Specialisation and the division of labour

Early societies often relied on a barter system to enable goods and services to be traded. Indeed, the earliest forms of market were established to allow producers to exchange their products directly for other products. Evidence suggests that barter systems were widespread around 8,000 years ago. However, the evolution of acceptable mediums of exchange, such as salt, gold and silver gradually replaced trade by barter.

Money occupies a central role in market economies because it acts as a medium of exchange. The advent of money replaced the need for exchange through barter and enabled producers and factor owners to specialise. For example, without money, a hairdresser would have to accept another good or service as direct payment for a haircut. However, if the hairdresser is paid in potatoes, it means that he or she must pay for the services of an assistant in potatoes, as well as pay his or her suppliers in potatoes. However, what if another client wants to pay in rice, and yet another in wheat? What is a haircut worth in terms of rice or wheat? Ex-change is most likely to occur when a single medium of exchange is accepted by everyone. Exchange through barter is very difficult, and barter economies tend to remain extremely undeveloped because direct trade is difficult.

Money allows complex trade and exchange

Money is any asset that is generally accepted in the settlement of a debt incurred in an exchange. For an asset to be widely used as money, it must have certain properties, including that the asset is portable, divisible, durable and stable in value. Some assets fulfill the role of money much better than other ones. Potatoes, for example, would not make a good medium of exchange because they are not durable, nor do they have a stable value. Throughout history, gold and silver have frequently been used as money, given their divisibility into bars and coins.

The introduction of paper money by the Chinese in the 9th Century AD marked a significant development in the evolution of money, especially given the ease with which different denominations could be created, and the portability of paper money in comparison with gold or coinage. It is said that the Chinese invented paper money because there was a shortage of metal to make coins.

In more recent times the invention of cryptocurrencies, such as Bitcoin, and new online payment methods has created new opportunities to exchange. What is clear that the evolution of money as a medium of exchange, and as a store of wealth, had a considerable impact on the development of modern commerce, international trade, and global prosperity.