Mechanics of Modern Barter for SMEs

By Bakor Al-Tayar Jelena Vukovic Fabiola Herera Elena Tchybysheva

5/27/2010

Trading Systems for Managers
Professor: Michel Kostecki

Mechanics of Modern Barter for SMEs

Index
Table of Contents
I. III. IV. VI. VIII. IX. Introduction ......................................................................................... 2 Methodology ? .................................................................................... 4 Trust, Contracts and Legality in Barter ................................................ 5 The Importance of the Collective in the Valuing of Virtual Currencies . 7 The Advantages Modern Barter ....................................................... 11 Practical Skills Necessary for Modern Barter ...................................... 12 II. Research Question ................................................................................ 4

V. Organization of the Barter System ........................................................ 6 VII. Forfeiture and Abandonment ............................................................ 10

X. Conclusion ......................................................................................... 16 REFERENCES ............................................................................................. 17

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Mechanics of Modern Barter for SMEs
I. Introduction
Before money came about, people would go about life trading what they make and do in a barter system. The strict definition of bartering is that it is a medium by which goods or services are directly exchanged for other goods and/or services without the typical medium of exchange of moneyi. This traditional form of barter is inefficient because of the double coincidence of wants problem. The problem is caused by the improbability of the wants, needs or events that cause or motivate a transaction occurring at the same time and the same placeii. With the advent of money, the system was presumed dead as money became a much more flexible and adaptable means of exchange for it resolved the double coincidence of wants issueiii. Yet the barter system has stayed alive and well, though at a much smaller and discreet scale than the traditional money exchange system. All trading entities currently engage in barter. Indeed, Governments engage in barter regularly, as Thailand did recently in offering Saudi Arabia rice for gas iv and 8 out of 10 “big cap” corporations regularly engage in barterv. Often it is possible to complement barter with traditional money, in which case the action no longer fits the definition of bartering, but engages in counter purchase.vi Human ingenuity has bypassed the double coincidence of wants problem, allowing small and medium sized companies to regularly barter. This is done through a methodological organization of vast amounts of changing information by software or brokersvii. With this capacity, modern barter exchanges play the role of a neutral third party record keeper, and have been active in their basic form since at least the 1960sviii. Barter exchanges have enabled multilateral bartering by

coordinating barter trades among members and deploying a virtual currency that is valued on a 1:1 basis with the local currencyix. That is to say, one person (A) pays with virtual currency what is offered from another (B), and (B) chooses to take another object from a member participating in the barter exchange at a later point in time using the received virtual currency. This system has been available in limited form through the mid early 1980s and beyond, but has taken a new form with the scale the Internet allows for. The more people subscribe to the barter exchanges, the more barter becomes effective as more diverse range of goods and services are proposed.

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II.

Why Retail Barter is Important

The 2005 “Sixth Annnual Global Entrepreneurship Monitor” report directed by the London Business school and Babson College concluded that there are 73 million persons in the world that are either nascent entrepreneurs, owners and managers a young businesses. These figures show that the number of new entrepreneurs composing the “backbone of the world economic community”x is not weaning. Sadly 60% of these enterprises fail in the first four years of their operationsxi. Most of the reasons revolve around a lack of competence from the entrepreneurs. Indeed, they tend to launch a business that lacks a viable market and with poor execution. The financial causes for the failure of young businesses are the excessive use of credit and undercapitalizing the company.xii One can remedy the issues revolving around under-education by simply educating oneself, but financing is notoriously difficult to obtain and is not under the same level of control as self-education. Modern barter plays a critically helpful role by alleviating financial pressures: it is the ideal tool to convert undesired assets in to useful assets whilst reducing cash outflows, conserving cash and providing one with an interest free open line of credit. These reasons explain the increased use of barter by small and medium sized companies during the economic crisis of 2007.xiii Barter has also proved appealing for its local and eco-friendly nature, allowing businesses to sell their unused carbon offsets and save on transportation costs.xiv The growth rate of the industry is testimony to the usefulness of the system. Indeed, in 2005 total barter transactions were estimated to be about 30 billion US$ in the USA alone and has been at an average rate of 17% per year since 1985. This is expected when one considers that 800,000 thousand companies have bartered at least once, that 80,000 SMEs become barter exchange members every year and that the average transaction tends to be over 16,000 US$. xv The advantages credited to barter as practiced today are not new; indeed, it’s basic form has been the same for the last 50 yearsxvi. Yet surprisingly, few papers document the industry’s mechanisms. Academic journals, books and news articles do not cover or explain the mechanisms in a sufficiently concise, complete and precise manner. Sadly the information is very disparate and difficult to come by. As such the purpose of this paper is to explore and synthesize the

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mechanisms of barter exchanges, their use by small and medium sized companies, its strengths and weaknesses.

III.

Research Question and Methodology

The question to which an answer is sought is: “what are the mechanics of modern barter?” The geographic range of the study is limited to the North American region for the simple reason that it has the most developed and densest barter systemxvii. This is not to say that other countries are not experiencing an important e-barter movement amongst its SMEs. Indeed, other developed and under developed nations see many of their SMEs practice barter, though not in an as widespread fashion as in the USAxviii. The basic functioning of North American electronic bartering tends to be the same as that of other countries;xix both enable multilateral trade by way of alternative currencies backed by the collective solidarity of the exchange members, the exchanges have similar charges (membership and subscription fees), regulation by both the state and the exchange. The major difference lies in the much more extensive use of technology in the developed nations than in developing countries. Various journal articles, specialized books and newspaper articles were used to enrich the researchers knowledge of multilateral trade exchanges. None of the journals studied modern multilateral bartering in sufficient detail. Information was often missing from one paper to the next, which prompted many questions to arise. The questions that arose formed the general outline of the paper, as we pursued their answers in a rational and coherent manner. The specialized books employed were either far too old or written in a non-academic manner. This was problematic in so far as resources were lacking, but useful in providing a practical insight into modern barter. We were not able to access barter networks because to do so requires being a member of an exchange. The costs of becoming a member were prohibitive and as such we could not get interviews with users of e-barter. To compensate for this loss we reverted to news articles interviewing barterers and articles written by established barterers about various barter related events and experiences. Furthermore, we gathered information concerning membership conditions and fees as well as transaction costs for each website. This gave us an idea about the general trend and structure of the various fees for small and medium sized companies, in the barter exchange industry.

