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Chapter 1
Barter System
Necessity of Exchange:
The act of exchange becomes the necessary mediator in the circulation of social goods because their
circulation is itself a social necessity. It has become a commodity because its producers participate in
a specific social relationship in which they have to confront each other as independent producers.
Barter System:
Barter is a system of exchange by which goods or services are directly exchanged for other goods or services
without using a medium of exchange, such as money. Barter may be defined as the direct exchange of goods or
services with which there is no use of commonly acceptedcurrency. The term “barter” is frequently used as a
synonym for "negotiation," in which the two parties engage in a back-and-forth discussion over the price of an
item. As for examples- corn may be exchanged for ox hides, house for horses, pigs for poultry, lemons for
orange, baskets for bananas, shoes for shirts and so on. In the barter system, thus, one has to give some kinds of
goods to get some other kinds of goods. So, we can say, barter system refers to a money less situation where
goods are exchanged directly against goods.
Conditions for a successful Barter System:
1. Desire to have other’s good,
2. Willingness to excluded own good for other’s goods and
3. Utility incurred with other’s good must be equal to the utility excluded with own good.
Problems of Barter System:
1. Wants of coincidence:
The first difficulty in the barter system of exchange is that there has to be a double coincidence of wants.
Two persons can have barter exchange only if their disposable possessions mutually suit each other’s
needs. In barter trading, thus, two parties must agree on their mutual exchange, which is possible only if
there exists a double coincidence of wants. In a barter, therefore, a person who wants to exchange his
goods for some other goods has not only to find another person who possesses what he needs but who, at
the same time, has a desire for what he has to offer. In practice, it is difficult always to have such double
coincidence of wants and, therefore. Trade and business cannot develop rapidly in a barter for want of
coincidence. Barter as such a high barrier to economic progress.
2. Lack of common measure of value:
Another serious difficulty of the barter is that it lacks any common measure of value or unit of account. In
the absence of a well-defined unit of account, in a barter, the values of goods are measured in a relative
sense; hence, there is no absolute measurement of value. Since the value of each commodity can be
expressed in terms of every other commodity, one has to remember a large number of cross relations of
values in exchange for different goods which is physically impossible to do when there are an infinite
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number of commodities. Under such conditions, no meaningful accounting system can be involved.
3. Want of means of sub-division:
Barter exchange also suffers from a severe inconvenience on account of indivisibility of many kinds of
goods. One can easily portion out a bag of food grains, a basket of fruits, etc. which are divisible goods
andcan give more or less in exchange for what is wanted. But the real difficulty arises in the process of
exchange between divisible and indivisible goods.
For instance, a horse is not divisible and cannot be exchanged in parts as against different divisible goods
like rice, sugar, potatoes, etc. Thus, barter trade between divisible and indivisible goods in small values
cannot be carried on without a loss of value. In the words of Jevons “in a barter system, smooth exchange
operations are impossible for want of a means of sub-dividing and distributing values according to
people’s varying requirements”.
4. Lack of Standard of deferred payments:
Another drawback of barter is that it lacks a standard of deferred payments, so that contracts involving
future payments or loan transactions cannot take place with ease in such a system. Credit transactions
cannot be promoted smoothly under barter trading. There will be no easy agreement on the mode of
payment.
5. Lack of efficient store of value:
Perhaps a major inconvenience of the barter is the lack of facility to store value or the lack of existence of
a generalized purchasing power. In barter system, people can store value for future use by storing wealth,
but the difficulty arises when wealth consists of perishable goods. In addition bulky goods cannot be easily
exchanged for other goods as and when required. A quick exchange sometimes involves heavy loss, too.
6. Lack of specialization:
Under the barter system, there is hardly specialization because of limited market. Specialization is limited
because of the limited exchange system. However, without specialization, the market cannot expand and the
economy cannot develop.
The above discussion implies that the barter economy is a highly inefficient economy of exchange. So, the
inconvenience and difficulties of the barter system led to its gradual replacement by money, which removed all
these inconvenience.
Removal of the Difficulties of Barter System:
After evolution of money, all inconveniences of barter system have been eliminated. How money eliminated
the difficulties of barter system is discussed below:
1. Removing the want of coincidence:
Want of coincidence was the major inconvenience of barter system. In barter system, coincidence is must
between the exchanging parties. For example, if a rice seller has need for cloth then he must find out such
a cloth seller who is intended to buy rice in exchange of his cloth and not only an ordinary cloth seller. In
reality this kind of finding out is very difficult. But money has eliminated this problem successfully
because anybody can buy any kind of goods and services without considering the matter of coincidence.
2. Removing the lack of common measure of value:
In barter system, exchange of goods for goods was complex due to lack of common measure of value or
unit of account for the valuation of goods and services. But now all commodities are valued in terms of
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money, which has removed the difficulty of the lack of common measure of value.Removing the want of
means of sub-division:
There are many goods, which are not divisible and cannot be exchanged partly. This indivisibility
restricted the barter system to work freely. But this problem is eliminated by the evolution of money
because it can be divided into small parts and can be spent for any required number/quantity of goods.
