Introduction to the Barter System

For the conduct of daily life, we need various types of goods and services. It is not possible for us to produce all the goods and services we need ourselves. We produce those goods and services that are easy and profitable to produce. We consume them and sell the remaining quantity in the market.

For goods or services that we cannot produce ourselves, we manage by buying them from the market. Thus, when we exchange any goods or services in the market, we use money. The use of money has made exchange transactions very easy in our society. Before the use of money, the barter system was prevalent in human society.

What is the Barter System?

For example, Ram's father has grown mustard in his own field through hard work. Similarly, Pema's mother in the neighboring house has raised a cow and produces plenty of milk and ghee. If Ram's family needs ghee and Pema's family needs mustard, then Ram's family exchanges the mustard they produced with the ghee produced by Pema's family to fulfill their respective needs.

This practice of exchanging produced goods or services among people engaged in different classes and professions in society to fulfill their needs is called the barter system. In the barter system, there is absolutely no use of money. Thus, the effort to fulfill each other's needs by exchanging goods with goods in the absence of money is called the barter system.

However, even today, some form of barter practice or tradition is found to exist in some parts of the world. For example, even today in rural areas of Nepal, the practice of exchanging grains with household utensils, and exchanging goods like doko, thunse, bhakari, nanglo, etc., is still alive.

Difficulties of the Barter System

In ancient society, the barter system was prevalent to fulfill people's daily needs. Due to various difficulties of the barter system, this system became impractical. The difficulties of the barter system are presented below:

1. Lack of Double Coincidence of Wants

For barter to take place, it is necessary for at least two parties to have goods or services available that mutually fulfill each other's needs. Otherwise, one party cannot fulfill the needs of the other, and exchange is not possible.

For example, a farmer who produces rice and vegetables can fulfill their need for clothes by giving their agricultural produce to a cloth merchant and taking clothes from the merchant. But for barter to happen, the cloth merchant must equally need agricultural produce. Similarly, if the same farmer needs to have clothes stitched after taking them from the merchant, they can give their agricultural produce to a tailor and get the clothes stitched.

However, exchange is possible only if the tailor also needs the goods produced by the farmer. Likewise, a merchant can give clothes to a tailor, and the tailor can stitch the merchant's clothes, and both can fulfill their respective needs by exchanging goods and services.

Thus, barter is possible only when there is a coincidence of wants between two parties. If someone who produces one type of good does not need any other type of good, barter cannot work. It is not necessary for everyone to have a double coincidence of wants in all situations. Therefore, the lack of double coincidence of wants is considered the most complex problem in barter.

2. Lack of a Common Measure of Value

In barter, there is no universally accepted common standard for measuring goods and services. In the absence of a universally accepted, official unit of measurement, it is almost impossible to measure standard or inferior goods, large or small quantities of goods, solid, liquid, and gaseous goods with a common standard.

For example, if you need to exchange a milk-giving cow with some goats, it is difficult to give the correct answer to the question of how many goats can be exchanged for that cow. In the absence of a common means of measurement, there is difficulty in determining how much rice to exchange for how much oil.

In this sense, the measurement and transaction of goods in barter have to be done on a rough or estimated basis.

3. Difficulty of Divisibility of Goods

Goods of large and small quantities, and of good and inferior quality, are exchanged in the market. If a large quantity of whole goods has to be exchanged with other small quantities of goods, difficulties arise.

For example, if a farmer needs to take some chicken chicks, some clothes to wear, some rice, salt, oil, and sugar by giving a goat, there is difficulty in determining how to divide the goat to take all those necessary things.

It is not easy and possible to obtain those different materials by cutting the goat into pieces because not everyone who provides those goods may need goat meat. Due to the difficulty of divisibility of goods, the exchange of large and indivisible whole goods with small goods becomes almost impossible.

4. Lack of Store of Value

In barter, most of the goods that are exchanged or transacted are perishable. If such goods are not consumed or used within a certain time limit, their quality is destroyed. There is no means or alternative method to preserve them.

For example, fruits, vegetables, milk, yogurt, and meat products produced by farmers cannot be stored indefinitely.

There is also a lack of a standard for future payments in the barter system. There is a problem in determining how much to pay or return when returning goods taken in a certain quantity now.

For example, if someone brings a milch buffalo on credit this year, there is a problem of determining what and how much to return later. Therefore, value cannot be stored in the barter system.

5. Difficulty in Transfer of Value

In the barter system, there is no standard measurement unit available to transfer the ownership of any goods. Goods and services under one's own control or ownership have to be consumed by oneself but cannot be given to others in exchange for value.

For example, it is difficult to transfer the ownership of immovable property such as houses and land and obtain another good or value in exchange.

Conclusion

The barter system was one of the earliest forms of trade, but its various difficulties made it impractical for large-scale economic transactions. The lack of double coincidence of wants, absence of a common measure of value, difficulty in divisibility, lack of store of value, and transfer of value issues made it inefficient.

As a result, the use of money eventually replaced the barter system, making trade more efficient and convenient. However, barter still exists in some rural areas and informal transactions.