Barter System and its Difficulties –
Barter System – It is system of exchange in which goods or services are exchanged with other goods or services directly.
In the starting of human civilization there wasn’t money as a medium of exchange. It was the barter system and there wasn’t many exchanges taking place since each family was nearly self sufficient and very less mobility as compared to today.
The exchanges which were taking place at that time were in the form of barter, people used to exchange goods for other goods.
There were a lot of difficulties in barter economy. There was no acceptable means of payment for the direct purchase of goods and services in the barter economy.
In a purely barter system, there was no generally acceptable medium of exchange in the form of a particular thing which could be used to buy goods and services and do other type of transactions.
Difficulties of Barter System –
1. Lack of a Standard Unit of Account –
A barter economy lacks a common medium of exchange and also a standard unit of account in which prices could be measured and quoted. In the absence of a common or standard unit of account, the number of exchange ratio (price of goods expressed in terms of each other) between goods would be very large.
For example, two bikes for one car, one bike for two quintals of rice, one liter milk for two kg. of wheat and so on.
So, the lack of a standard unit of account to measure value of different goods and services makes exchange or trade difficult.
2. Double Coincidence of Wants –
The lack of generally acceptable medium of exchange creates a problem of double coincidence of wants which is faced by the persons who wants to buy or sell goods.
For exchange of goods, persons desiring to exchange goods must specially want those goods what others offers in exchange. So, an individual who wants to have a good must find another person who offers to give up the good wanted by him and who is willing to accept in exchange the good offered by him.
So, in the barter system only when wants for buying and selling goods of different persons coincided the exchange was possible.
It was a very time consuming process to find a person with whom wants coincide.
3. Impossibility of Subdivision of Goods –
Another problem under barter system was the impossibility of subdivision of goods without loss of their value.
For example, if a person has a horse and wants to have 10 kg. of wheat, it is too costly to give one horse for 10 kg. of wheat he required. Then, to do this transaction horse has to be divided. But the fact is one horse can’t be divided. So, the impossibility of subdivision of goods posed a great difficulty in exchange or trade of goods.
4. Lack of Information –
Another problem in the barter system was that it required traders to have a good amount of information for exchange of goods.
For example, if person A wants to have a chair in exchange of a table which he has made. Not only should person A be able to access the value of chair but the maker of chair should also be able to determine the value of the table which person wishes to exchange. All this required a lot of information about goods for which people must spend a lot of time and resources to obtain such information. If there exists a medium of exchange, most of the problem will be solved. But, still person A has to determine the value of the table in terms of the medium of exchange. So, if there exists a medium of exchange, with well known characteristics, it will reduce the time spent to get the information or information cost of trading.
5. Production of Large and Very Costly Goods not Feasible –
Another problem of barter economy is related to the production of large, costly goods.
Suppose an individual who has technical skill and equipment to manufacture a car will not have much incentive to manufacture it in the barter economy.
This is because he can exchange a car with a person who has enough goods having a value equal to a car so that their exchange with a car can take place. The car maker must obtain food, clothing and several other commodities of day-to-day consumption in exchange for a car. It will be very difficult, almost impossible to find a prospective buyer who has enough of these goods and services to give in return for a car.
Barter system could work in a primitive economy where life was simple and man was self sufficient. But, as man made some economic progress, division of labour and large scale production came to exist, barter system could not fulfill the increasing needs for exchange of goods.
Due to the difficulties of barter system, would have no large scale production, no advantage of division of labour or specialization and no easy mean to store value.
To meet the needs for a common unit of account and also as a generally accepted medium of exchange and to overcome the difficulties faced under the barter system, money was invented.