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BARTER SYSTEM
What is a barter system?
Barter System is that system in which goods are exchanged for goods. In
ancient times when money was not invented trade as a whole was on barter
system. This was possible only in a simple economy but after the development
of economy, direct exchange of goods without the use of money, was not
without defects.
The barter system sustained early economies for millennia, and it probably
predates recorded history. It has a lot of disadvantages that the invention of
currency solved. A skilled artisan who made tables, he would barter tables for
the things he need, like food. But what the artisan will do when he want
meat, and the herders don't use tables? Artisan have to search for someone
who is both in need of a table and has meat he's willing to sell.
When a society agrees on an acceptable form of currency, however, these
problems either disappear or severely diminish. We no longer have to find
people who have what they want and are willing to barter their stuff for what
we are offering. Carrying coins is also easier than carrying tables.
Marketing is steeped in bartering as well. For instance, a business can always
trade services for advertising space. Newspapers offer ad space, shops offer the
side of their building for billboard space, film producers offer product
placements -- the opportunities are virtually limitless. Sponsorships and
promotions work the same way. If Coca-Cola buys the uniforms for a little
league baseball organization, the teams can agree to put the Coca-Cola logo on
each jersey and hang banner ads in their ballpark.
No money is changing hands, but each party is giving and getting something in
return. Bartering didn't die off as soon as money was invented.
HISTORY OF MONEY
What is money?
By definition, it’s something of value. But over the last 10,000 years, the
material form that money has taken has changed considerably—from cattle
and cowry shells to today’s electronic currency. Here, get an overview of the
history of money.
Barter:
The first people didn't buy goods from other people with money. They used
barter. Barter is the exchange of personal possessions of value for other goods
that you want.
Shells:
At about 1200 B.C. in China, cowry shells became the first medium of
exchange, or money. The cowry has served as money throughout history even
to the middle of this century.
First Metal Money:
China, in 1,000 B.C., produced mock cowry shells at the end of the Stone Age.
In addition, tools made of metal, like knives and spades, were also used in
China as money. The Chinese coins were usually made out of base metals
which had holes in them so that you could put the coins together to make a
chain.
Silver:
At about 500 B.C., pieces of silver were the earliest coins. Eventually in time
they took the appearance of today and were imprinted with numerous gods and
emperors to mark their value and were first shown in Lydia, or Turkey and
further improved upon by the Greek, Persian, Macedonian, and Roman
empires.
Leather Currency:
In 118 B.C., banknotes in the form of leather money were used in China. Onefoot square pieces of white deerskin edged in vivid colors were exchanged for
goods.
Noses:
During the ninth century A.D., the Danes in Ireland had an expression "To pay
through the nose." It comes from the practice of cutting the noses of those who
were careless in paying the Danish poll tax.
Paper Currency:
From the ninth century to the fifteenth century A.D., in China, the first actual
paper currency was used as money. Through this period the amount of
currency skyrocketed causing severe inflation. Unfortunately, in 1455 the use
of the currency vanished from China.
Potlach:
In 1500, North American Indians exchange of gifts at banquets, dances, and
various rituals.
Wampum:
In 1535, though likely well before this earliest recorded date, strings of beads
made from clam shells, called wampum, are used by North American Indians
as money. Wampum means white, the color of the clam shells and the beads.
Gold standard:
In 1816, England made gold a benchmark of value. This meant that the value
of currency was pegged to a certain number of ounces of gold.
Depression:
Because of the depression of the 1930's, the U.S. began a world wide
movement to end tying currency to gold. Today, few nations tie the value of
their currency to the price of gold.
Today:
At present, nations continue to change their currencies. For example, the U.S.
has already changed its $100 and $20 banknotes. More changes are in the
works.
The Future: Electronic Money
In our digital age, economic transactions regularly take place electronically,
without the exchange of any physical currency. Digital cash in the form of bits
and bytes will most likely continue to be the currency of the future.
FUNCTIONS OF MONEY:
Generally, economists have defined five types of functions of money which are
as follows:
(i) Medium of exchange
(ii) Measurement of value;
(iii) Standard of deferred payments
(iv) Store of value and
(v) Transfer of Value
(i) Medium of Exchange:
Money facilitates transactions of goods and service as a medium of exchange.
Producers sell their goods to the wholesalers in exchange of money.
Wholesalers sell the same goods to the consumers in exchange of money.
(ii) Money as a Unit of Value:
Money measures the value of various goods and services which are produced in
an economy. The value of various goods and services are expressed in terms
of money such as Rs. 10 per metre, Rs. 8/- per kilogram etc. In this way,
money works as common measure of value by expressing exchange value of all
goods and services in money in the exchange market.