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The paper will explore the mechanics of modern barter by studying how trust is bread in a barter environment (IV) followed by an analysis of the barter system (V), the virtual currency (VI) and crisis response mechanisms (VI). Finally, the paper will explore the advantages of the art (VIII) and explore areas where the industry can improve (IX). The paper will end with the practical implications of barter for small and medium sized companies (X).

IV.

Trust, Contracts and Legality in Barter

Before multilateral bartering was possible bilateral bartering was used. Through time, the former has proven itself more resilient in unstable environments. For instance, if contract enforcement through state authorities cannot be relied on, trade partners would seek other means of protecting their interests in business transactions. Traditional bilateral barter thus introduces a deal-specific collateral that serves to protect the interest of the creditor for one particular business transaction.xx The main difference between a promise on future money and a promise on future goods is that goods have superior credit enforcement properties. Indeed money is an anonymous medium of exchange whereas goods can be earmarked as property of the creditor. This system makes contract enforcement by the state unnecessary by nature of bilateral barter, as was the case in African and Central American communities that were significantly under-developed throughout the 60sxxi. Yet, to enable a robust multilateral trade exchange system, a strong legal environment is necessary. An emphasis on the term “robust” is necessary. Indeed, multilateral bartering was present before its formal recognition by the United States in 1982xxii. Yet, the exchanges tended to be much smaller and brokers tried to connect as much as possiblexxiii. These exchanges employed the same techniques as modern exchanges to dissuade fraudulent members from becoming members. A stringent ethical code, membership fees, and transaction costs ensured the serious nature of the members engagement, and avoids “hit and run” strategies where members try to avoid taxes or rid themselves of low quality inventory on unsuspecting members of an exchangexxiv. These elements bestow upon the exchanges a security and a credibility that are necessary to breeds trust amongst members. A strong legal environment provides the exchange with the tools necessary to develop membership asset backed virtual currencies, and multilateral trade in general.

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By recognizing the barter industry, regulating it (to a certain extent) and taxing it, the state endows the barter system and its virtual currency with more credibility. The credibility in turn attracts more users and grows the size of the network, which render it more efficient in satisfying members’ needs.xxv In consideration of the fact that barter income is taxed, one is not encouraged to become a member to avoid taxes. Indeed, trade exchanges have had the obligation of keeping records, and communicating these to the proper authorities since the promulgation of the tax equity and fiscal responsibility act of 1982 in the USA. This doubles with the good faith obligation users have of reporting their barter income as normal income, in form 1099B and 1099 of the IRS. The US treasury department recognized the existence of virtual trade dollars in treasury regulations T.D. 7873 (26 CFR Part 1) issued March 11 1983xxvi. The obligation for the barter company to record transactions would put it in a situation of conflict of interest with the members of the exchange if they were one entity. It is one of the reasons the barter exchange and barter company are typically distinct entities.

V.

Organization of the Barter System
A typical retail barter system is usually set up so that the barter company and the trade

exchange are separate and distinct entities. The barter company is typically empowered to manage the trade exchange and receives its profits in the form of membership fees and commissions from the transactions that occur.xxvii A trade exchange is an association, or network of business owners and professionals that form a market place to barter goods and services. To justify the fees and commissions the barter company charges, it renders many services to the trade exchange. One of the services is an obligation imposed on the barter company by the American 1982 TERFA actxxviii. According to this law, the barter management company that operates the exchange is considered a third party record keeper under US law. xxix The services the barter companies provide also include making a market for buyers and sellers, advertising the availability of products and services, processing sales vouchers. Some barter companiesxxx also provide a broker whose general task is to work closely with the members to better understand the dynamics and needs of their businesses. The personal touch adds a human dimension, which makes barterers particularly fond of their brokers.xxxi Furthermore, the broker
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makes gives confidence to the member by acting as his ally. Indeed, other tasks assigned to the broker are to promote the member’s business, attract new sales, assist the member in sourcing products and services and facilitate larger trade negotiationsxxxii. Barter companies that do not offer brokerage services rely on software that requires users to post their offerings. By so doing, the software is provided with sufficient information to generate suggestions regarding offerings of potential interest. xxxiii If the product is not available, the software will inform the member. The problem behind the unavailability of the product is that a waiting time must be held until the desired product or service is offered. The downside is that there can be some inevitable loss in the depreciation of trade dollars that cannot be converted to cashxxxiv. To decrease the risk of waiting exchanges must grow. To do so, some allow for individuals to run a barter exchange as a franchisee. These larger barter corporations allow for the individual barter exchanges to be federated and thus use the same virtual currency xxxv. As such, the size of the market where his virtual currency is accepted is made larger.

VI.

