The complexities of the modern money system might seem overly complicated to many. However, the ironic thing about our situation is that the system we have is, perhaps, the most simple we have. The most basic purpose of an economy is to function as a system for which we are able to exchange goods and services. Due to the direct way that it speaks to this function, there are people, even in today’s highly educated world, that believe that a bartering system could utilize as a more efficient way to do this. However, this is a highly simplistic notion, while perhaps a bit romantic. Here are some of the comparisons between using a currency system, versus a bartering one...

The barter system is too complex

A bartering system is one in which each citizen has a skill, craft, or item that can be utilized by other people around them. They then trade this service with other people, who have their own goods and services, as a way to round out everything they need. The problem with any notion of this system is that the goods, services, and skills of today are far too complicated, with far too many niche industries, to ensure that everyone is able to get what they need. You also run into the problem that someone who deals with expendable goods might not be able to retain the value that someone who produces permanent goods is able to. Trying to work out a system that uses bartering in today’s workplace would simply be counterintuitive and, frankly, impossible.

Commodity Money

While we can safely say that using currency as a vehicle for trading is far superior, there are two different types of currency that have been used around the world. The first of these types of currency is commodity money, which is when people use items that have intrinsic value as a basis for trade. This can include gold, gems, oil, or even food and cigarettes, in certain social situations. For thousands of years after the concept of currency was adopted by several world cultures, commodity money was the way that people went about empowering the economy.

Fiat Money

In today’s highly digitized and fast-moving marketplace, however, commodity money is actually too slow and ineffective to generate the velocity of currency that is required to keep an economy as big as the United States up and running. This brings us to the modern view of currency, which is where we use fiat money, which is currency that has no intrinsic value other than what the government declares, and what the people accept. The government is able to control the value of fiat money by controlling the money supply, and inflation and deflation forces.