The earliest form of commerce and trade was through barter: exchange goods or services for other goods or services directly without using money, without any intermediary medium of exchange.

In small villages or tribes, with limited specialization of production and similar needs and wants, this was an acceptable approach.

Although it was form of exchange specific for primiitive society, there are still some forms of it even nowadays.

For example:  International Bilateral / Bloc Trading: Even as late as the 1980s, there were many bilateral agreements, such as between  Eastern Bloc and Iran, that primarily involved commodities (such as oil or grain) being exchanged for heavy industrial equipment and products.

As human society eveolved,  problem with “double coincidence of wants” emerged. For example one sheep  would be exchanged for three chickens. It is necessary that a person who has sheep finds someone who acctually has and wants to exchange chickens and also needs sheep.  So arranging  such an exchange was  very difficult.

Also there were some other problems with barter such as lack of subdevision (in case of goods which are indivisible – sheep in our example) and lack of common standard of value  (all the goods which are going to be exchanged are not of the same value, so it is very difficult to determine the ratio of exchange between the different goods – not always 1 sheep is equivavlent to 3 chickens).

All these problems caused using of some kind of goods as a medium of exchange

First medium of exchange actaully were commodities that everyone agreed to accept in trade and  that was so called primitive money.  Form of primitive money were:

seeds / grain, spices, shell beads, whale’s teeth, tobacco and so on. Some forms of primitive money exists even nowadays in isolated economies – e.g. cigarettes in prisons.

It was the only form of money until coinage was invented in Lydia (Greece) in the 7th Century BCE. 

Generally speaking, what makes a good medium of exchange?
• Durability: Metals/jewels  vs. tobacco / chocolate
• Transportability: Paper money  vs. metals / jewels
• Divisibility: Metals / paper money vs. cattle
• Non-counterfeitability: A long-standing problem for almost all currencies
• Fungibility: Each unit is identical to others in its characteristics and functions. Paper money vs.
cattle/tobacco/cowrie shells

Primitive money had a lot of advantages compared to simple bartering, but still there were a lot of obstatcles in everyday  trading. Problems occured regarding durability, transportability, fungibility and so on.

So obeviously some new form of money was needed...