MONEY AND BARTER SYSTEM

This unit introduces the learner to concept of money, its evolution through barter system, it also discuss the problem encountered by the barter system 

which lead to the evolution of money. Moreover, this unit looks at the 

relationship between barter systems and counter trade. It equally explained the 

uses of money as a medium of exchange and discusses its characteristics and 

functions. The functions perform by modern money cum its qualities offset the problems encountered during the barter systems.

At the end of this unit, you should be able to 

i) Define money and barter system.

ii) Discuss the problem encountered in the barter system

iii) Explain the relationship if any between barter system and counter trade.

iv) Discuss the features and functions of money

Conceptual Definition of Money

L.V. Chamdler in ‗the economics of money and banking‘ 1973, defines money as what the law says it is. He said a thing is likely to have difficulty in achieving general acceptability in payments if the law prohibits its use for this purpose. 

However, he argues, that legal definitions are unsatisfactory for purposes of 

economic analysis. This is because people may refuse to accept what is legally 

defined as money for exchange of goods and services. On this basis, he concludes that legal provisions are necessary but not sufficient to determine things that do or do not serve as money.

It is the functional or operational definition of money that counts in economic analysis. Therefore, money has been defined as anything that is generally  acceptable in payment and generally used as a medium of payment or exchange 

no matter what its legal status. All coins and paper money are generally 

acceptable and endorsed with full legal status for the settlement of debts. Also, 

money is the modern medium of exchange and the standard unit in which prices 

and debts are expressed. The Central bank of Nigeria (CBN) controls the behaviour of money and credit in order to influence the balance of saving and investment expenditure and hence the rate of price level.

Therefore, in conclusion money, is defined in economics, is anything that is readily and widely accepted as a medium for exchange of goods and services or in settlement of debts. Money plays a crucial role in the economic system of any 

country. It is a means for promoting specialization and exchange on which 

modern economic activity is based.

Self Assessment Exercise

i. Differentiate between the legal definition of money and the functional definition of money.

ii. Can we say that, money is what money can buy? If so, what perspective of  definition is that?

iii. Examine the definition of money from its source.

The Barter System

Before the invention of fiat money in the forms of currency notes and coins as we know now, trade had been conducted by barter, that is, exchange of commodities for commodities, however, an advance stages of barter witness exchange through the use of commodity monies such as 

cowries, shells, cow, manilas, iron bars, salt and pepper etc. the barter system refers to a situation where goods are directly exchanged for goods. 

The problems associated with the barter systems are:

a. Double coincidence of wants:

 It entails finding a person who has what you want and requires what you have. That is, someone who does not only need what you have but also have what you need. 

For example, a person who has rice and needs yam must search for another person who has yam and needs rice. This process is too cumbersome and leads to time wastage.

b. No common unit of measure:

 It was difficult to arrive at a uniform or an easily acceptable exchange rate (i.e. what quantity of a particular commodity would be exchange for certain quantity of another commodity) between different commodities.

c. The absence of storing wealth or value: 

under the barter system it is difficult to store wealth because most articles of trade, especially agricultural products are easily perishable.

d. Difficult in making deferred payment: 

as a result of exchange rate problem, the barter system does not lend itself easily tom the credit system i.e. to make a good or service available to somebody now for the payment to be made at a future date.

e. Problem of bulkiness and indivisibility of some goods: 

some goods are often too bulky to be carried from one place to the other, and are not capable of being divided into smaller units to facilitate transactions.

f. Indivisibility of some product:

 Some products were too wholesome to be divided for exchange to take place. For instance an exchange of tuber of yams and meat from cow.

g. Transport and weight problem:

 This distance to be covered before exchange could take place was unimaginable couple with the weight of the product made the process too cumbersome.

h. No specialization: 

During the period people tend to engage in production of many product as a panacea to other problems encounter during trade.

Self Assessment Exercise

i. List and explain the problems associated with barter system. 

ii. Does the barter system solve its problem?

Barter vs Counter Trade

Barter is form of counter trades, others include switch trade and offset trade. 

Counter trade is a system in which two or more countries involve in exchange of 

commodities for commodities or goods for services and vice versa. Mostly barter 

exist among local people who have common tradition, believe and cultural 

background (not in all cases) but once it extent to other countries, in which case, 

it has involve export and import then it becomes counter trade. Both barter and 

counter trade still exist up till date but in a minima quantum. An example of counter trade is the case of Congo and China in which the former rely on the later for infrastructural development in exchange for metals. Counter trade could 

take any form but it involves a memorandum of understanding between the countries signing the agreement.

