Barter System & its disadvantages over Money

All about your Money Honey… Part 1

Before understanding money, its characteristics & functions, it is better to understand barter system. So first let’s begin with what does Barter System mean and its demerits over Money.

Old Age Barter System

The Barter System was a practice by which people exchanged goods for other goods. It is the oldest method of trading traces back to 6000BC. It was introduced first by the tribes of Mesopotamia. It leverages the unused inventory, reduced cash outlay & turns resources into purchasing capacities at the hour of need. This was possible only in a simple economy but
after the development of economy, direct exchange of goods without the use of money was having many defects. One person could have felt cheated out of a barter deal whereas the other could have felt joyful.

Difficulties faced during barter transactions were as follows:

1.Lack of double coincidence of wants

Double coincidence of wants may not be always possible with Barter System as two persons desiring exchange must not be having the need & usefulness for the goods under possession of each other.

Eg., If Sam possessed cloth, and wanted to exchange it for shoe hence he had to search for a person who is ready to exchange shoe for cloth. Sometimes it is impractical to find such persons who required what you wanted to sell and he has what you want to buy. Thus, it takes lot of time & work.

2.Lack of common unit of value

We can't develop any system of account when there is no common unit of value and when commodity is valued in terms of other commodities in the market and there is no money valued.

Since there was no medium available to value a commodity, thus reaching on a consensus was difficult. How much to be exchanged was a question mark. Under such conditions one party had to suffer & will not get the full value of the commodity he possessed.

3.Lack of standards for deferred payments

As Credit transactions were not easily carried out in the barter system, Contractual payments or future payments would certainly be very difficult to undertake.

4.Lack of system for storage of value

Because of lack of money in the barter economy, wealth is stored in terms of goods/commodities. However, Commodities are mostly perishable in long run & are subject to some problems such as cost of storage, loss of value, non-monetary etc.

5. Lack of subdivision of commodities
Sometimes it was really difficult to measure & subdivide the commodity and then exchange without the loss in value. In most cases either the commodity was indivisible or a consensus wasn’t reached.

6. Lack of surplus stocks

Barter System is not possible, when there is no excess stock availability of goods with either party.

Let’s see how “Money took birth to bring an end to the Barter System” in the next blog Part 2.­­

Categories: Barter System, Importance of Money, Money Basics, Money Management, Tutorials