BARTER SYSTEM:-
Money
is something which is generally accepted as a medium of exchange. It is one of the
most basic and significant inventions of mankind. Before money came into use, exchange
took place through barter system i.e. goods were exchanged for goods. Barter means
direct exchange of goods. In other words, barter refers to exchanging of goods without
the use of money. For example, corn may be exchanged for cloth, house for horses,
bananas for oranges and so on.
The
barter system has certain advantages:-
1. It is a
simple to avoid the complex problem of the modern monetary system.
2. There is no question of over or under-production
( or of unemployment or over-full employment) under the barter system since goods
are produced just to meet the needs of the society
3. The problems of international trade, such
as, foreign exchange, crisis, adverse balance of payments do not exist under barter
system.
4. There is no problem of concentration of economic
power into the hands of a few rich persons under the barter system because there
is no possibility of storing the commodities.
5. Personal and natural resources are ideally
utilized to meet the needs of the society without involving any wastage.
6. The barter system also reaps the benefits
of division of labor because it represents a
great step forward from a state of self-sufficiency in which every man has
to be jack of all trades and master of none.
Barter
system was in existence in the primitive communities emerging from subsistence economy
to exchange economy. In these communities, the economic units were mostly self sufficient
and there was very little trade activities. Even today, in some parts of African
countries and even in some backward rural areas of India, barter exchange prevails.
Barter system works well in a traditional society in which human wants are basic
and few, the level of economic development is very low, the scale of production
is small and the exchange is limited. As the society develops, exchange through
barter becomes more and more difficult and the need for money is increasingly felt.
DIFFICULTIES OF BARTER SYSTEM :-
Barter
system involves various difficulties and inconveniences which are discussed below:
1. Double
Coincidence Of Wants :- For exchange under the "barter system of exchange"
double coincidence of wants was required. For example, if a person have a goat and
he needs a cow. He will have to find a person who can supply him cow and who at
the same time willing to accept goats for his cow. Such a Double coincidence of
wants rarely occurs in a modern society and involves great difficulties.
2. Absence
Of Common Measure Of Value :- Another difficulty which arises under barter system
was the absence of common measure of value. Since there was no common measure of
value, the problem arises as how much goat should be exchanged for how many cows.
Unless and until the parties who are willing to exchange their goods does not assign
the same value, the exchange cannot take place.
3. Lack Of Divisibility :- Another difficulty was that all goods cannot be divided or subdivided.
For example a man want to sell his horse and get in exchange goat and shoes, then
it would be impossible to divide the horse in two parts so as to buy two different
goods.
4. Problem
In Storing Wealth :- In the barter system the goods were used as money but it
was very difficult to store goods for a long time. Several goods such as vegetables,
milk, wheat, etc. could not be stored for a long time and therefore they could not
be conveniently stored for future.
5. Contract
Involving Future Payments :- Contracts for future payments are always involved
in any kind of exchange. But in barter system of exchange, these becomes almost
impossible. For example, it was agreed to exchange two things for one another and
if any of the two things gain value or lose value. The dispute may occur between
the parties as to who will bear the loss or who will enjoy the gain.
6. Problem In Transfer Of Wealth :- It was
difficult to transfer the wealth as the wealth under barter system was stored in
the form of goods, animals and perishable goods. Therefore, it was difficult to
transfer the wealth from one person to another or from one place to another.
7. Problem Of Savings :- Under barter system,
savings and investments could not be mass.The period of barter was the time of "self sufficient economy" where people
were satisfied with what they had. Savings
and multiplication of wealth also became impossible due to the inability of common measure
and storage place like banks.
8. Tax Collection :- Under barter system it would also be extremely difficult to impose and collect
taxes. Barter means exchanging goods and services for other goods and services in
the absence of money. Thus, it was impossible to collect goods from different people
as taxes because they were of different forms and mostly perishable.
The
above discussion clearly indicates that the costs of barter are much more than its
benefits particularly in a modern society. The barter system may be suitable for
the societies in which individuals have limited wants and simple living and , as
a result, a small range of goods and services is produced and there is little trade.
But in modern society, with the expansion of volume and variety of production and
increase in the frequency of trade, barter is highly inefficient system of exchange.
It is because of the various difficulties of the barter system, money was invented and some kind of monetary
system was evolved in every society.
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