Introduction

The present day economy is called as money economy. Money is one of the
greatest inventions of mankind. Man invented money to facilitate the process of
exchange or trade. Before money was invented, man had to offer the surplus of
the commodity he had to get another commodity he wanted in exchange from
another person. This exchange of commodity for commodity is what we call barter
system. Thus, before the invention of money took place, barter was the order of
the day. However, after the invention of money, man sold his surplus of the
commodity for money and used this money to buy another commodity he wanted.
Thus, the introduction of money has transformed the 'commodity for commodity'
exchange system into the modern 'commodity for money for commodity'
exchange system. What are the advantages of this transformation? To find
answers, we need to look at the disadvantages or difficulties of the barter system.

Barter System
Barter system is the direct exchange of goods for goods. It is the oldest mode of
exchange. As goods are directly exchanged for goods, a particular want is satisfied
in a single transaction.

Difficulties of the Barter

The following were the main drawbacks of the barter as felt by the people involved
in the process of exchange or trade:
Difficult to find double coincidence of Wants: The sort of a situation
where one has to find a person who needs the good he has and has the good
he needs is called double coincidence of wants. Existence of a double
coincidence of wants is a must for any exchange to take place under the
system of barter. In the absence of such a double coincidence of wants,
exchange in barter is impossible.
Difficult to determine exchange rate: In barter system every time a
transaction is made, exchange rate has to be determined. As the number of
goods and services to be transacted increase, it becomes increasingly
difficult to determine exchange rate between them.
Lack of a common measure of value: In barter, there is absence of a
common unit or measure in terms of which the values of all goods and
services could be expressed. This necessitated the value of every good or
service to be expressed in terms of every other good or service.
Indivisibility of commodities: Indivisibility of certain commodities renders
exchange impossible under the system of barter. Suppose, for example, a
person wants to exchange his cow to get a TV set and a hen. It is now not
possible to divide the cow in two parts to buy two different commodities.
Problem in storing value: It is very difficult to store value or purchasing
power for future use in barter system. There are many commodities that are
perishable and therefore cannot be stored to buy other commodities later.
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There are also other costs involved in the storing of value in the form of
goods for future use.