MONEY #2: Premoney

This is the follow up of last episode, 'what is money'. We defined money and provided its function and property. Money is a medium of exchange used for transaction. But before money was invented, how did humans transact?

Barter

I'm an hardworking farmer and I grow wheat, fruits and vegetables. Farming is the occupation of my father and my father's father. My friend, Ben is an herdman, he and his family rear cattle and sheep.

It's harvest time and I have surplus of wheat, fruits and vegetables, but I have no meat. So, I went to my friend, Ben who has cattle and sheep, but needs wheat and vegetables. I gave him a quantified amount of wheat and vegetables, and he gave me the same amount in cattle and sheep. This type of trade is called barter.

Barter is a system of exchange where goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. You simply use what you have to get what you want.

Barter system is believed to be the predecessor of money and this phenomenon was pioneered by Adams Smith. Studies from anthropology shows that barter system usually exist among strangers or potential enemies, transactions within a community are usually gift economy and debt.

Gift economy

Gift economy is a mode of exchange where valuables are given without an explicit agreement for immediate or future rewards. Gift economy as an economic exchange has a number of controversies, but you should read this for more details.

Debt

Debt is a system of exchange where valuables are given out with an agreement for future return or reward.

One ancient case study is Mesopotamia, where everyone is indebted to someone else. At the end of a period, everyone gather together and renegotiate till most debts are forgiven and just a few people are left to settle each other. In fact, one of the most ancient word known to mean freedom is the sumerian word 'Ama-gi', which also means exception from debt.

Sophisticated credit system has been in existence long before money was invented. A written political document by a sumerian king shows how interest rate is calculated and added to the principal.

One of the advantages of gift and debt economy is that it enhances interaction among the parties, it provides an excuse to see each other and communicate.

These three exchange systems still exist today, both in small uncivilized ethnic groups and urbanized cities. In fact, last night, I swapped my plate for another plate of different size and shape, I lend a friend money last week and just shared my breakfast with another friend.

Please leave your thoughts and suggestions in the comment. If you haven't read Money #1, click here. Follow me so as to be notified when I post money #3: commodity money. Thanks for reading.