(iii) Standard of Deferred Payments:
Modern economic setup is based on credit and credit is paid in the form of
money only. In reality the significance of credit has increased so much that it
will not be improper to call it as the foundation stone of modern economic
progress.
(iv) Store of Value:
With the help of money, people can store surplus purchasing power and use it
whenever they want. Saving in money is not only secure but its possibility of
being destroyed is very less. Besides, it can be used whenever need be.
(v) Transfer of Money:
Value of any assets can be transferred from one person to another or to any
institution or to any place by transferring money. The transfer of money can
take place irrespective of places, time and circumstances.
USE OF MONEY IN ECONOMY AND HOW IS IT REGULATED BY RBI TO
CONTROL THE ECONOMY:
(I) USE OF MONEY IN ECONOMY:
Money has three legitimate uses. They are to buy, to economize and to donate.
The money to buy is necessary to consume what we need.
The second use of money is to save. It is something for tomorrow. The banks
make it produce by lending it to those who want to use it and do not have
capital of their own. They receive the money as a loan but make it earn in the
production. They pay interest to the bank and a portion goes to the owner of
the money.
The third use of money is to donate. Money is not to be accumulated but to
circulate. If our needs are sufficiently and decently attended, if we have
guaranteed the well being and a certain future for our family, to donate is a
gesture of great generosity.
(II) HOW MONEY IS REGULATED BY RBI TO CONTROL THE ECONOMY:
The Reserve Bank of India (RBI) with its monetary policy, functions as a
regulatory body ensuring overall economic stability of India.
The RBI has the sole power of issuing currency notes. The special system by
which RBI issues notes is called Minimum Reserve System. Issuing money
depends on several other factors.
Besides issuing money the RBI, through its monetary policy, regulates the
money supply in the economy. RBI also acts as banker to the government as
well as to other commercial banks.
The RBI is empowered to control the credit flow which is necessary for
accelerating the economic growth of India. Banks must keep a part of its
money as reserve money, a part of which is kept as vault cash and the rest is
deposited with The Reserve Bank of India.
Another instrument that is frequently used by RBI for this purpose is called
Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). CRR represents
the fraction of deposit which commercial banks must keep with the RBI to
regulate the money supply. SLR is the portion of deposits that a bank has to
keep with RBI in term of gold, bullion or Government Securities
The RBI can purchase government bonds from or sell the same to the public.
When RBI buys them, excess money is infused in the economy thereby
increase the money supply.
The RBI is also responsible to maintain stability of foreign exchange and to
hold the foreign exchange reserve. RBI with its monetary policy also protects
domestic economy from external shocks.
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$$$
The origin of the "$" money sign is not certain. Many historians trace the $ money sign to either the
Mexican or Spanish "P's" for pesos, or piastres, or pieces of eight. The study of old manuscripts shows
that the "S," gradually came to be written over the "P," looking very much like the "$" mark.
U.S. Money Trivia
On March 10, 1862 the first United States paper money was issued. The denominations were $5, $10,
and $20. They became legal tender by Act of March 17, 1862. The inclusion of "In God We Trust" on
all currency was required by law in 1955. The national motto first appeared on paper money in 1957
on $1 Silver Certificates, and on all Federal Reserve Notes beginning with Series 1963.
Barter
Shells
First Metal
Money
Silver
Leather
Currency
Noses
The first people didn't buy goods from other people with
money. They used barter. Barter is the exchange of personal
possessions of value for other goods that you want. This kind
of exchange started at the beginning of humankind and is still
used today. From 9,000-6,000 B.C., livestock was often used
as a unit of exchange. Later, as agriculture developed, people
used crops for barter. For example, I could ask another farmer
to trade a pound of apples for a pound of bananas.
At about 1200 B.C. in China, cowry shells became the first
medium of exchange, or money. The cowry has served as
money throughout history even to the middle of this century.
China, in 1,000 B.C., produced mock cowry shells at the end
of the Stone Age. They can be thought of as the original
development of metal currency. In addition, tools made of
metal, like knives and spades, were also used in China as
money. From these models, we developed today's round
coins that we use daily. The Chinese coins were usually made
out of base metals which had holes in them so that you could
put the coins together to make a chain.
At about 500 B.C., pieces of silver were the earliest coins.
