Barter is a market situation in which buyers and sellers offers good for sale to one another and carry out the exchange without the use of money.The situation is found in the backward areas where tribal people sell their produce and buy their necessaries from the traders visiting them. In the absence of a generally acceptable medium of exchange, as was the case in the absence of money, one would acquire the needed with one’s own “surplus” goods. Such a transaction is called a barter transaction. When such transactions were taking place on a large scale, they constituted the barter system.
According to Jevons,
“Barter is the exchange of comparatively superflous with comparatively necessary.” This means that a barter transaction is one which involves both the sale transaction and the purchase transaction simultaneously.
Difficulties of Barter
This means that as economic system became more complex in the wake of increased human wants, barter could not continue. Money was invented and used. Under barter, people had the following difficulties:
Under the barter system all goods and services would be directly exchanged for one another. It follows that if a person A has too much good (say X) and nothing or too little of another good (say Y), he must a find person B who is precisely in the opposite position i.e, who has too much of Y and too less of X . To take up a concrete example, a fisherman who had a lot of fish and no bread could trade only if he found someone who not only had surplus bread with him but also wanted to acquire fish.
- This is what economists refer to as double coincidence of wants. Thus, in barter system lot of time and energy was wasted on exchange due to this difficulty. We can well imagine the nature and magnitude of these diffculties in a modern economy where human wants are multiplying and ever greater variety of goods and services is available in the market.
- Lack of Common Measure of Value : The second difficulty which arose under barter was that there was no common yardstick of measuring value.Each item brought to the market could bear a difficult value in relation to each one of the other items. This would give rise to a large number of exchange ratios. Competitive pricing under such conditions would become very difficult.
- Want of a Means of Subdivision of Value : Another difficulty of the barter system was that an individual might be faced with the difficulty of dividing his possessions. Suppose a shepherd had goat and desired to exchange it for bread. It was too costly for him to give one goat for the quantity of bread he required. How could he, then, divide his goat ? If he did so, he would simply be destroying the whole value of the goat? This difficulty of the division of each commodity for the purpose of exchange was a great inconvenience.
- Lack of Store of Value: Human beings try to save something in order to regulate their economic affairs over time. Under the barter system saving was every difficult. Goods lose their value the passage of time, and if value is stored in the form of goods, it will be subject to wide fluctuations. Moreover, if the commodities in the form of which value is stored are of a non-durable nature (such as wheat, skins, furs etc).,their worth is likely to go down with the passage of time. This, we find that under barter, there was no convenient, riskless and efficient means of storing value.
- Restricted opportunity for exchange due to small size of the Market: Under barter it is very difficult to conclude a transaction. To affect a barter transaction, the buyers and sellers had to possess sufficient information about who is offering the goods desired to be purchased, what quantity is being offered and how many of these offers are acceptable? Lack of such information reduced the number of transactions and hence the size of the market.
- Difficulties of Multilateral Trade: Barter allowed trade only between two persons. This is called bilateral trade. An expanding economy requires trading among a number of persons, i.e. multi trading, Under barter, it was extremely difficult to undertake multi-lateral trade.
- Lack of standard of deferred payment: People could not freely borrow and lend goods on account of the absence of a calculate rate of interest. In the absence of money, many difficulties arose in the smooth of credit transaction and trade as there was no easy agreement about the mode of payment.
- Difficulties of taking rational decisions: A barter transaction embodies a sale as well as a purchase transaction. To enter into exchange one had to take two decisions at a time. This made rational decision making a difficult proposition.
- Low level of Economic Development: Due to the various exchange difficulties, barter seriously restricted the volume of transactions, reduced the size of the market and division of labor. All this kept a barter economy at a low level of economic development.
From the above transaction, it is clear that the barter system could work only in a primitive economy where life was simple, As population increased and the number of goods traded also increased, people began to think that barter should be replaced by some other convenient method of exchange. Their efforts at evolving a medium of exchange in the form of gold and silver resulted in the invention of money.