Self Assessment Exercise

I. Examine the relationship between counter and barter trade.

II. Does counter trade involve physical cash?

III. How does equilibrium reached in counter trade?

Function and Features of Money

The Functions of Money

The functions of money can be seen from the major problems of barter system 

been solved by the modern day money. These functions serves as relieve from 

obstacles of trade by barter. These are what money could be used for or what it 

does, they include the following:

a) A medium of exchange: 

Money facilitate the exchange of goods and services because people exchange the goods and services they produce for money and then use the money realised to buy other goods and services they want, which was hitherto not possible during barter and enabled man to overcome the problem of double coincidence of want.

b) A unit of Account: 

Money serves as a unit in term of which goods and service could be expressed and recorded

c) A measure of value: 

Money serves as a unit in which the value of goods and services could be established. This allow us to compare any two or more goods or services.

d) A store of value: 

Money is a good store of value providing purchasing power in a general form that can be used to meet future needs of goods and services. Under the barter system, articles of trade are easily perishable and cannot be stored for future transaction.

e) A standard of deferred payment:

 Money makes it possible for people to enter into contract, such as lending and enjoyment of services for fixed amount of money payable at future date. The exchange rate problem makes this impossible under the barter system.

The Features of Money

The features of money are basically major qualities that anything called money is 

expected to possess. These features or qualities are otherwise known as attributes or characteristics of money. They include the following among others;

i) General acceptability:

 It must be acceptable by all economic agents in the country in which it is used in payment for goods and services,  and in settling debts and obligations at all time.

ii) Divisibility: 

It should be available in units of a standard sufficiently divisible to facilitate the purchase and sale of goods and services over a wide range of prices.

iii) Durability: 

It should be able to last for a long time without losing its value. This is the reason why high quality papers are used to print paper currency and precious metals are used in minting coins.

iv) Portability: 

Money should be conveniently carried about for easy 

transfer to other people during transactions.

v) Homogeneity: 

One unit of money must be the same in all respect (i.e. identical) everywhere throughout the country. This will promote general acceptability.

vi) Relatively Scarce:

 It must be unique, not something that can be found easily anywhere and it must not be supplied in excess so as not to lose its value whereby it will not be able to serve effectively as a store of value and a standard of deferred payment.

vii) Malleability: 

This is a characteristic of coin – money. The precious metal use for money must be re-coinable when the need arise

Self Assessment Exercise

i. Discuss some of the characteristics of Money.

ii. What are the functions of money in a modern economy?

iii. Which of the function of money is (are) synonymous to problem of inflation?

iv. Examine the most important of the function of money 

v. Which of the qualities of money is related to inflation?

vi. In your own Opinion, what is(are) the reason(s) for rejection of coin-money 

in Nigeria

Conclusion

The introduction of money has enabled man to overcome the problems associated with the barter system or rather has put barter system into extinction.  And that barter system is a kind of counter trade since the two include exchange of commodities for commodities or services. The unit also sufficiently enumerates and explained the several function money performs and that for anything be considered as money it most exhibit some certain characteristics.

Summary

This unit explored the barter system and it attendant problems, it also examine

the evolution of fiat money and explained the relationship between counter trade 

and barter trade. It also explained the features and functions of money. In sum,

this unit explored the role of money in every modern economy.

Marked Assignment

i) What do you understand with barter system, what are its allied problems?

ii) Examine the nexus between the barter systems and counter trade. 

iii) What are the functions of money in a modern economy?

iv) Which of the function of money is (are) synonymous to problem of inflation?

v) Examine the most important of the function of money 

vi) Which of the qualities of money is related to inflation?

vii) In your own Opinion, what is(are) the reason(s) for rejection of coin�money in Nigeria

viii) Would there be problem of inflation in the absence of money?

ix) Evaluate the role of money in any economy. 

x) Is money a source of vice or virtue?

References/Further Readings

Attah B.O, Bakare, T.A. & Daisi, O.R., (2011); Anatomy of Economics  Principles, Q&A (Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, Lagos, Nigeria

Amacher, R and Ulbrich, H, (1986); Principles of Economics, South Western

Publications Co. Cincinnafi, Oliso

Bakare –Aremu T.A, (2013); Fundamental of Economics Principles (Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, Lagos, Nigeria