Barter both as a form of direct trade, and as a book-keeping entry, has been around much longer than the current “fiat” money that operates in society today.
The existence of “goods and services” debts were recorded in the form of clay tablets which are at least 2000 years older than the oldest coins.
The origin of barter [commodity-backed] money requires goes back to the beginning of trade in ancient societies, which started with temples and clay tablets in Mesopotamia and Egypt :
“Tax payments [by farmers] became standardised in terms of quantities of wheat or barley grain. These grain standards formed the basis for all the early money of account units, such as the mina, shekel, lira, and pound. Money, then originated not as a cost minimizing medium of exchange, but as the unit of account in which debts to the palace (tax liabilities) were measured. As the area over which taxes were imposed increased, palaces found it useful to farm out tax collections to private farmers. The first evidence of lending at interest comes from the practice of payment of taxes by the tax farmers, who then took bondservants and charged interest on the village debts. ... The clay shubati (received) tablets record these and other debts. Each tablet indicated a quantity of grain, the word shubati, the name of the person by whom received, the date, and the seal of the receiver. The tablets were either stored in temples where they would be safe from tampering, or sealed in cases, which would have to be broken to get to the tablet. Unlike the tablets stored in temples, the case tablets could and did circulate. A debt could be cancelled and taxes paid by delivering a tablet recording another’s debt whereupon the case which recorded the cancelled debt could be broken to verify the debt terms. This was general practice for several thousand years …. In other words, taxes, debts, and price lists existed for thousands of years, with clay tablets circulating before anyone had the bright idea of reducing transactions costs by creating money through stamping precious metals to coins. ... From the earliest times, markets operated on the basis of credits and debits, and even the smallest sales to consumers took place on credit, which could be carried on the books of the merchant for years before being cleared.”
When we refer to the term “barter dollars” in today’s economy we actually refer to what has historically been known as “commodity-backed money” or “representative money”.
Historic Barter
Traditional barter was the precursor of both fiat and commodity backed money and involved the direct exchange of goods or services for one another.
Aside from the obvious issue of fair trade (ensuring that the items being swapped both have the same value), barter has other problems such timing restraints and quantity restrictions. If you wish to trade corn for fish you can only do this if corn is in season. If you wish to trade a tonne of corn for a tonne of fish you have to ensure that you need a tonne of fish before you carry out the trade.
Commodity-Money
If the trade takes place now when corn is not readily available, or you are unable to use all of the fish now, then an “IOU” or intermediary resource is needed. This intermediate commodity can then be used to buy fish when they are needed. Thus the use of money makes all commodities become more liquid. When such an intermediary is introduced this becomes the basis of a commodity currency – money backed by a multilateral barter agreement between all participants.
Examples of early currency of a similar type appear throughout history:
In ancient China tea leaves were compressed into “bricks”
In medieval times Iraqis used bread
At various stages in history Russians used compressed cheese
Through the colonial era when gold was rare commodity money was present in the form of gunpowder, musket balls, corn and hemp.
The East African Masai used a currency made of miniature iron spears fastened together in the form of a necklace
Today, cigarettes are seen traded in prisons and social-settings whilst in the remote parts of Columbia coca (or cocaine) is used in lieu of a nationally issued currency.
Since payment by commodity generally provides a useful good, commodity money is similar to barter, but is distinguishable from it in having a single recognized unit of exchange.
Each of these items was desirable in their own right and was inter-tradable with other items which the holder of the currency might desire to acquire.
One of the (many) stumbling blocks of this type of money is that not everyone in the community may desire the resource.
Imagine, for a moment, trying to read a financial statement that had listed assets such as: cash $5,000; 14 boxes of oranges; 25 boxes of apples; 1000 board feet of lumber; 3 acres of land; and, 8 machines. A first question that might pop into your mind is: “How in the world do I add these assets into one another?”
It is immediately clear that for financial statements to be meaningful, amounts of dissimilar items must be stated in similar units. Money becomes the obvious choice of “similar units”. By converting different kinds of objects into monetary amounts, they can be dealt with arithmetically. This is called the “money-measurement concept” and is a fundamental principle of accounting.
Representative Money
The system of commodity money in many instances evolved into a system of representative money. This occurred because banks would issue a paper receipt to their depositors, indicating that the receipt was redeemable for whatever precious goods were being stored (usually gold or silver money). It didn't take long before the receipts were traded as money, because everyone knew they were "as good as gold".
In this system, paper currency and non-precious coinage had very little intrinsic value, but achieved significant market value by being backed by a promise to redeem it a valuable asset which was universally desired. This is the origin of the term "British Pound" for instance; it was a unit of money backed by a Tower pound of sterling silver, hence the currency Pound Sterling. For much of the nineteenth and twentieth centuries, many currencies were based on representative money through use of the gold standard.
Representative paper money made possible the practice of fractional reserve banking, in which bankers would print receipts above and beyond the amount of actual precious metal on deposit.
In this system, the material that constitutes the money itself had very little intrinsic value, but none the less such money achieves significant market value through being scarce as an artefact.
Fiat Money (Money Today)
Fiat money refers to money that is not backed by reserves of another commodity. The money itself is given value by government fiat (Latin for "let it be done") or decree, enforcing legal tender laws, previously known as "forced tender", whereby debtors are legally relieved of the debt if they (offer to) pay it off in the government's money.
By law the refusal of "legal tender" money in favour of some other form of payment is illegal, and has at times in history (Rome under Diocletian, and post-revolutionary France during the collapse of the assignats) invoked the death penalty.
Governments through history have often switched to forms of fiat money in times of need such as war, sometimes by suspending the service they provided of exchanging their money for gold, and other times by simply printing the money that they needed (eg. Germany of World War 1). When governments produce money more rapidly than economic growth, the money supply overtakes economic value. Therefore, the excess money eventually dilutes the market value of all money issued. This is called Inflation.
In 1971 the US finally switched to fiat money indefinitely. At this point in time many of the economically developed countries' currencies were fixed to the US dollar (Bretton Woods Conference), and so this single step meant that much of the western world's currencies became fiat money based.
As stated by leaders of the OECD as presented in their 2001 “Forum for the Future“ conference held in Luxembourg, today, trust has shifted from a belief in the convertible value of money “toward the critical acceptance of the institutional capacity of controlling the flows of money.”
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