This is my attempt to relate money to bartering.. though it may not be an effective way to explain money. It’s either a work in progress.. or a throwaway idea.. I’m not sure. – Charles
Although economists will tell you that there is no proof that money came about as a way of making barter work better, money really is just a scorekeeper that operates in a manner that in effect allows you to time-shift bartering.
In other words, all the money floating around in an economy is the sum total of all the goods and services that the people of an economy are able to create and trade, it’s a score-keeper of all the trades.
To give you an example of a time-shifted barter, imagine, each week your neighbor Bob comes over and cleans your car, and in exchange, you give him a gallon of milk. You’ve both decided that one gallon of milk is equal to a car cleaning and it’s been working out well for the both of you:
1 gallon of milk = 1 car cleaning
But, one day Bob rushes over to your house in a tizzy – he has relatives coming to visit and he needs 2 gallons of milk! But you only need your car cleaned once, so how the heck is Bob going to be able to get 2 gallons of milk from you?
You both sit there scratching your heads trying to figure out a solution. Suddenly, after a few minutes, Bob has a brainstorm and blurts out:
“I have an idea, I’ll clean your car for one gallon of milk like I always do, but in exchange for an additional gallon of milk I’ll owe you another car cleaning! What do you think?”
You think about it for a bit and then say..
“OK, fine, I’ll give you that extra gallon, but you have to write down on this piece of paper an IOU “good for one car cleaning” otherwise I might forget.”
“OK” – says Bob.
And off he goes with his 2 gallons of milk, and you with your “IOU good for one car cleaning” in your pocket.
Now our list of items of equal value is growing:
1 IOU = 1 gallon of milk = 1 car cleaning
Later that night, your wife tells you she needs a basket of tomatoes for dinner. You grab a gallon of milk and run down to the Smith’s house to trade your gallon for a basket of tomatoes. When you get there though, Mrs. Smith tells you that, unfortunately, they have all the milk they need.
The both of you sit there scratching your heads wondering how you can get that basket of tomatoes from Mrs. Smith since she doesn’t need your milk. After a minute or two, you jump up when you notice that Mrs. Smith’s car is really dirty! You reach in your pocket, pull out the IOU, and tell Mrs. Smith:
“Your car is so dirty! Would you like your car cleaned in exchange for a basket of tomatoes?”
Mrs. Smith says:
“Sure, that sounds like a fair trade.”
So you give her the IOU.
“Here is an IUO for one car-cleaning from Bob, my neighbor. He’ll come over any time and clean you car!”
Mrs. Smith says:
“OK.. cool.. and here is a basket of tomatoes in exchange!”
Off you go back home happy with your basket of tomatoes!
So now our list of items of equal value has grown:
1 IOU = 1 car cleaning = 1 gallon of milk = 1 basket of tomatoes
What this means is that you should be able to trade 1 IOU for any of the items above, as they are all equal in “value.” With 1 IOU, you could get a gallon of milk, or a basket of tomatoes, or a car cleaning!
YOU HAVE JUST CREATED MONEY!
The value of 1 unit of the money (an IOU) is equal to each one of those items above.
And, as a result, your new ECONOMY has been created.
Each item of money is an IOU and all the money in the economy is the sum total of all the IOUs trading amongst the people.
*The fact that it’s called an IOU should not confuse you into thinking that money is debt. The owing part simply means the piece of paper can be traded for the original person’s, or anyone else’s, goods or services of equal value in the future. Once it passes from someone to you, it changes from becoming an IOU to a “someone owes me” goods or services equal to this piece of paper. That’s money.