The Importance of the Collective in the Valuing of Virtual Currencies

Modern barter, through the barter exchanges, uses trade dollars to enable multilateral trade. Yet when a barter company is created it does not have any virtual currency. The virtual currency is created in one of two ways. The first is to use trade dollars to purchase inventory from members for resale. The second manner is to allow for members with in-demand offerings to spend in the negative; that is to say, with a debt towards the barter exchange. Either way, the trade dollars have value by being backed by material goods and by the contractual commitment of members to accept the virtual currency so as to facilitate commerce. xxxvi Under the terms of a typical barter membership contract, the barterer agrees to make available a certain dollar amount of goods and/or services for barter trade with other clients and with the exchange. In so doing, they agree to accept a specified minimum amount of barter business by selling goods or services in return for payment received in the form of trade dollarsxxxvii. As one needs virtual dollars to make payments, there are two ways to acquire trade dollars. Barter companies have the power to make trade dollar loans to clients that are to be repaid in trade dollars. It is important to understand that these loans are not made by the barter company,
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but are made on behalf of the mutual association of members by the barter company. This is because it is the members who extend credit when they accept trade dollars as a means of paymentxxxviii. Such borrowing is administered and regulated by the exchange on behalf of the members collectively. Because the volume of trade dollars in circulation is thus in the power of the exchange, handing out loans must be regulated to prevent depreciation of the barter currencyxxxix. For instance, if a member would like a loan to purchase a product or a service that would take him far too long to repay, the exchange would reject the loan. The regulation by the barter company also intervenes in order to prevent a member’s excessive indebtedness, or to avoid the creation of excessive barter buying power relative to the supply of goods and services. Therefore the supply of trade dollars expands and contracts in proportion to the supply of goods and services available for trade. When there is a situation of trade expansion, members increase their total borrowing to finance larger purchases. When there are less goods and services on the market, the loans are repaid and the supply of money contracts. It follows that in a soundly managed system, the number of trade dollars in circulation is a function of the total dollar value of goods and services traded on the exchange.
xl

As such, trade dollar assets are the liabilities of

debtor members collectively and assets of the creditor members collectively. Thus, barter assets and liabilities should always balance: for every trade dollar outstanding there is a contractual obligation imposed on debtor members of the network to make available a US dollar’s worth of fulfillment goods and services. xli To illustrate, if a carpenter that is new to the system purchases a saw from a dentist, the dentist will be able to spend the trade dollars received on any other good or service available in the exchange. The carpenter places himself in debt to the system by taking the saw, and as such will make available his offerings to the remaining creditors. The carpenter could have received trade dollars either by receiving them as a result of a trade where he became a net creditor, or by receiving a loan from the barter exchange. The task of maintaining a balance by regulating the flow of virtual currency has been made simpler through the use of adapted and proprietary software which track the activities of individual and collective barterers in real timexlii. Thus collected enables the barter company to know relevant information to manage the volume of virtual currency. The information thus gathered also helps barter companies determine whom is a viable recipient of a virtual credit and to what extent, in
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consideration of how much money the exchange can support being infused with. technology, the members form the backbone of the barter system. xliii

Despite

Sound exchanges do not allow for exchanges to become members easily. Applications require one to have sufficient assets, and often allow only for officers/directors of companies to apply. History checks are performed to verify the credibility and reliability of the applicant to enter the “member’s circle”; for instance one whom has had a bankrupt company reduces his chances of being admitted. Furthermore current IRTA members must provide two reference letters to support the applicant, and prior experience in barter must be reported. The prior experience must be reported in order to estimate the impact the new member will have on the system.xliv This is important because as a rule of thumb, it is considered that credit extended to a member should not exceed the amount of barter sales to be made by the member in a yearxlv. Various dues are applied depending on the exchange network one seeks to join. The IRTA requires members to pay dues of 1000 US$ a year, with subscriptions fees ranging from 500 dollars to 7500 dollarsxlvi depending on the type of membership demanded. This prohibits abusive

practices by fraudulent citizens aiming to make a quick profit with a dubious business ethic. Finally, the members have to accept a code of ethics, which if broken guarantees exclusion from the barter exchange.
xlvii

According to IRTA the value of a trade dollar is one US dollar, as a result of a broad range of transactions executed through the commercial barter exchange. The trade dollar valued at 1-dollar as a result of a natural process, in accordance with the “purchasing power value”. According to this doctrine, each trade represents the promise of the entire exchange’s membership, as a group, to allow the recipient of the unit to use it to acquire the goods and services offered by the membership. Promises represented by trade units are readily assignable or transferable to other members of the trade exchange. Therefore the value of the trade dollar is derived from its purchasing power as can be noted from the trades taking place in the system. Acceptable margins of difference between the “real world” prices and those of the virtual currency can be accepted, and are considered similar to price differences present in the cash economy. xlviii Complementary to this doctrine is the fact that users need a benchmark reference to have a better idea of the value of the goods and services offered, and in turn a better idea of what one’s own goods and services are worth. To make it so that the virtual currency is valued on par with the
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local currency makes it convenient for the usersxlix. One can conclude that users in the value their offerings in consideration of the offerings’ value in the local currency and thus users decide the purchasing power of the virtual currency. With the transparency the internet provides, members of any exchange can sell their goods and services at fairly accurate prices, by comparing the value of their offerings to that of the rest of the market, and adjust according to differentiating qualities of the goods and services (such as quality, popularity etc.)l. Thus, we see that a trade dollar is a financial unit of identical value to cash dollar, except that a trade dollar is redeemable only by a dollar’s worth of goods and services and not by cash.

VII. Forfeiture and Abandonment
Forfeiture and abandonment provisions are included in all industry contracts. Abandoned or forfeited trade dollars endure in the benefit of the barter company that has contracted with the defaulting client. The rationale is to compensate the barter company for the instability caused to the system by the defaulting barterer. li Abandonment is defined as the cessation of participation in the barter system due to bankruptcy, relocation, cessation of business, etc. Most often, barterers simply disappear, without leaving any trace for any reason, most often to avoid facing their responsibilities. Forfeiture of trade dollar balances is a penalty imposed by the membership contract for failure to liquidate the account within a reasonable time after notice of termination is given under the contract for any reason. The termination can be initiated by any party, and are most often due to a prior default by a client or disobedience to the code of conduct agreed on upon signing up for membership. It is usually the final action following a series of steps outlined in the guidelines or membership contract, to have an orderly liquidation of a client’s remaining balance. lii In general, if debtors fail to repay their debt, loan losses must be absorbed by the entire network, in parallel to the abandonment and forfeiture processes mentioned above. This is done by charging a loan reserve account, owned not by the barter exchange but by the members of the barter network collectively and which is typically fueled by membership, subscription and commissions. liii

