Sunday, November 17, 2013

The Meaning of a Word

I have been involved in a comment thread in another blog ( Some of the discussion revolves around whether barter economies ever existed and whether barter is used in some areas. One side of the discussion emphatically says that barter economies don't exist and that barter occurs very infrequently if at all. The other side says that of course barter exists as we have many examples societies which don't use money yet exchange goods or examples today where goods are exchanged without the use of money. As in many discussions, I found that both sides are right. The problem is that they define the term "barter" differently.

One group uses barter to mean "the exchange of goods without the use of money". The other group defines barter as "The immediate exchange of goods without the use of money". The difference is that the second definition requires that the barter exchange happen immediately while the first allows delayed delivery of a good.

Thus, if two kids eating lunch at school agree to trade one kid's cookies for the other's apple, that is barter. But if they agree to trade one kid's cookies today for the other kid's brownie in tomorrow's lunch, that is not barter (because the second half of the exchange happens the next day).

I've observed the same thing with other terms. Economics has the concept of "commodity money", meaning money which is based on the value of some commodity. Gold coins are commodity money if the value of the coin is based on the value of its gold content. Cigarettes are used as an example of commodity money in POW camps or prisons, where they are exchanged for goods.

Again, there are people who claim commodity money doesn't exist. They point out that the value of a coin is generally not exactly the value of the gold or silver in the coin (since gold and silver values can vary). They similarly argue that as soon as the commodity (e.g. cigarettes) start being used as a unit of value (e.g. IOUs are written stating how many cigarettes you owe somebody) then they are no longer commodity money but instead become an accounting unit. So this group uses a very narrow definition of commodity money -- the value must be based solely on the commodity content and all transactions must be made using the physical commodity.

Others use a more relaxed definition of commodity money, considering commodity money to be anything which is primarily based on the value of the underlying commodity, even if the value of a gold coin is not exactly the value of the underlying metal or the commodity turns into an accounting unit. After all, many monetary terms originated as units of weight, from the shekel to the pound sterling.

So why the differing definitions? One reason is to facilitate arguments against some past work. Adam Smith argued that societies first engaged in barter, then

So why the controversy? In the case of barter and commodity money, it is because there are two basic schools for how money originated. One says that people first traded using barter and that certain intermediate items (e.g. a specific weight of gold or silver) became accepted as a standard unit of value, with other goods gaining a value or price based on this standard. Numerous materials have been used as this standard unit of value (e.g. cowrie shells through much of Africa and south Asia) but eventually gold and silver coins became the standard.

The other theory for the origin of money is based on the "credit theory of money". This says that money first arose as an accounting technique, with trade done in some standard unit of value. Money has never been based on quantities of some commodity (e.g. a weight of gold) but instead is defined in terms of credit and debt.

The problem I see is that both schools of thought are correct. Any time trade exists there needs to be a method of measuring value. There is good evidence that certain commodities became used as a standard of value. There is also good evidence that this standard of value was used as an accounting unit, specifying a debt between two people.