The history of barter (and of money too)

September 15, 2009 by bobbagga
Filed under: Barter Education

Now that I’ve addressed some of the issues and opportunities associated with modern barter, I thought it would be appropriate to take a step back and look at the beginning of barter (and of money while we’re at it). Turns out the practice of barter is as old as time.

Barter in the early days

Barter is in fact the oldest (consensual) system of exchanging goods and services. Long before the advent of any sort of money, people exchanged their own goods of value for other things they wanted.

As a quick aside, one of the most famous barter transactions occurred on May 24, 1626, when Peter Minuit, a director of the Dutch West India Trading Company, bartered about $24 worth of beads and trinkets to local Indians in exchange for the island of Manhattan.

The advent of currency

Moving on to currency, the earliest forms are not the paper and coinage systems we think of today, but currency in the form of things like livestock—think sheep and cattle (commodity money). You’ve heard of people trading goats for spouses? That happened in some parts of the world—a lot.

There are of course challenges and limitations with these types of transactional systems. First, in the case of direct barter, the buyer and the seller must have what’s called a double coincidence of needs, meaning they must have what each other wants at the same time. Second, it’s very difficult to properly value goods with direct barter—one cow may not produce as much milk as the next. And last, there is no ability to store value. These challenges and limitations are what lead to the development of representative currency.

Representative currency

Representative currency serves primarily as a store of value that can be redeemed against goods or services at a later time. And the more liquid the currency (widely accepted) the more valuable it is.

It first appeared around 1200 B.C. in China in the form of cowry shells. Metal coins followed, along with leather currency and eventually paper notes in the 9^th century. Europe finally came around in the 15^th century and began using paper notes too. Representative money saw its sweet “golden” era during the 18^th and 19^th centuries, when the price of most currencies was pegged to the price of gold. But that didn’t last for long.

1971 marked the end of the gold standard in the U.S., and by 1976, most other countries in the world followed suit. What the vast majority of people in the world now use as tender is technically referred to as “fiat money,” which is currency given value by the laws of a government.

Barter exchanges emerge

Getting back to barter (which has for the past several thousand years served as a supplemental form of exchange in currency-based economies), even though it is the oldest form of trade, it has evolved significantly, especially in the last century. The most notable evolution has been the vast growth in scope and number of trade exchanges (like my company, BizXchange).

The most commonly acknowledged first business barter exchange is the WIR system. WIR—which means “we” in German—was founded in 1934 by businessmen Werner Zimmermann and Paul Enz to help cope with currency shortages after the stock market crash of 1929. Within one year of its founding, the WIR system had 3,000 participants, and today the organization is still growing with more than 62,000 members doing over $2 billion a year in B2B barter transactions.

The great advantage of a barter exchange is that it eliminates the need to directly conduct a barter transaction with another party; it eliminates the necessity of a double coincidence of needs. Additional benefits are that valuing products and services becomes much easier due to the expanded market; transactions can be easily tracked and reported; trade revenue can be banked and stored; and the speed of transactions has increased.

Barter 2.0 and beyond

I like to call what has developed in the last 70 years barter 2.0. And I think the progress made from the 1.0 state is akin to the advent of modern-day financial products, such as credit cards, online banking, etc.

What has really accelerated barter exchange systems in the last decade though is the introduction of computer facilitation. Especially in today’s technologically advanced world, the level of security, customization, speed and accessibility associated with the barter software being used by most exchanges makes carrying out trades via a barter exchange easier than ever before. Exchange members can easily and instantly search, buy and sell among their partner members for the goods and services they need, or conversely for prospects that might be looking for goods and services.

There is still of course a very important place for cash in the modern day economy, but it’s evident that more people and businesses are discovering that it makes sense to save cash if what’s needed can be obtained through barter. Especially if you are able to use idle capacity, excess inventory or simply incremental business to pay for goods or services that you would have otherwise paid cash for.

And that pretty much brings us to present day.

So there you have a quick (or not so quick!) summation of the history of barter (and money). So what’s next? Let me know what you think.

- Bob