Eventually in time they took the appearance of today and were
imprinted with numerous gods and emperors to mark their
value. These coins were first shown in Lydia, or Turkey, during
this time, but the methods were used over and over again,
and further improved upon by the Greek, Persian,
Macedonian, and Roman empires. Not like Chinese coins,
which relied on base metals, these new coins were composed
from scarce metals such as bronze, gold, and silver, which
had a lot of intrinsic value.
In 118 B.C., banknotes in the form of leather money were
used in China. One-foot square pieces of white deerskin
edged in vivid colors were exchanged for goods. This is
believed to be the beginning of a kind of paper money.
During the ninth century A.D., the Danes in Ireland had an
expression "To pay through the nose." It comes from the
practice of cutting the noses of those who were careless in
paying the Danish poll tax.
From the ninth century to the fifteenth century A.D., in China,
the first actual paper currency was used as money. Through
Paper
this period the amount of currency skyrocketed causing
Currency
severe inflation. Unfortunately, in 1455 the use of the currency
vanished from China. European civilization still would not have
paper currency for many years.
In 1500, North American Indians engaged in potlach, a term
that describes the exchange of gifts at banquets, dances, and
various rituals. Since the trading of gifts was so important in
Potlach
figuring the leaders’ community status, potlach went out of
control as the gifts became more extravagant in an effort to
surpass others' gifts.
In 1535, though likely well before this earliest recorded date,
strings of beads made from clam shells, called wampum, are
Wampum
used by North American Indians as money. Wampum means
white, the color of the clam shells and the beads.
In 1816, England made gold a benchmark of value. This
meant that the value of currency was pegged to a certain
Gold Standard
number of ounces of gold. This would help to prevent inflation
of currency. The U.S. went on the gold standard in 1900.
Because of the depression of the 1930's, the U.S. began a
world wide movement to end tying currency to gold. Today,
Depression few nations tie the value of their currency to the price of gold.
Other government and financial institutions now try to control
inflation.
At present, nations continue to change their currencies. For
Today
example, the U.S. has already changed its $100 and $20
banknotes. More changes are in the works.
FUNCTIONS OF MONEY:
Generally, economists have defined five types of functions of money which are as follows:
(i) Medium of exchange
(ii) Measurement of value;
(iii) Standard of deferred payments
(iv) Store of value.
These four functions of money have been summed up in a couplet which says: Money is a matter of
functions four, a medium, a measure, a standard and a store.
(i) Medium of Exchange:
Right from the beginning, money has been performing an important function as medium of
exchange in the society. Money facilitates transactions of goods and service as a medium of
exchange. Producers sell their goods to the wholesalers in exchange of money. Wholesalers sell the
same goods to the consumers in exchange of money.
In the same way, all sections of society sell their services in exchange of money and with that buy
goods and services which they need. Money, working as medium of exchange, has eliminated
inconvenience which was faced in barter transactions. However, money can operate as medium of
exchange only when it is generally accepted in that role. Bank money can be treated as money simply
on the basis of their general acceptability for they are highly useful.
(ii) Money as a Unit of Value:
Money measures the value of various goods and services which are produced in an economy. In other
words, money works as unit of value or standard of value. In barter economy it was very difficult to
decide as to how much volume of goods should be given in exchange of a given quantity of a
commodity.
Money, by performing the function of common measure of value, has saved the society from this
difficulty. Now the value of various goods and services are expressed in terms of money such as Rs.
10 per metre, Rs. 8/- per kilogram etc. In this way, money works as common measure of value by
expressing exchange value of all goods and services in money in the exchange market. By working as
a unit of value, money has facilitated modern business and trade.
(iii) Standard of Deferred Payments:
Modern economic setup is based on credit and credit is paid in the form of money only. In reality the
significance of credit has increased so much that it will not be improper to call it as the foundation
stone of modem economic progress. Money, besides being the basis of current transactions, is also
the basis of deferred payments. Only money is such a commodity in whose form accounts of deferred
payments can be maintained in such a way so that both creditors and debtors do not stand to lose.
(iv) Store of Value:
It was virtually impossible to store surplus value under barter economy; the discovery of money has
removed this difficulty. With the help of money, people can store surplus purchasing power and use
it whenever they want. Saving in money is not only secure but its possibility of being destroyed is
very less. Besides, it can be used whenever need be. By facilitating accumulation of money, money
has become the only basis of promoting capital formation and modern production technique and
corporate business facilitated there from.
(v) Transfer of Money:
Value of any assets can be transferred from one person to another or to any institution or
to any place by transferring money. The transfer of money can take place irrespective of
places, time and circrumstances.
I. Money
A. Money is defined as anything people accept for goods and services. In modern
economies, money is national currency.
