The barter system is historically the oldest form of financial transaction. It has been around from before currencies denoting money had been invented, so it involves the exchange of a prudent amount or kind of goods, as per requirements. There is no medium of exchange involved, and only goods change hands. So, if you wish to have a pencil and have a spare eraser, you can give the eraser to a person who has a pencil to spare, and it will be a fair exchange. However, it will be unfair if pencils are a rare commodity ad erasers can be found by the dozen; in such a situation, you will be expected to cough up maybe a couple of erasers and throw in a few sharpeners into the mix to balance things out. Now that we have defined and exemplified the barter system, let’s see what the pros and cons are.
Positives of barter system:
First of all, let us begin with the positives of the barter system.
Fosters good business relationships
If a business relationship hinges on the exchange of commercial goods instead of cash or favors, chances are that all parties involved will focus on delivering the highest quality of goods and services possible to the others, especially if they have been involved in the relationship over a considerable period of time. Each partner is dependent on the other to make sure that their needs are met, and this makes for a good, healthy relationship that no one wants to mess up by delivering low quality products or services. Such a system calls for more reliability, simply because barter deals are in place only in case of goods and services required that cannot be easily- if at all- purchased with money, and no one would want o let go a good business deal that supplies them with the required object in exchange for something they can provide.
The barter system is most effective when you are running on a shoestring budget. If you really need something but do not have enough money to purchase it, all you need to do is find a commodity that you can spare. The next step would be to find a person with a spare of the commodity you need, and in want of what you can provide. This way, you will be able to put into use what you probably have lying around and have your requirements met, without having to worry about cash.
Good teaching tool
The barter system is a great way of instilling the value of money in young children. Bestowing very young people with cash may not be a very good idea, since most of them would find it difficult to grasp the concept of thrift and prudent spending, and would likely spend the entire allowance in the first opportunity that presents itself. However, teaching them to exchange one commodity for another would teach them the value of goods and expense, and they would learn to prudently hold on to their possessions to be exchanged when a more worthy requirement comes along.
Negatives of barter system:
But there are some downsides to the barter system as well.
The double coincidence roadblock
The biggest one, of course, is to find someone who needs the exact thing you can spare, and has the exact thing you need. This is a double coincidence that is, needless to say, difficult to manage at best. In modern society, where a wide variety of goods is available in exchange for money, it is admittedly difficult to make sure that this double coincidence of wants occurs. Reliance on the barter system in the modern world, as a result, ends up in individuals being forced to hold on to goods for a very long period of time while looking for someone to exchange them with; in the end, the requirement might not be met at all.
Barter system also poses a major logistical problem. When money is the currency of exchange, you can store it in cash or in virtual form- in your own home, in the bank, or even in the form of digital currency. Transacting with said currency is no issue either, and thanks to international standards, you can exchange currency for its appropriate value anywhere in the world. It’s different, however, for commodities as currency. First of all, the problem of storage is there as many of these commodities have a limited shelf life- be it food items or livestock. Besides, there is no standard value of exchange, so an item highly valued in one region will be completely unworthy of exchange in another. It is also difficult to make the transaction in certain cases, with additional expenses such as transportation being involved.
The barter system is, no doubt, highly effective in some cases. In others, however, it seems quite impractical, especially in modern times. It is to be noted, however, that if a global calamity does occur, this system of exchange will probably push all other traditional currency out of the way.