Barter System & it’s Drawbacks

What is Barter System

The barter system is a system where goods were exchanged for goods in the olden days. The sale and purchase of goods occur at the same time, and their value also remains equal at that point. After the money came into existence, a person could purchase or sell goods with cash without selling or purchasing any goods at that point. Thus, the act of purchase and sale was separated.

Difficulties of the Barter System

  • Lack of double coincidence of wants: A person with a particular good has to find a person who has the good of his wants and he should also possess the wanted good of the other person. Hence, the exchange of good is not possible without the double coincidence of wants.
  • Lack of store of value: Wealth is stored in terms of goods as there was no money in existence, storage of goods cost, loss of value and movement of transfer. Hence, it is not practically possible to store the people’s purchasing power.
  • Lack of divisibility: All types of goods cannot be divided and sub-divided. In the absence of a common medium of exchange, a problem arises when a big indivisible commodity is to be exchanged for a smaller commodity.
  • Lack of deferred payment: Money has made deferred payments easier. When money is borrowed, the principal and interest amounts have to be returned to the lender. However, these transactions are not possible in goods and services.
  • Problem of storing wealth: In the absence of money, individuals have to store wealth. The value of stored commodities may change in the due course of time. Storing a particular good for longer period is more expensive.

Evolution of Money

The evolution of money has passed through various stages with time, place, and circumstances.

  • Commodity money: Various commodities used as money is known as commodity money. It is the most primitive form of money. However, certain problems such as improper standardization, indivisibility and storage difficulty made this form of money an unsuitable medium of exchange.
  • Metallic money: Mono-metalism and bi-metalism, i.e. valuable metals such as gold and silver, were used as a medium of exchange. As society progressed, different sections of people agreed to consider some precious metals as a common medium of exchange. The gold coin was introduced in India by King Kanishka of the Kushan Dynasty during the first century AD.
  • Paper money: The paper currency system is a system where coins and currency notes are used as a medium of exchange. Because of the expansion of trade and commerce and an increased demand for money as a common medium of exchange, metallic money was replaced by paper money. The Central Bank of a country assumes supreme authority in issuing paper money of definite denominations and values. A medium of exchange which is generally acceptable and enforced by law is called fiat money. For example, rupee notes and coins are legal tender.
  • Bank money: At the final stage of evolution of money, demand deposits with commercial banks are considered bank money. Demand deposits are current account deposits with banks or other financial institutions which are payable on demand by cheques. Thus, cheques drawn on the demand deposits of commercial banks can be used as a medium of exchange.

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