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VIII. The Advantages Modern Barter
Having exposed the mechanisms of virtual currency, one wonders what the difference is between the barter system and the traditional money system. The advantage of the barter system in general terms is that it speeds up the flow of goods and services to their most productive use. This is especially true when the barter community is cash poor, for they can expand and exercise their purchasing power by trading what is at one’s disposal. The following list exposes the advantages of barter in greater detail. In a normal economic environment, the system is a robust cost cutting method that also allows for an interest free, open line of credit. Anything can be bartered other than mortgages, telephone service, and highly specialized products that have no secondary market (i.e. custom made cabinets a diamond cutting machine, etc.) Barter companies free business owners from cumbersome activities by providing control, record keeping, and administrating barter activities. As a result of the transaction tracking, an easy-to-read itemized monthly statement is also made available for accounting purposes. One saves money by exchanging excess capacity and underperforming assets for needed goods and services of purchasing the latter. One does not have to pay back cash, but can do so in whatever is at hand, good or service; thus providing the barterer with more flexibility in managing his debt. By not using cash, barter allows for cash conservation, reduction of cash outflows increased sales, and enables firms to spread their overhead costs over more units of output, thus reducing average costs and lessening inflationary pressures. The money saved will allow the business to more easily finance its projects. It also allows for access to a greater market, more distribution channels, more advertising through word of mouth and referrals. It is especially suitable for the trade of goods that cannot be stored or for goods whose storage involve a positive cost. This is the case for foods, hotel vacancies, and even advertising on television and radio shows. Furthermore barter can cushion the blow of economic insecurity during adverse economic conditions.
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The advantages enumerated above justify the feeling barterers have of being “more independent and financially secure” than when they have to rely on commercial banks and their loansliv. The advantages also explain that contrary to popular belief, barter follows a pro-cyclical movement evolving in tandem with the larger economy. The 1990s was a period of strong economic growth for the USA, and at the same time, it was a period of growth for the barter industry. Barbara Cresti’s 2005 paper entitled “US DOMESTIC BARTER: An empirical investigation” remarks that commercial barter is correlated with GDP, and that capacity utilization has a positive relation with commercial barter in the short and long run. Basic economics teaches that when an economy operates near full capacity, costs increase because of resource shortages and bottlenecks. Yet there is a range between capacity utilization and full capacity in which firms can expand output at constant or even declining cost. This is the range where commercial barter transactions can take place profitably. Jeff Powel’s 2002 paper on the Argentinean barter experiment suggests the same idea for bartering in Under-developed countries. The difference between Jeff Powel’s conclusions and those of Barbara Cresti’s lie only in the mode of bartering ; Argentinean barterers use physical barter markets whereas North American small and medium sized companies use the internet. Both authors’ results complement the idea that firms resort to barter to increase their profits and not to overcome trade difficulties. Indeed, there was an average of 8 percent increase of sales reported from bartering by small and medium sized companies during economic crisis.

IX.

Practical Skills for Modern Barter

The advantages barter come at the cost of mastering the intricacies proper to the barter environment. This section will define the most essential skills necessary associated with barter, and are an addition to the many . The first challenge is to find and choose a proper barter exchange. The barter exchange is only as strong as its members and the quality of their business conduct.lv This is because as mentioned before, barterers benefit from one another’s commitments to the exchange’s ethical code, and from the referrals and experience they gain with practice. The quality of the exchange and its members is verified by its history and reputation. This can be difficult when the exchange is web-based as information can easily be falsified. To counter this trap, one must ensure that the exchange has verifiable offices. It is then necessary for the barterer to properly manage his cash and virtual cash resources. Because barter transactions are taxed at the same rate as cash transactions under the “income”
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category, one risks ending the fiscal year with a surplus of virtual dollars and insufficient cash reserves to pay one’s taxeslvi. Barter exchange managing companies tend to see a flooding of virtual dollars in to the system when the tax deadline comes near, as members try to convert their virtual dollars in to assets to be solvent when facing the tax authorities. It is for this reason that bartering businesses and barter companies strongly recommend others to restrict the barter part of their business to between 20% and 30% of all inventory and incomelvii. Negotiation is a key skill to master for bilateral bartering. It is a less important skill in the domains of multilateral bartering or where brokers are involved, for in the first scenario prices tend to be fixedlviii, and in the second the broker negotiates for the member of the exchange. Nonetheless, experienced barterers encourage bilateral bartering as a matter of business strategylix. Indeed, when one has a constant, recurring and mutually beneficial barter relationship, the partners grow to know, trust and find stability in one another. This kind of relationship allows for one to have partners that are more inclined to consider each other’s changing needs and situation more thoroughly and patientlylx. Thus one observes that bilateral barter encourages interdependent relations to appear between businesses based on mutual satisfaction of needs and consideration. The remaining skills can fit under a category entitled “creative solutions”, whereby barterers, for instance, benefit from an application of a combinations of laws to reduce the amount of taxes they must pay. Another creative bartering technique is trading up, where one man’s trash is another’s treasure. It is by trading up that Kyle Macdonald managed to trade his way up from a red paper clip to a house.lxi

X.