B. In the absence of money, societies use a “barter” system in which goods are
exchanged for goods.
1. Barter economies require a “Double Coincidence of Demand” in that the two
market participants must each be supplying what the other demands.
2. Barter also implies negotiations over the exchange (a cost modern economies
often avoid), which have the economic cost of the time spent for each purchase an
individual makes.
C. In a more Modern System, paper currency is the means of exchange. Society’s
acceptance of it for goods and services gives money its value. President Nixon took
the US off the gold standard in 1971 in response to a massive wave of people
redeeming gold for dollars. The panic was induced by double-digit inflation.
D. Functions of Money:
1. As a “Medium of exchange,” money exchanges are far more convenient than
barter, as they do not require any double coincidence of demand.
2. As a “Standard of value” or monetary unit, the value of any good or service
can be compared, whether the goods being compared are very similar to each
other or extremely different.
3. As a “Store of value” money enables saving, although inflation can diminish
this function. It does not deteriorate (rot) like many commodities, and the
ability to earn interest increases the utility of this function.
4. As a “Means of deferred payment,” money facilitates the credit system
(includes credit cards and payment plans for durable good purchases) and all
other types of loans.
E. The purposes people hold money are:
1. Transaction – regular purchases
2. Precautionary – emergency costs or unexpected income adjustments
3. Speculative – stocks or goods purchased in the expectation their value will
increase in the future.
II. Money Supply: Money in our economy is demand deposits plus currency and coin.
A. “Demand deposits” are checking accounts held at financial institutions known as
“Depository Institutions.” Mostly these are commercial banks.
B. Besides demand deposits, the Money Supply also includes currency and coin in
circulation (held by people).
C. “Fiat” money has less value as a commodity itself, and more value as a money. If our
coins were solid gold, then it would not be fiat money. Literally, fiat means by
declaration; in this case, it is the government declaring a national currency as the
accepted means of exchange.
D. Specifically, the government declares their national currency to be “Legal Tender,” or
money that must be accepted for payment of public or private debt.
E. The solid gold coin would be called “non-debased” if its value as a metal equals its
value as a currency. Modern fiat money is “debased” by the definition of fiat money.
F. “Gresham’s Law” is that debased money will drive non-debased money from
circulation. This is partly because non-debased money has other uses (e.g., for gold,
jewelry and crafts) and partly because non-debased money has become an item for
collectors, bidding up its value beyond the original value as money. These factors
significantly prevent non-debased money from circulating in the US economy.
G. Money is debt, and the supply of money is the monetization of certain forms of debt,
meaning your demand deposits and currency holdings are in the form of money
(monetized) and it is debt since the demand deposits are a liability to the bank, which
must have the money there for account-holders to withdraw, and currency is a
liability for the Fed, which ensures that it will provide a new bill in exchange for an
old bill.
H. Measuring the Money Supply
1. M1: demand deposits, plus currency and coin in circulation.
2. M2= M1 + near monies
i. “Near Monies” will store value but cannot themselves be in circulation
for purchases. Savings deposits, small time deposits (e.g. a 3-month
certificate of deposit), and money market mutual funds (funds that
grows your investment in a selected group of money market funds).
3. M3= M2 + large value CDs. This type of certificate of deposit is
denominated in units such as $100,000, is negotiable for resale, and cannot be
withdrawn against by check writing.
Credit cards are only a method of borrowing money, and are not added into the
calculation of money supply.
From M1 to the large value CDs in M3, liquidity has changed drastically.
Liquidity is how close a given account is to money, a means of making an
immediate purchase. Near monies are highly liquid.
4. The book also mentions L as a broad measure of money where L includes
M1, M2, and short-term debt instruments (less than 1-year to maturity).
I. Banking involves a “fractional reserve principle,” meaning only a small percentage of
demand deposits actually has to be on hand all the time, because banks do not have all
accounts being used up simultaneously. This enables banks to make loans and grow the
overall money supply.
J. Electronic exchange systems, and primarily the debit card, have partially offset the
need for people to carry currency, or write checks. Still, many suppliers of goods and
services take only cash, and debit cards do not eliminate the possibility of theft and fraud.
The Reserve Bank of India(RBI) which was established on April 1, 1935 is thecentral bank of India. Earlier it was a
shareholders’ bank but later on January 1, 1943 it has been nationalized. The RBI, with its monetary policy, functions
as a regulatory body ensuring overall economic stability of India.
