Barter system

 A system in which goods and services are directly exchanged for other goods without the use of money is called a barter system. In other words, it is the direct exchange of goods for goods. According to Prof Standy, a barter economy is such an economy in which there is no use of a generally accepted medium of exchange. Before the emergence of money, this system was in practice. Nowadays it is not completely eliminated from the economy however its use has become limited. Even in modern times during the monetary crisis or hyperinflation, the system has replaced the use of Money.

Disadvantages of Barter System

Lack of Double Coincidence of Wants

For a successful transaction of goods, the satisfaction of both parties is a must. It means that a person having some good and looking for its exchange with the other good must get that. For example, a person has a piece of cloth and he wants to exchange it with wheat, first of all, he will have to search for such a person who possesses it and secondly he is willing to exchange. This exercise usually takes a long time and consumes energy therefore this system did not succeed.

Lack of Common Measure of Value

The second important drawback is the lack of a common measure of value. If two persons come across each other to willingly exchange their goods, then what will be the common yardstick to measure the value of different goods for the purpose of exchange? For example, if one person has meat and the other has fruit, then how would this exchange take place as both these goods are measured in different units. Furthermore, for every new transaction, the determination of value will be required afresh.

Lack of Store of Value

It means people cannot store the value of goods because the majority of goods when stored are either worn out or become less useful. For example, wheat, rice, sugar, etc. cannot be stored for a long time. However, in the case of money, the value of any kind of good can be stored.

Inconvenience in Lending and Borrowing

In the system due to the time-lapse, the value of goods may decrease which affect those who generally lend because, at the time when they lend the goods may be of high value but it is quite possible when the goods are returned after some time, it may not have the value as it had before.

Transfer of Wealth

Under the direct exchange, it is difficult to transfer certain goods from one place to another which in the case of money is quite easy. A person having a house cannot shift it from one place to another while he can transfer its value in the form of money.

Inconvenience in Government Receipts and Payments

Under the barter system, it is extremely difficult for a government to collect taxes because there are certain issues like types of taxes, different goods, collection and storage problems, similarly payment to government servants in the form of goods would also be extremely difficult.