Evolutions of Barter

Smaller businesses tend to prefer exchanges that regroup a large enough number of members in a decent geographic proximity. Most often trade exchanges have franchises dispersed throughout a country, as is the case with ITEX, MBElxii, and U-Exchange. Distance and location of barter exchanges are important factors for small companies. This is because delivering goods or services to a member can quickly become financially costly if the receiving barterer is too far from the delivering bartererlxiii. Out of 1239 barter exchanges as of 2003, only 2 provided nation-wide

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and international service in the USA; these were the MBE and IRTA. The remaining 1237 were focused on small businesses. lxiv 7 years later companies have noticed there was demand for international barter exchanges by medium sized companies and some small businesses. As of May 2010, the number of international barter exchanges has increased to include the IMS, ITEX, TradeBank and the IBE exchange networks alongside the IRTA and the MBElxv. This benefits the barter industry for as already mentioned, the larger the network, the wider the range of diverse offerings available, which increases the volume of transactions and speeds up the process of efficient allocation of resources. An explanation for this phenomenon can be found in the rapidly growing e-commerce industry’s facilitation of globalization. By enabling consumers, businesses and brokers to simultaneously search and compare multiple distributors around the globe for a particular product to find the lowest price possible (or almost). The purchaser then takes in to account shipping and handling costs, import dues, and the product’s net price in selecting a distributor. Additionally, many services, such as those that are media based, can be performed remotely and transferred electronically, thus saving money on transportation costs. lxvi This trend has naturally lead businesses to increase international trading and consequently use of international delivery companies such as FedEx and UPS. This resulted in marginal economies of scale, as well as an organic increase in cost efficiency and reliability of the delivery companies, with the lower costs ultimately benefiting their customerslxvii. These lower prices in turn have allowed for more small businesses to expand the geographic radius of their business activity. Medium businesses on the other hand will find themselves increasingly involved in international trading, as they trade in greater volumes than smaller businesses. The economies of scale from large orders combined with the lowest price strategy make for a profitable and attractive solution for medium sized businesses. This will not be cost efficient for all products, but the international barter exchange market will give medium sized businesses an opportunity to seize good opportunities when they ariselxviii. Though many exchanges are united under one barter company’s management, there is a great fragmentation of the exchanges. This is caused by barter companies barring their exchanges from

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trading with rival barter companies’ exchanges. Yet one cannot presume this is done solely to conserve profits. There are also technical obstacles to consider. The infrastructure and programming necessary to keep track of transactions in a truly global barter exchange is quite costly to purchase and in upkeep. Despite the high cost the risk of failure would be quite highlxix. To illustrate, if the system were to malfunction because of an instability caused by an excessive volume of simultaneous transactions that require too much computing power, the system would crash and vital information would be lost. Considering barter companies have an obligation to keep a record of all the transactions and to report them to tax authorities, a failure to do so would make a barter company suffer important financial losses lxx. This requirement is applied in New Zealand, the UK, Australia, and Canada amongst other countries that copied the American model. Barter exchanges could benefit from offering an insurance service. This seems counterintuitive considering that the North American Barter Association had only 2% complaints on the total number of calls it received from barter exchange members in 2006.lxxi It is nonetheless easy for fraud to take place. Indeed, there could be exchanges of counterfeit, defective or otherwise unsatisfactory products. As such, barter companies must include an Insurance against fraud. A similar system is employed by E-Bay Corporation’s paying system “PayPal”. This system allows customers to shop online with a constant insurance that any dissatisfaction with any purchased products using PayPal will be reimbursed. To minimize the risk of fraud, a customer must link and verify her credit card information with her PayPal account. A similar system can be applied with barter credit cards that can distinguish barter purchases from cash purchases, such as those offered by ITEX. A more pressing issue than insurance is the barter industry’s poor marketing. Though the larger e-barter companies have websites to attract potential members, they tend to resemble one another in the type and shallowness of the information provided. Most of them will not allow a non-member to view the offerings availablelxxii, nor will they guide potential users through the process of concluding a deal on the barter exchange. The NABA not exempt as they too demonstrate poor communications skills. The NABA collects statistical data and defends barterers’ rights from abusive practices by both fraudulent barterers and questionable barter companieslxxiii. Yet they do not publish their findings for the open public to access and the results of extensive searching for an official website and
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academic articles about NABA were inconclusive. In view of its lack of direct communication, it is difficult to give credibility to NABA. Yet the volume of references to it by specialized newspapers and well-established barterers’ articles make it difficult not to trust the associationlxxiv. This is understandable only in so far as the majority of barter exchange members are typically far too busy running their business to spend time on the Internet searching for deals. Instead they rely on local exchanges to send them newsletters and faxes regarding current eventslxxv. Yet, this strategy fails to inform the inquiring non-bartering businesses of the potential gains from barter. Furthermore, by failing to publish statistical figures it forgoes the opportunity of infusing credibility in to the barter system, and misses an opportunity to win the trust and confidence of would-be barterers. Therefore, barter companies and exchanges must agree to be represented by one barter association whose aim will be to provide the public with all the information a potential member would like to know, in a synthesized, organized, complete and concise manner.

XI.

Conclusion
This paper aimed to defy the opacity of the American barter industry, to explore and

express the mechanics North American barter systems. The importance of the state has been underlined in enforcing a preexistent credibility and trust in the barter system, it’s recognition of the virtual currency has proven the system to be viable enough for potential members. The conditions set out barter exchanges ensure the system’s viability and further deters would be fraudulent users by means of taxation. The cohesiveness of the community and collective obedience to the ethical charter is also crucial to the stability and credibility of the barter exchange. The paper then described the organization of barter systems, in the distinction between barter companies and barter exchanges. Barter companies manage the barter exchanges in the name of its members, controlling the flow of virtual currency, through the mechanisms of loans and reimbursements, to benefit the exchange as much as possible. The goal is to keep a balance between the amount of virtual currency available and the amount of goods and services offered in the barter exchange. This naturally leads to the question of indebted and problematic users, and
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mechanisms to resolve their financial issues to minimize the impact such failures could have on the barter exchange. Finally, the advantages of modern barter were illustrated, as were the practical adaptations necessary for individual barterers to have bartering success. The Internet’s role as a tool to connect more exchanges, and the decrease in transportation costs have allowed for barterers to expand the geographic limits of their activities, benefitting both the small and medium sized enterprise. Technological advances have also allowed for the broker to be replaced by software, but the cost of doing so is losing the human touch that has a strong comforting and (thus loyalty building) effect. This study on barter has focused mainly on the cashless transactions and briefly mentioned the close cousin of barter, countertrade. The next study on barter must be conducted from a much closer and practical perspective, with studies of various barter companies’ practices, the role of different employees (such as the broker); delving deeper in to the intricacies of the art of barter, to extract from it knowledge that is akin to science. Furthermore, the next study must be seek to study and understand the adaptive differences that arise between the barter exchanges from different economies and countries. Finally, the next paper must verify if the opacity of the American barter industry is unique to the USA or if it is a widely spread phenomenon.