3. Removing the lack of standard of deferred payment:
Now-a-days, borrowing and its repayment both are successfully done by money. Money is more stable
than goods. Moreover, there is no change in the quality of money. So, it has able to remove the lack of
standard of deferred payment of barter system.
4. Removing the lack of store of value:
Storing was difficult in barter system due to perishability, bulkiness of goods etc. But, after the evolution
of money this inconvenience is removed. Now anything is much more easy and safe to store for future in
terms of money.
5. Removing the lack of specialization:
Money has increased the exchange activities and extended the division of labor which were absent in
barter system. So, many has increased specialization and is helping the economy in its development.
Evolution of Money:
Barter
• Money, as we know it today, is the result of a long process.
• At the beginning, there was no money. People engaged in barter, the exchange of merchandise for
merchandise, without value equivalence.
• Commodity Money
Some commodities, for their utility, came to be more sought than others are.
Accepted by all, they assumed the role of currency, circulating as an element of exchange for other
products and used to assess their value. This was the commodity money.
Cattle, mainly bovine, was one of the mostly used, and had the advantages of moving for itself,
reproducing and rendering services, although there was the risk of diseases and death.
• Metal
As soon as man discovered metal, it was used to made utensils and weapons previously made of stone.
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For its advantages, as the possibility of treasuring, divisibility, easy of transportation and beauty, metal
became the main standard of value. It was exchanged under different forms. At the beginning, metal was
used in its natural state and later under the form of ingots and, still, transformed into objects, from rings to
bracelets.
• In the 7th century B.C. the first coins resembling current ones appeared: they were small metal pieces,
with fixed weight and value, and bearing an official seal that is the mark of who has minted them and
also a guaranty of their value.
• Gold and silver coins are minted in Greece, and small oval ingots are used in Lydia, made of a gold
and silver alloy called electrum.
Gold, Silver and Copper
• The first metals used in coinage were gold and silver. Employment of these metals happened for their
rarity, beauty, immunity to corrosion, economic value, and for old religious habits. In primeval
civilizations, Babylonian priests, knowledgeable about astronomy, taught to people the close
relationship between gold and the sun, silver and the moon. This led to a belief in the magic power of
such metals and of objects made with them.
Paper Money
In Brazil, the first bank notes, precursors of the current notes, were issued by Banco do Brasil in 1810.
They had its value written by hand, as we today do with our checks.
With time, in the same form it happened with coins, the government came to conduct the issue of
notes, controlling counterfeits and securing the power to pay.
Currently, all countries have their central bank in charge of issuing coins and notes.
Monetary System
• The set of coins and bank notes used by a country form its monetary system. The system is regulated
by appropriate legislation and organized from a monetary unit, its base value.
• Currently almost all countries use a monetary system of centesimal basis, in which the coinage
dividing the unit represents one hundredth of its value.
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Checks
As coins and notes ceased to be convertible into precious metal, money became more dematerialized
and assumed abstract forms.
One of these forms is the check that, for simplicity of use and security offered, is being adopted by an
increasing number of people in their day-by-day activities
This document, by which one orders payment of a certain amount to its bearer or to a person
mentioned in it, aims mainly at transactions with bank deposits.
Definition of Money
• A current medium of exchange in the form of coins and banknotes; coins and banknotes collectively.
• Money is a medium of exchange in the sense that we all agree to accept it in making transactions.
• Adam Smith writes:
"Money is like a road which helps in transporting the goods and services produced in a country to the
market, but this road does not itself produce any thing.
Importance of Money:
The importance of money is that you can use it to trade for other things that you need. Which is a very
good thing because it helps you get your needs met.
Money is very good at helping you solve the set of problems that you have that require an economic
exchange to take place for those problems to be solved.
So things like, if you need shoes, money can solve that problem because you can exchange it for a pair of
shoes. Problem solved.
So problems involving an economic exchange can be solved with money.
However, problems that cannot be solved with economic exchange cannot be solved with money.
Money is a good servant but a bad master.
You should be fond of money to an extent that you are controlling it. Don’t fall into the evil hands of
money.
There are many ways to earn money, but to sustain your wealth you have to handle your own money.
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Rich people are rich because they know the true value of money and hence they manage their business. It
is generally said that money will stay in the hands of people who know its value.
If you are a lavish spender, spending money in unnecessary ways, you will soon lose all your wealth.
Hard work and commitment is essential if you want money to stay in your hands.
There are many people in this world who want money without working hard. Some of them are successful
in their goal but the true legitimate way to earn money is to work hard.
You should use the money for solving your financial problems but you should be careful that your money
does not transform you into a different person. People who are rich are praised by the society and you
should be careful about those who are flattering you.
If you have money, rather than spending it in satisfying luxurious desires you can try investing it. Money
when invested has the ability to increase in amount which will let you buy more luxuries. Money is always
a trap and wise people are able to ride on it while there is fall into it.
