The origins of money
We have learned that one major cause of productivity increase in pre-industrial economies is the gains from division of labour resulting from occupational diversification in an economy where regions and nations exploit their comparative advantages. But these gains cannot be reaped without exchange between increasingly specialized producers. Money, as a means of exchange, developed alongside the occupational and regional division of labour. The first money, some five or six thousand years ago, did not consist of stamped coins, but rather of standardized ingots of metal which were generally accepted as a means of payment. The Chinese and Greek civilizations introduced coins which were stamped like a modern coin. To understand the advantages of money it is worth looking at its historical antecedent and alternative. Direct bilateral exchange of one commodity for another, so-called barter, requires coincidence of wants between trading partners. It means that if you want to exchange a pair of shoes for wheat you have to find someone who has wheat and wants a pair of shoes. The matching process necessary to detect coincidence of wants will be very time-consuming, and time matters because it is scarce and has alternative uses. Barter will not only be associated with high search costs, but will also reduce the volume of trade to below its potential level because trade must be balanced. However, the volumes participants want to trade need not balance and in those cases the ‘minimum’ trader will determine the volume of trade. For example, a weaver might find a baker willing to exchange bread for cloth at an agreed price, but the weaver might not be willing to buy as much bread as the baker wants to sell. After all, bread is more perishable than cloth and is typically bought daily in small quantities. The volume traded when relying on bilateral balanced trade will thus, in this particular example, be constrained by the cloth maker, the ‘minimum’ trader.