REFERENCES
1. 2. 3. Barter & Trade Exchanges, Jerry Howell & Tom Chmielewski, 2009, Alpha Books, New York, USA. Barter & The Future of Money, Terry Neal, Garry Eisler, Master Media 1996, New York The Structure of Exchange in barter and Monetary Economies, Ross M. Starr, The Quarterly Journal of Economics, Vol. 86 No. 2, May 1972, MIT press. 4. “You can Buy Almost Anything with Potatoes” : An Examination of Barter During Economic Crisis in Bulgaria. Barbara A. Cellarius. Ethnology, Vol. 39 No. 1 Winter 2000, University of Pittsburgh – Of the Commonwealth System of Higher Education. 5. Money, Barter and the Optimality of Legal Restriction, Merwan Engineer and Dan Bernhardt, The Journal of Political Economy, Vol. 9, No. 4 (Aug. 1991), The university of Chicago Press. 6. 7. Computational Issues in E-commerce Trading Exchanges Carl Menger and the Evolution of Payments Systems: From Barter to Electronic Money Goodhart History of Political Economy.2004; 36: 210-212 8. BARTER: A Backbone Architecture for Trade of Electronic Content, Springer Berlin / Heidelberg, Trends in Distributed Systems for Electronic Commerce, Thursday, February 19, 2004 9. From Theoretical e-barter Models to an Implementation Based on Web Services Mario Bravetti , Adalberto Page

17

Mechanics of Modern Barter for SMEs

Casalboni, Manuel Núñez and Ismael Rodríguez, 18 May 2006. 10. Increasing Bid Expressiveness for Effective and Balanced E-Barter Trading, Lecture notes in Computer Science, Spirnger Berlin/ Heidelberg, Declarative Agent Languages and Technologies VI, December 25, 2008 11. E-Barter Versus Fiat Money: Will Central Banks Survive? Forest Capie, Dimitrios P. Tsomocos, Geofrrey Wood, Bank Of England Working Paper no. 197, August 2003 12. The Cash Strapped Turn To Barter, Mickey Meece, New York Times, November 13 2008 13. Barter exchanges Catch on as credit tightens, Stacy Perman, Nov. 11 2008, Businessweek 14. Old-Fashioned Bartering Helps Pare Medical Bills, Tom Murphy, AP Business 15 December 2009 15. Bartering Boom: Fledgling businesses preserve cash by swapping services, goods online, Carolyne Said, The Chronicle May 17 2006 16. With Money tight, bartering Appears Online, Mike Harvey, The times Nov. 20 2008 17. Regulators keeping close watch on barter practices, Matt Krantz, 5 of may 2002, USA Today To weather Recession Argentines revert to Barter, Clifford Krauss, May 6 2001, The New York Times 18. Tanzer, Michael, January 2006, “Towards Promoting Multilateral Barter Trade among Third World Countries”, http://cog.kent.edu/lib/MichaelTannzer-Towards.pdf accessed 03/05/2010 19. Knaup, E. Amy, May 2005, Monthly Labor Review, “Survival and Longevity in the Business Employment Dynamics data”. USA Bureau Of Labor Statistics Publications, Washington DC. 20. Hummels, David, 2004, Transportation Costs and International Trade Over Time, 130 International Trade Round Table, OECD, Paris, France. 21. The following Barter exchange websites were frequently referenced to and researched: www.itex.com, www.irta.com, www.mbe.com, www.ibe.com, www.tradebank.com
th th th th th

c

Transport and

ANNEX I- Density of exchanges Map ANNEX II - THE IRTA APPLICATION ANNEX III – DIFFERENT EXCHANGES INFORMATION MATRIX ANNEX IV – Testimonials
“I have a catering business and although our food and facilities are amazing, our location is a bit tricky to get to… Those barter clients who might have come from a little farther out because we were on trade have such a great experience they refer us to everyone they talk to. As if all this free advertising wasn’t enough, then I get to spend barter dollars with other members… I’ve gotten a garage door, flooring, car stereo & alarm, printing, limo rides, and pest control… ALL ON BARTER.”
 P.N., Catering Service 18

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Mechanics of Modern Barter for SMEs

“You have made such a difference in our family vacation this year that I couldn’t let it go unnoticed. Usually I would have to spend days on the internet researching the best locations and the best prices to accommodate our whole family. But this year, you took care of all that for me. We had a great time at FDR Pebbles in Jamaica. Once again, thanks for all your help and tell your boss to give you a raise!”
 L., Signs and Marketing

ENDNOTES

i

Barter & Trade Exchanges, Jerry Howell & Tom Chmielewski, 2009, Alpha Books, New York, USA.

ii

Carl Menger and the Evolution of Payments Systems: From Barter to Electronic Money Goodhart History of Political Economy.2004; 36: 210-212
iii

BARTER: A Backbone Architecture for Trade of Electronic Content, Springer Berlin / Heidelberg, Trends in Distributed Systems for Electronic Commerce, Thursday, February 19, 2004
iv