The RBI has the sole power of issuing currency notes. The special system by which RBI issues notes is called
Minimum Reserve System. According to this system the RBI can issue any quantity of money if there is a minimum
reserve of gold worth Rs 115 crore and a foreign exchange reserve of at least Rs 85 crore. This system was adopted
in 1956. However, issuing money depends on several other factors.
Besides issuing money The RBI, through its monetary policy, regulates the money supply in the economy. RBI also
acts as banker to the government as well as to other commercial banks. The RBI controls the credit creation and is
also responsible for the stability of foreign exchange reserve of which it acts as a custodian.
The RBI is empowered to control the credit flow which is necessary for accelerating the economic growth of India.
Banks must keep a part of its money as reserve money, a part of which is kept as vault cash and the rest is
deposited with The Reserve Bank of India. When commercial banks fall short of funds, they can borrow from RBI at
a rate called Bank Rate. In a monetary policy where the Bank rate is high will discourage commercial banks from
borrowing from The RBI. As a result these banks will naturally charge higher interest rates from their lenders. Thus
in such a monetary policy, which is called Dear Monetary Policy, money supply in the economy will reduce. On the
other hand, a monetary policy, where bank rate is low and money supply is more, will be called a Cheap Monetary
Policy. Thus bank rate can be an effective instrument of The RBI to regulate the money supply in the market.
Another instrument that is frequently used by RBI for this purpose is called Cash Reserve Ratio or CRR, which
represents the fraction of deposit which commercial banks must keep with The RBI to regulate the money supply.
Similar to CRR, Statutory Liquidity Ratio is the portion of deposits that a bank has to keep with RBI in term of gold,
bullion or Government Securities. Any modification in the levels of CRR or, SLR therefore, will have significant impact
on the economy. For example, increasing either the SLR or CRR or, both means a decrease in liquidity of the
commercial banks. Thus with appropriate monetary policy RBI can either siphon off the liquidity or induce more
liquidity in the market. Though keeping reserves this way with the RBI is costly for banks, it is necessary to ensure
that they are able to pay their account holders when asked for it.
The RBI can purchase government bonds from or sell the same to the public. When RBI buys them, excess money is
infused in the economy thereby increase the money supply. The reverse, that is, selling the bonds will suck out
excess liquidity from the market. This operation is called the open market operation which is also a part of monetary
policy of The Reserve Bank of India and may work as complementary of bank rate policy.
The RBI is also responsible to maintain stability of foreign exchange and to hold the foreign exchange reserve. How
can foreign exchange reserve affect a country’s economy? Suppose an investor from the US wants to invest in Indian
market. USD doesn’t work in domestic market in India. The person who sold goods to the investor will get USD in
exchange of his good. What will he do now? He will go to one of the commercial banks and get Indian Rupee in
exchange of the USD. The bank will submit the foreign currency to The RBI which will then credit the bank equal
amount of money in domestic currency. The foreign exchange reserve of the RBI, at the same time, increases. But
money supply in domestic market has already increased due to this foreign exchange inflow. To adjust this The
RBI will sell out Government securities of an amount equal to the foreign exchange inflow. Thus RBI with its
monetary policy also protects domestic economy from external shocks. If money supply suddenly rises in the
domestic market without any significant rise in the supply of goods and services, the price of goods will rise. How?
Well, because a sudden increase in money supply means an increase in the purchasing power of individuals. So
people will want to buy more goods and services with that money. But supply of goods and services haven’t
increased. This means, more and more people are competing for this limited amount of resources which in turn will
increase the price of those resources. This condition is more popularly known as inflation. On the other hand, lack of
money in market is called deflation. The RBI with its monetary policy prevents such bad things from happening to
Indian economy.
As we’ve already observed, monetary policies of The RBI that are directed to controlling inflation may, at times,
interfere with the economic growth of the country. Since advances made by commercial banks play a vital role in
industrial development, any monetary policy that hinders the circulation of money will bring the industry to a
momentary halt. Moreover, most of the economic agents that play active roles in forming the market are beyond the
jurisdiction of The RBI. This limitation is often overcome by joint effort of RBI, SEBI and other related authorities.
The RBI also has a vital role in formation and implementation of several policy initiatives taken by Government of
India for the welfare of society and agriculture.
Persian 309–379 AD silver
1914-British Gold sovereign
Exchange of goods in Barter system
Exchange of goods in Barter system
Logo of RBI
First Metal money
The world earliest paper money
HISTORY OF MONEY
HISTORY OF MONEY
Medium of Exchange of money
OLD INDIAN RUPEE
Ancient coins of India
Coin from an electrum - Lydia's 1 stater of times of king Ardisa
Saving of money (Store of Value)
COWRY SHELLS