In a money-based economy, the gardener pays the hairdresser for a haircut. The butcher sells lamp chops to the motor mechanic and buys potatoes from the gardener. The farmer pays the mechanic to fix his tractor and sells the flour to the miller. The baker buys flour from the miller and sells bread to the hairdresser. In this system, the goods and services flow one way and the money flows back the other way.
If the money system breaks down and the cash machines are empty, these exchanges would be impossible. If money loses value, buying and selling might become difficult. The world will have to go back to barter, where two people swap their surplus goods and services. Barter is very restrictive, due to search costs. If a hairdresser wants some bread, he must find a baker who wants a haircut. Economists call this the “coincidence of wants”. The problem is that when the hairdresser finds a baker with surplus bread, he might be bald and need a new shirt. A lot of productive time will be wasted looking for people who want to make exchanges, so everyone will be worse off.
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