well before money. Early human tribes depended on community-based ledgers managed by trusted third parties. Nowadays, we take such things for granted with automated systems ensuring that everything is recorded and tallied. So who does this for us?
We, too, rely on third parties to maintain a ledger of our accounts. Not just our accounts, but the transactions of companies and governments! Yes, I’m talking about the banks and other financial institutions, not to mention other government agencies that keep a record of our money and other assets.
Bill and his tribe trusted Ted. The question is, do you trust the institutions you have entrusted with your ledger? To know more, subscribe to my newsletter and don’t forget to share this article with other like-minded souls.
Nice articulation on Barter system.. The entire ecosystem is built on this theory ..