Exchange of goods and services people produce and want is critical to satisfying the diverse wants of everyone. Such exchange is possible by using either the barter system or money as a medium of exchange…
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Barter and Monetized Systems of Exchange
Different items have worked as money at different times. For instance, tobacco in America, chisels in China, gold until the gold standard was abandoned in the 1930s and paper currencies thereafter. Exchange of goods and services people produce and want is critical to satisfying the diverse wants of everyone. Such exchange is possible by using either the barter system or money as a medium of exchange. Barter was prevalent medium of exchange before the advent of money. It remains the principal form of exchange even today in tribal and traditional societies where political institutions are primitive, economies are not yet monetized and social systems are based on traditional practices and communal support. Even in advanced societies and economies like the United States, barter is still carried out to a limited extent in rural areas and public and charitable activities. On the other hand, modern societies and economies like that of the United States rely on money as the main medium of exchange. They have the highly developed political institutions to regulate money and prevent exploitation, manipulation and profiteering that money makes possible; they have monetized economies that help create and accumulate wealth; and they have social awareness that is necessary for people to trust an intrinsically worthless currency note, a mere piece of paper with the central bank’s assurance in small prints, as a medium of exchange. Barter and monetized systems of exchange have their own advantages and disadvantages (benefits and costs). ...
Third, since commodities and services are exchanged directly, there are no foreign exchange fluctuation or balance of trade and payment crises. Fourthly, the division of labor is clear, as one produces what one has the means to do. Barter’s Disadvantages: The barter system has several serious disadvantages too. First, coincidence of wants might be difficult unless the net is cast widely, which makes trade cumbersome. Secondly, in barter, there is no common measure of value making it difficult to ascertain, say for instance, how many loaves of bread would be equivalent to a cow if one wants to sell bread and the other cows. Third, in many cases the commodity one wants to sell, as the cow here, might be indivisible to sell in parts to buy a few loaves of bread. Fourth, commodities and animals often deteriorate in value fast and cannot be stored for long, which makes accumulation and storing of wealth difficult. Fifth, barter makes deferred payment and contractual deal problematic. Sixth, transporting bulky commodities from place to place becomes cumbersome in a barter system of exchange. Money’s Advantages: To avoid repletion of what has been already said, money takes care of all of the disadvantages of the barter system of exchange. Sexton describes the functions of money as a medium of exchange, a measure of value, as a store of value, and as a means of deferred payment (792-794). Briefly speaking, when money is used as a medium of exchange, there is no need for coincidence of wants. Money represents the common measure of value; it is divisible into small and large amounts; it can be stored almost forever if it is put away safely; it makes deferred payment easy; and
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