The Problem with the Barter Theory

Our understanding of the creation of money is something that has been debated for many years.

One theory that seems to have stood the test of time is that of ‘barter’. Let’s go through an imaginary example of what a barter system may look like.

Tom the Toolmaker needs to feed his family of five, but he has run out of bread for their favourite sandwiches. He decides to visit Bruce the Baker to stock up for his meal.

Tom the Toolmaker asks Bruce the Baker for three loaves of bread. In return, Tom will give him some of his high-quality tools. Bruce is in need of some tools, so he agrees to this and the trade goes through without a hitch.

The next day Tom the Toolmaker is in need of some meat. He decides to visit Billy the Butcher.

Billy the Butcher doesn’t need any tools, but he does need clothes. To complete this trade, Tom the Toolmaker must find someone that will trade some clothes for his tools, so he can go back to Billy and get his meat.

Simple, right?

Well, no… not really. As you can imagine, this sort of system is not straightforward at all and would become very messy, very quickly.

The Problem with Barter

The problem is caused by something known as ‘the double coincidence of wants’. In other words, a transaction based on barter can only take place if both parties have something the other party wants or needs enough to be willing to exchange. This has all kinds of limitations.

Imagine trying to do this for everything you needed for your family for an entire week. The food you will all eat, the clothes you will wear, the utensils you use to cook… even the place you live in!

Another issue with this method is that people would have different values for different products. Someone with tools might think theirs are worth more than some bread and would then want something more in return. It would be difficult to have one agreed measure.

The Barter Theory — Historically Inaccurate?

Somehow, according to countless economics textbooks and many other articles and publications, this is what took place before money was…