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2 - The Journey to a Stable Monetary System Begins

Meeting Our Basic Needs

In early society mankind had three principal needs: food, water and shelter. Utilising each other’s particular talents for the benefit of the group as a whole, those with quickness went hunting, the strong fetched water or built shelter, the mothers and the elders tended to the children, prepared food and made clothing.

The Exchange of Goods and Services

As society progressed, barter agreements became commonplace. A hunter might swap his meat with a farmer in exchange for butter, milk and vegetables. The farmer might later swap potatoes with a fisherman in exchange for a share in the day’s catch. The fisherman might swap the remaining catch with a cobbler for a pair of shoes.

These exchanges are made voluntarily by each character and each character benefits because he values the items he receives more than the items he gives up. Think of it this way, it makes less sense for each character to fetch water separately, to gather food separately, to build and maintain shelter separately. This simple society is better off and experiences more prosperity if each character focuses on his or her own particular skills, exchanging the fruits of their labour with other members of society for something else they might need.

However, the merits of such a barter society are limited by two important factors. To quote Murray N. Rothbard in his book What Has the Government Done to Our Money?: “The two basic problems are “indivisibility” and “lack of coincidence of wants”. Thus, if Smith has a plough, which he would like to exchange for several different things, say eggs, bread, and a suit of clothes - how can he do so? How can he break up the plough and give part of it to a farmer and another part to a tailor? Even where the goods are divisible, it is generally impossible for two exchangers to find each other at the same time. If A has a supply of eggs for sale, and B has a pair of shoes, how can they get together if A wants a suit?”

This leads us to the first major conclusion so far... direct exchange is not efficient as a society grows. Instead we need to develop a system of “Indirect Exchange”.

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