- Aug 17, 2011
In trade, two parties willingly exchange goods and services. The economist Adam Smith observed that people have an intrinsic “propensity to truck, barter, and exchange one thing for another.”2 Trade originally involved barter, the direct exchange of goods and services. If you have two items to trade, then you agree a rate of exchange—for example, five of this is worth one of that. If you have 100 items, then traders would have to remember 4,950 exchange ratios. For the 10,000 different items that a supermarket may stock, you need to remember 49,995,000 exchange ratios.
In the eighteenth century the French opera singer, Mademoiselle Zelie, performed in French Polynesia during her world tour, receiving one-third of the box office—3 pigs, 23 turkeys, 44 chickens, 5,000 coconuts, and considerable amounts of fruit. Unable to consume the payment, Mademoiselle Zelie’s fee equivalent to 4,000 francs—a considerable sum at the time—was wasted.3 When naturalist A.R. Wallace was exploring the Malay Archipelago, he planned to obtain food through barter. But he found that the indigenous people did not want the commodities he brought. Wallace nearly starved as his and the Malays’ needs rarely coincided.4
The problems of barter are overcome where traders negotiate through a medium of exchange—money. Money allows separation of buying and selling in the process of exchange. Any traveler in the Malay Archipelago today carrying cash or an American Express or Visa card is unlikely to suffer the indignities and privations of Wallace.
Barter still exists. During the Cold War era, communist economies bartered for essential goods. The UK exchanged Russian grain for Rolls Royce jet engines that were used to power Soviet MiG fighters in the Korean conflict. “Returned with interest,” Glynn Davies, a monetary historian, grimly noted. In 2010, North Korea’s cash-strapped totalitarian regime, through its Bureau 39, offered several tons of ginseng, a curly white root claimed to improve memory, stamina, and libido, to settle $10 million in accumulated debt owed to the Czech Republic.5