Originally, an exchange took place without money, through barter. Long before money appeared in the world of commerce, people exchanged goods for goods. This system of barter made it possible to meet many needs that otherwise would not have been met. Barter raised the standard of living, but in such a system the exchange of goods was made much more difficult. Barter requires that both buyers and sellers need each other’s goods. Again, indivisible quantities made exchange difficult, as half a canoe or half a cow could not enter barter.
There was also no standard of value in the barter system. The ratio between canoes and arrows was expressed if they were exchanged for each other, but such an exchange did not indicate the ratio of bread to meet or even canoes to meet. Because of these flaws, money was introduced into the commercial system as an intermediary for which all goods could be sold and for which all goods could be bought. In this way, money fulfills its first function, as a medium of exchange.
Money is the medium of exchange widely accepted for goods and services. Originally, the medium of exchange was the commodity most widely traded in a given place and time. Cattle served in Greece at the time of Homer. Grain, furs (in the Hudson Bay area), oil, salt, ivory, tea, wampum (among American Indians), tobacco (in the Virginia colony), and many other commodities served as a medium of exchange in various parts of the world. Everything was sold for them, everything could be bought for them. They were the money of the time. But gradually the tendency developed to use metals: iron, copper, silver, and gold.
When metal was first used, it was not in the form of coins, but consisted of a certain weight. To guarantee the weight (and later the quality), it became customary to stamp the metal with a government stamp. We still have a British standard coinage, the pound, originally a pound of silver. But this stamp did not prevent “trippers” from cutting off pieces and making the money lose weight. To prevent this, a seal or stamp was placed on both the top and bottom of the piece. Sweaters would then cut off the sides. Today, coins are milled, meaning that there are folds on the sides to prevent clipping. Today, money consists of coins and cash, which act as a medium of exchange.
In barter, there is no standard of value, no lowest common denominator of value. With money, we have a medium in which all values can be expressed, and money enters its second function, to act as a standard of value. In the monetary system, we express all values in the commercial world in terms of a standard coin, and in the United States in terms of dollars.
With all commodities referenced to one common standard, we know that it wants to determine the relationship to each other of all commodities whose value is given in money. If one commodity has its value is given as one dollar and another as five dollars, we know that the ratio of the value of one to the other is one to five.
Money has another function. Borrowing and repaying debts has always been an important stage of trade. The difficulties we experience in using money as a deferred payment standard are due to its instability and changes in its purchasing power. People are not interested in money, but in what they buy with it. The purchasing power of money depends on the price level, which, depending on the stability of the government, changes dramatically from period to period.
The future of money in the global economy will enable faster and more liquid transactions. People with goods and services in countries around the world will be able to exchange efficiently. As money evolves, its availability will increase. The Internet is rapidly changing the face of money, and with this change will come new opportunities to profit from it.