Lecture Notes: Evolution of Money from Barter System
Introduction to Barter System
- Initial simple economies relied on barter.
- Example: A small village with few families exchanging goods.
- Two families: one bred rabbits, the other grew wheat.
- Initial trade agreement: 1 bag of wheat for 1 rabbit.
Challenges with Barter
- As the village grew, more families and goods/services complicated barter.
- Example scenario with Catherine, daughter of a shoemaker:
- Attempted to trade shoes for wheat but faced challenges.
- Complex trade chains needed to satisfy both parties (shoes for wheat, apples, horseshoes, trousers).
- Conclusion: Barter becomes inefficient and time-consuming in larger economies.
Need for a Medium of Exchange
- Money is required to overcome barter inefficiencies.
- Functions of money:
- Medium of exchange.
- Unit of account for measuring costs and revenues.
Characteristics of Money
- Durability: Long-lasting without deterioration.
- Homogeneity: Identical units.
- Portability: Easy to carry.
- Divisibility: Ability to make change.
- Value Stability: Maintains value over time.
Historical Media of Exchange
- Examples: Cattle, salt, seashells.
- Issues: Indivisibility, lack of portability, quality inconsistency, loss of value over time.
Gold as Money
- Gold emerged due to:
- Durability: Corrosion resistance.
- Homogeneity: Identical coins, purity marking.
- Portability: Small volume with high value.
- Divisibility: Coins of different weights.
- Value Stability: Limited natural supply.
- Historical role: Used as money for most of human history.
Modern Monetary System
- Shift from gold standard in modern times.
- Exploration of consequences in future discussions.
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