I was recently browsing the web and came across a discussion about America going back to the barter system. The author of the discussion ranted, “let’s get rid of big evil business, money, oil, and go back to horse and buggy and the barter system !” This actually sounds like a decent idea at first. Many Americans long for a more simple government and financial system. Big business is public enemy number one to the common blue collar worker. But would reverting to the barter system actually do anything to address America’s ongoing problems?
A barter system is characterized by the trading of goods between two separate entities. I trade you some berries for a shell necklace. This seems like a fair and efficient method of payment, until you examine the situation more closely. There are a variety of problems that make the barter system archaic and inefficient.
One of these problems is what economists call a “double coincidence of wants.” What in the heck is that? Simply, it means that I may have those berries to trade for your necklace, but you don’t want them! I may have to search for an item you want, necessitating multiple transactions with many different individuals. Having a standardized commodity as a currency minimizes transaction costs. You may not realize it, but the dollar makes your life a lot easier!
Another problem with the system is the need for an enormous amount of different prices. How many shells equal a vegetable? How many cars equal medical care? Let’s take a look at a hypothetical country that uses the barter system.
In Williamsland, there are 1000 goods people trade with each other. With a standardized currency, like the United States has today, there would be… 1000 different prices! The standardized currency allows for simple pricing of a variety of products. Here is how many prices would be necessary in Williamsland:
1000(999)/2 = 499,500
There would be nearly half a million different prices! I don’t know about you, but that does not sound like the ideal marketplace to me. Financial innovation in the modern era has allowed the world to become more efficient. So sorry all of you who want to travel back in time 500 years; you would be making your life much harder!