Running a modern economy on barter

Running a modern economy on barter

Question: If money is just an exchange medium, why is an financial crisis so catastrophic for most industries when almost all goods and services can technically still be produced/provided without the existence of money?


You are referring to barter.

There are many problems trying to run a modern economy on barter. For instance, if you own cows, how can you trade a part of those cows to pay for a bus ride to town?

Let’s concentrate on one problem in particular: borrowing, and specifically fractional-reserve banking. The foundation of a free- market economy, fractional reserve banking cannot be done via barter.

What is fractional reserve banking? When you put your money in the bank, the bank gives you a statement attesting that your money in full is sitting in bank vaults ready for you when you want it. However, it isn’t. As soon as you put your money in the bank, the bank lends out 90% of it to borrowers and retains only about 10% of it as reserves (kept at the Federal Reserve). This is how the money supply increases. As the money supply increases, more money is made available to other borrowers who want to expand their businesses. That’s how the economy grows.

If this sounds like a house of cards, it is. But this is how a modern economy is structured. Take away fractional-reserve banking and the economy would go into steep recession from which it would never recover. We would all be running around in loin cloths with spears.

Nomads have no proof of ownership of their animals. So they must either sell the animals for cash or keep them. They cannot borrow money against these assets. This is a severe drag on economic development in nomad economies. (Cryptocurrency could be a big benefit to these societies by allowing proof of ownership necessary for collateralizing a loan.)

Another vital feature of a modern economy is the stock market. The stock market pays investors today for what their companies will earn 10 years from today. In that sense, the stock market brings forward wealth from the future to be enjoyed today.

The stock market could not function in a barter economy. With no currency by which to measure wealth, the riches we enjoy today from this “timing accelerator” we call the stock market would not be possible.

Borrowing brings money from the past to be used today, while the stock market brings money from the future to be used today. These two vital wealth-transmission mechanisms enrich our lives today beyond imagination. Neither would be possible without real or digital currency. 

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