How_Money_Works_-_The_Facts_Visually_Explained

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Barter, IOUs, and money

Barter in practice

Essentially, barter involves the exchange

of an item (such as a cow) for one or

more of a perceived equal “value” (for

example a load of wheat). For the most

part the two parties bring the goods

with them and hand them over at the

time of a transaction. Sometimes, one

of the parties will accept an “I owe you,”

or IOU, or even a token, that it is agreed

can be exchanged for the same goods

or something else at a later date.

Barter—the direct exchange of goods—formed the basis of trade for

thousands of years. Adam Smith, 18th-century author of The Wealth

of Nations, was one of the first to identify it as a precursor to money.

PROS AND CONS

OF BARTER

Pros

❯❯Trading relationships Fosters

strong links between partners.

❯❯Physical goods are exchanged

Barter does not rely on trust that

money will retain its value.

Cons

❯❯Market needed Both parties

must want what the other offers.

❯❯Hard to establish a set value

on items Two goats may have a

certain value to one party one

day, but less a week later.

❯❯Goods may not be easily divisible

For example, a living animal cannot

be divided.

❯❯Large-scale transactions can be

difficult Transporting one goat is

easy, moving 1,000 is not.

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Simple exchange
One party directly
swaps its item (a cow)
for the other party’s
goods (wheat)
Summer Wheat is
delivered in exchange
for an IOU for a cow.
Winter Once the cow is
fully grown it is handed
over to fulfill the IOU.
COW
IOU
COW
IOU
US_014-015_Barter.indd 14 13/10/2016 16: