by Alexander W. Salter
The American Institute for Economic Research
Money is an indispensable part of modern economic activity. It was not always so: barter, where goods trade directly for other goods, was the norm for most of human history. But the rise of money as an economic institution greatly increased humanity’s productive potential.
Think about how hard it is to get the goods you want to consume in a barter economy. You first must find someone who has the good you want. But that person must also want the good you offer in exchange. This is known as the “double coincidence of wants” problem. The need to find a double, or mutual, coincidence of wants is effectively a large transaction cost—a kind of trade barrier associated with general economic activity. When we use money, however, this problem is eliminated. The seller automatically wants what the buyer is offering because the buyer is offering the ability to purchase whatever the seller wants. And that effort that would have been devoted to finding the right trading partner can be put to more productive uses.