I'd recommend reading David Graeber's Debt: The First 5000 Years, or watching his lecture@Google, which pretty much covers all the major points. In it, he argues that our conception of the linear progression from barter to coinage to our current financial system stems from a hypothesis by Adam Smith, with no basis in reality. Barter economies have existed in the past, but were practiced by communities that either had a parallel economy based on currency, or used to in the recent past. For communities that weren't already For communities that didn't have a concept of a common currency (e.g. precious metals, wampum beads, salt, etc. etc.), people relied on a credit economy. Essentially, it is your quid pro quo situation. If you needed vegetables, you borrow them from your neighbor. At some point in time, if your neighbor needed a new table, he comes to claim his debt. Some communities, such as medieval villages in England, formalized it by a village meeting at the end of every year, where everyone lays out what they've borrowed, and after all the debts are canceled (Richard gave Ulric two sheep who gave three bushels of peas to Alice who gave a leather jacket to Richard...), net losses and gains are calculated, and then finally settled with a final exchange of goods. In essence, the village balances its sheets and starts each new year with a blank slate for everyone. In other communities, everyone is always a little in debt of everyone else. I might owe you a bunch of chickpeas, but you owe me a cup of flour. This isn't a bad thing, b/c it always gives me an excuse to come over and borrow something (and hang out and be neighborly), because, you know, you still owe me something.

It's called a barter system or barter economy. It still exists today in limited instances.

Yes. People used to trade (barter) goods or services before there was money. Example: I'll give you 20 potatoes for that chicken. Or I'll build you a hut if you give me that horse. But there are some flaws with this system. If someone wants 20 potatoes for a chicken, they have to find someone who has 20 potatoes, wants a chicken, and agrees to the trade. However, with currency, the person with the chicken could offer a price of 5 silver coins, and buy 20 potatoes with the 5 silver coins.