Carl Menger and the Evolution of Payments Systems: From Barter to Electronic Money Goodhart History of Political Economy.2004; 36: 210-212
v

Money, Barter and the Optimality of Legal Restriction, Merwan Engineer and Dan Bernhardt, The Journal of Political Economy, Vol. 9, No. 4 (Aug. 1991), The university of Chicago Press
vi

BARTER: A Backbone Architecture for Trade of Electronic Content, Springer Berlin / Heidelberg, Trends in Distributed Systems for

Page

19

Mechanics of Modern Barter for SMEs

Electronic Commerce, Thursday, February 19, 2004

vii

BARTER: A Backbone Architecture for Trade of Electronic Content, Springer Berlin / Heidelberg, Trends in Distributed Systems for Electronic Commerce, Thursday, February 19, 2004
viii

Because the USA was the first to officially recognize multilateral bartering in 1982, there is no record of a

precise starting date for the practice, though it is well known it was present well before its formal recognition. The law came as a recognition of a “fait accompli” rather than as an introduction to a novel way of doing business. ix Carl Menger and the Evolution of Payments Systems: From Barter to Electronic Money Goodhart History of Political Economy.2004; 36: 210-212

x

Meyer, B. Robert, 5/6/2005 Statistics Reinforce Enormous Potential For Commercial Barter Industry, www.barternews.com accessed 31/04/2010
xi

Geofrrey Wood, Bank Of England Working Paper no. 197, August 2003

xii

From Theoretical e-barter Models to an Implementation Based on Web Services Mario Bravetti , Adalberto Casalboni, Manuel c Núñez and Ismael Rodríguez, 18 May 2006.

xiii

Money, Barter and the Optimality of Legal Restriction, Merwan Engineer and Dan Bernhardt, The Journal of Political Economy, Vol. 9, No. 4 (Aug. 1991), The university of Chicago Press.

xiv

BARTER: A Backbone Architecture for Trade of Electronic Content, Springer Berlin / Heidelberg, Trends in Distributed Systems for Electronic Commerce, Thursday, February 19, 2004

xv

Money, Barter and the Optimality of Legal Restriction, Merwan Engineer and Dan Bernhardt, The Journal of Political Economy, Vol. 9, No. 4 (Aug. 1991), The university of Chicago Press.

xvi

From Theoretical e-barter Models to an Implementation Based on Web Services Mario Bravetti , Adalberto Casalboni, Manuel c Núñez and Ismael Rodríguez, 18 May 2006.
xvii

Barter & The Future of Money, Terry Neal, Garry Eisler, Master Media 1996, New York Barter & The Future of Money, Terry Neal, Garry Eisler, Master Media 1996, New York

xviii xix

In fact, the similarities are even greater when one considers that it is not until recent evolutions in cloud computing, data mining and enabling consumer technology that Internet bartering has increased in importance. Before then, the business barterers were too busy running his businesses to scout the web for interesting deals, relying on faxes and newsletters to engage in bartering. Recent technological advancements the trend maybe on the brink of reversal.
xx

Barter & The Future of Money, Terry Neal, Garry Eisler, Master Media 1996, New York

xxi

Geofrrey Wood, Bank Of England Working Paper no. 197, August 2003

xxii

From Theoretical e-barter Models to an Implementation Based on Web Services Mario Bravetti , Adalberto Casalboni, Manuel c Núñez and Ismael Rodríguez, 18 May 2006.
xxiii

Money, Barter and the Optimality of Legal Restriction, Merwan Engineer and Dan Bernhardt, The Journal of Political Economy, Vol. 9, No. 4 (Aug. 1991), The university of Chicago Press.

Page

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Mechanics of Modern Barter for SMEs

xxiv

Tanzer, Michael, January 2006, “Towards Promoting Multilateral Barter Trade among Third World Countries”, http://cog.kent.edu/lib/MichaelTannzer-Towards.pdf accessed 03/05/2010
xxv

Barter & Trade Exchanges, Jerry Howell & Tom Chmielewski, 2009, Alpha Books, New York, USA.

xxvi

“Property or services are exchanged through a barter exchange if payment for property or services is made

by means of a credit on the books of the barter exchange or scrip issued by the barter exchange or if the barter exchange arranges a direct exchange or property or service among its members or clients or exchanges property or services with a member or client”.
xxvii xxviii

Geofrrey Wood, Bank Of England Working Paper no. 197, August 2003 Barter & Trade Exchanges, Jerry Howell & Tom Chmielewski, 2009, Alpha Books, New York, USA.

xxix

xxx xxxi

These include, TradeBank, ITEX,

See praises in Annex IV Tanzer, Michael, January 2006, “Towards Promoting Multilateral Barter Trade among Third World Countries”, http://cog.kent.edu/lib/MichaelTannzer-Towards.pdf accessed 03/05/2010
xxxii xxxiii

The Structure of Exchange in barter and Monetary Economies, Ross M. Starr, The Quarterly Journal of Economics, Vol. 86 No. 2, May 1972, MIT press
xxxiv

The Structure of Exchange in barter and Monetary Economies, Ross M. Starr, The Quarterly Journal of Economics, Vol. 86 No. 2, May 1972, MIT press
xxxv

The Structure of Exchange in barter and Monetary Economies, Ross M. Starr, The Quarterly Journal of Economics, Vol. 86 No. 2, May 1972, MIT press
xxxvi

BARTER: A Backbone Architecture for Trade of Electronic Content, Springer Berlin / Heidelberg, Trends in Distributed Systems for Electronic Commerce, Thursday, February 19, 2004
xxxvii

BARTER: A Backbone Architecture for Trade of Electronic Content, Springer Berlin / Heidelberg, Trends in Distributed Systems for Electronic Commerce, Thursday, February 19, 2004
xxxviii

