Evolution of Trade from barter system to money economy

Trade and Economic Development

Evolution of Trade from barter system to money economy

Trade is one of the key determinants of economic development. Development of trade can improve a country's development. Trade is simply the exchange of commodities which takes place at different levels. The earliest form of trade was probably barter in which one type of good was exchanged for another good. In the beginning of human existence, needs were simple and every individual produced what he wanted. In course of time, people settled down in different occupations. When specialization emerged, trade came into existence. Initially direct exchange of goods for goods known as barter system of trade prevailed. For instance, in a barter economy a person who had plenty of food but no clothes exchanged a part of his food with the person who had plenty of clothes but no food. In this method of direct exchange or barter, there were many difficulties and inconveniences.

The main inconvenience of barter was the necessity for double coincidence of wants. For example, a person has a cow and he wants to exchange cow for rice. Another person who has rice does not want a cow but he wants a horse. In this case, the transaction cannot take place, because there is no double coincidence of wants. The simple process of barter might have worked well when transactions were few and simple. As the system of exchange progressed, and with the advent of industrialization, the domestic system of production gave place to factory system. At this juncture, absence of double coincidence of wants posed a major problem in the transaction of goods. Further there were other difficulties of barter system, which hinder the trade practices. These are problems of store of value, standard of value and measure of value. Because of the inconvenient system of exchange under barter system, man had to give up barter and had to invent an intermediate commodity which makes the buying and selling of goods very easy. This intermediate commodity would have to be familiar, easily recognizable and generally acceptable to all people, since it had to serve as the medium of exchange. This medium of exchange was known as money.

'Money is one of the most fundamental of all man's inventions. In the whole of man's social existence, money is the essential invention. Money acts a medium of exchange, a measure of value, a store of value and a standard of deferred payments. Thus barter economy has given place to money economy.

With the introduction of money, the process of direct exchange of goods for goods was given up. A new system of exchange was introduced. Under the new system, a person who has an article to exchange, sells it for money and with the money he can purchase the commodities he wants. The problem of expressing the value of each article in terms of all other is solved and the value was expressed in terms of a single commodity, money. The problem arising from the absence of double coincidence of wants is also solved. It is enough if a person is able to find a purchaser for his goods. It is not necessary that person should possess what he requires. Money can be conveniently stored and a person can save a part of his income for future use. Thus money overcomes all the disadvantages of barter system of exchange.

Before the introduction of paper money, any commodity that was generally demanded was chosen by common consent as a medium of exchange. For example, people living by sea-shore chose shells as medium of exchange, in cold countries people used skins of animals and fur; in tropical countries, elephant tusks, plumage of birds and tiger teeth were used as medium of exchange. With the progress of civilization and economic development, metals like gold, silver, and copper came to be used as money.

It was found inconvenient as well as dangerous to carry gold and silver coins from place to place. In the 15th and 16th centuries, European merchants adopted the practice of carrying proper receipts showing their title to metallic money, which they had kept with well-known goldsmiths for safe custody.

In this way, paper money was introduced as a substitute for metallic money. Then the system of monopoly of note issue by the central bank of the respective country was introduced. At present legal tender money consists mainly of currency notes or paper money issued by the central bank. Therefore, banking practices facilitate trade and development within the country as well as among countries through employment of monetary weapons like exchange rate.

It would be right to say that the present day trade dimensions would not have been possible without money.