A barter system is an old method of exchange. This system has been used for centuries and long before money was invented. People exchanged services and goods for other services and goods in return. Today, bartering has made a comeback using techniques that are more sophisticated to aid in trading; for instance, the Internet. In ancient times, this system involved people in the same area, however, today bartering is global. The value of bartering items can be negotiated with the other party. Bartering doesn't involve money which is one of the advantages. You can buy items by exchanging an item you have but no longer want or need. Generally, trading in this manner is done through Online auctions and swap markets.
History of Barter System.
If we go through the evolution of human history, early humans had very little needs. They used leaves and animal skin as clothes and ate fruits and flesh of animals. There was no need for exchange of goods, as their needs were limited. As the number of people increased, they had to travel long distances to find food. They started forming groups. The members of each group stayed together while traveling and hunting, and they refrained from any interaction with other groups. Gradually, inter-group interaction started and this paved the way for the system of trading. They started exchanging their goods for what they needed. This type of exchange was mainly done to fulfill basic needs, like food, clothes, etc.
After years of nomadic life, people started settling down in areas, where they began growing plants and raising farm animals. As cultivation and farming flourished, people started developing other skills too. There was no shortage of food, and they had enough time to spend on other work, like pottery, carpentry, weaving, etc. With surplus goods in hand, the system of trade flourished. They started trading surplus goods for goods and services they needed. A hand-made spear in exchange of woven cloth, or a cow for a sack of grains, etc. Apart from goods, services were also exchanged. People started traveling long distances to buy and sell their products.
Inconveniences of Barter System
1. Lack of double coincidence of wants:
Double coincidence of wants means what one person wants to sell and buy must coincide with what some other person wants to buy and sell. ‘Simultaneous fulfillment of mutual wants by buyers and sellers’ is known as double coincidence of wants.
There is a lack of double coincidence in the wants of buyers and sellers in a barter exchange. The producer of clothes may want shoes in exchange for his clothes. But he may find it difficult to get a shoe-maker who is also willing to exchange his shoes for clothes.
2. Lack of common measure of value:
In barter, there is no common measure of value. Even if the buyer and seller of each other commodity happen to meet, the problem arises in what proportion the two goods are to be exchanged. Each article must have as many different values as there are other articles for which it is to be exchanged.
3. Lack of standard of deferred payment:
There is a problem of borrowing and lending. It is difficult to engage in contracts which involve future payments due to lack of any satisfactory unit. As a result, future payments are to be stated in term of specific goods or services. But there could be disagreement about the quality of the good, specific type of good and change in the value of the good.
4. Difficulty in storing wealth:
It is difficult for people to store wealth or generalize purchasing power for future use in the form of goods like cattle, wheat, potatoes, etc. The holding of stocks of such goods involves costly storage and deterioration.
5. Indivisibility of goods:
How to exchange goods of unequal value? If a household wants to sell his cow and get in exchange cloth equal to the value of half of his cow, he cannot do so without killing his cow. Thus, lack of divisibility of goods makes barter exchange impossible