BARTER: A Backbone Architecture for Trade of Electronic Content, Springer Berlin / Heidelberg, Trends in Distributed Systems for Electronic Commerce, Thursday, February 19, 2004
xxxix

Increasing Bid Expressiveness for Effective and Balanced E-Barter Trading, Lecture notes in Computer Science, Spirnger Berlin/ Heidelberg, Declarative Agent Languages and Technologies VI, December 25, 2008
xl

Barter & The Future of Money, Terry Neal, Garry Eisler, Master Media 1996, New York

xli

Tanzer, Michael, January 2006, “Towards Promoting Multilateral Barter Trade among Third World Countries”, http://cog.kent.edu/lib/MichaelTannzer-Towards.pdf accessed 03/05/2010
xlii

information about the transaction recording and organizing process by barter companies that employ

brokers could not be found for comparison. The writers presume the transactions are recorded as they happen by software. xliii Tanzer, Michael, January 2006, “Towards Promoting Multilateral Barter Trade among Third World Countries”, http://cog.kent.edu/lib/MichaelTannzer-Towards.pdf accessed 03/05/2010
xliv

Barter & The Future of Money, Terry Neal, Garry Eisler, Master Media 1996, New York

xlv

The Structure of Exchange in barter and Monetary Economies, Ross M. Starr, The Quarterly Journal of Economics, Vol. 86 No. 2, May 1972, MIT press.

Page

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Mechanics of Modern Barter for SMEs

xlvi

often employing countertrade to facilitate payment, requiring payement in both virtual dollars and cash

dollars. See annexed IRTA application The Structure of Exchange in barter and Monetary Economies, Ross M. Starr, The Quarterly Journal of Economics, Vol. 86 No. 2, May 1972, MIT press.
xlvii xlviii xlix

“You can Buy Almost Anything with Potatoes” : An Examination of Barter During Economic Crisis in Bulgaria. Barbara A. Cellarius. Ethnology, Vol. 39 No. 1 Winter 2000, University of Pittsburgh – Of the Commonwealth System of Higher Education
l

Hummels, David, 2004, Transportation Costs and International Trade Over Time, 130 Transport and International Trade Round Table, OECD, Paris, France.
li

th

Hummels, David, 2004, Transportation Costs and International Trade Over Time, 130 Transport and International Trade Round Table, OECD, Paris, France.
lii

th

“You can Buy Almost Anything with Potatoes” : An Examination of Barter During Economic Crisis in Bulgaria. Barbara A. Cellarius. Ethnology, Vol. 39 No. 1 Winter 2000, University of Pittsburgh – Of the Commonwealth System of Higher Education
liii

Barter & Trade Exchanges, Jerry Howell & Tom Chmielewski, 2009, Alpha Books, New York, USA. Barter & The Future of Money, Terry Neal, Garry Eisler, Master Media 1996, New York The Cash Strapped Turn To Barter, Mickey Meece, New York Times, November 13 2008
th

liv

lv

there are no known cases of a government accepting virtual currency Tanzer, Michael, January 2006, “Towards Promoting Multilateral Barter Trade among Third World Countries”, http://cog.kent.edu/lib/MichaelTannzer-Towards.pdf accessed 03/05/2010
lvi lvii. lviii

“You can Buy Almost Anything with Potatoes” : An Examination of Barter During Economic Crisis in Bulgaria. Barbara A. Cellarius. Ethnology, Vol. 39 No. 1 Winter 2000, University of Pittsburgh – Of the Commonwealth System of Higher Education
lix

Money, Barter and the Optimality of Legal Restriction, Merwan Engineer and Dan Bernhardt, The Journal of Political Economy, Vol. 9, No. 4 (Aug. 1991), The university of Chicago Press.
lx lxi lxii

For 2007, 28% of barter transactions were for services, and 72% were for products. Geofrrey Wood, Bank Of England Working Paper no. 197, August 2003 The Merchants Barter Exchange was the first exchange to recognize the potential of international bartering.

Encouraged by the NAFTA agreement, they set up in Mexico and Torronto in 1999. lxiii Geofrrey Wood, Bank Of England Working Paper no. 197, August 2003
lxiv

Barter & Trade Exchanges, Jerry Howell & Tom Chmielewski, 2009, Alpha Books, New York, USA.
th

lxv

Hummels, David, 2004, Transportation Costs and International Trade Over Time, 130 Transport and International Trade Round Table, OECD, Paris, France.
lxvi

Tanzer, Michael, January 2006, “Towards Promoting Multilateral Barter Trade among Third World Countries”, http://cog.kent.edu/lib/MichaelTannzer-Towards.pdf accessed 03/05/2010
lxvii

Hummels, David, 2004, Transportation Costs and International Trade Over Time, 130 Transport and International Trade Round Table, OECD, Paris, France.
lxviii

th

Knaup, E. Amy, May 2005, Monthly Labor Review, “Survival and Longevity in the Business Employment Dynamics data”. USA Bureau Of Labor Statistics Publications, Washington DC.
lxix

Knaup, E. Amy, May 2005, Monthly Labor Review, “Survival and Longevity in the Business Employment Dynamics data”. USA Bureau Of Labor Statistics Publications, Washington DC.
lxx

Other important obstacles exist revolving around the political, economic, legal and practical difficulties of implementing a universal virtual currency that has the same attributes as a virtual currency valued on a 1:1 basis with a local currency.

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Mechanics of Modern Barter for SMEs

lxxi

It also planned to reduce that number by 50% by 2007 ITEX being the only exception
th

lxxii lxxiii

Hummels, David, 2004, Transportation Costs and International Trade Over Time, 130 Transport and International Trade Round Table, OECD, Paris, France.
lxxiv lxxv

an archive.google.com search will reveal a plethora of sources of articles relating to NABA Barter & Trade Exchanges, Jerry Howell & Tom Chmielewski, 2009, Alpha Books, New York, USA.

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