Barter System - Through the Centuries

Early Humans: If you go through the evolution of human history, early humans had very little needs. They used leaves and animal skin as clothes, and ate fruits and flesh of animals. There was no need of exchange of goods, as their needs were limited.

Formation of Groups: As the number of people increased, they had to travel long distances to find food. They started forming groups. The members of each group stayed together while traveling and hunting, and they refrained from any interaction with other groups. Gradually, inter-group interaction started and this paved way for the system of trading. They started exchanging their goods for what they needed. This type of exchange was mainly done to fulfill basic needs, like food, clothes, etc.

Cultivation and Farming: After years of nomadic life, people started settling down in areas, where they began growing plants and raising farm animals. As cultivation and farming flourished, people started developing other skills too. There was no shortage of food, and they had enough time to spend on other work, like pottery, carpentry, weaving, etc. With surplus goods in hand, the system of trade flourished. They started trading surplus goods for goods and services they needed. A hand-made spear in exchange of a woven cloth, or a cow for a sack of grains, etc. Apart from goods, services were also exchanged. People started traveling long distances to buy and sell their products.

Evolution of Barter System: The system of trading, wherein goods and services were exchanged for other goods and services, without any medium, like money is called barter. The history of bartering can be traced back to 6000 B.C. It is believed that barter system was introduced by the tribes of Mesopotamia. This system was then adopted by the Phoenicians, who bartered their goods to people in other cities located across the oceans. An improved system of bartering was developed in Babylonia too. People used to exchange their goods for weapons, tea, spices, and food items. Sometimes, even human skulls were used for barter. Another popular item used for exchange was salt. Salt was so valuable at that time, that the salary of Roman soldiers was paid in salt. The main drawback of this system was that there was no standard criteria to determine the value of goods and services, and this resulted in disputes and clashes. These problems were sorted out with the invention of money, but the barter system continued to exist in some form or another.

Origin of Money: Though trade was done through barter, people started confronting some problems with the system. In order to exchange an item, the seller must have the specific good the buyer needs and vice versa. This was not always possible. Another major drawback was lack of a common value to measure the value of goods. How can a person fix the worth of his goods? So, people started stacking certain valuable things that were acceptable for a majority. They included salt, metal, farm animals, etc. Materials, like shells, feathers, animal teeth, etc., were also used as money. This was made possible after they agreed upon specific values for these materials and use the same for trade. However, it became difficult to carry and use these materials. So traders wanted something that was not perishable and easy to carry, as a medium of exchange. This led to the use of metal pieces as money. It is believed that the first recognizable metal coins appeared in China, during 1000 B.C. However, the first minted coins are believed to be made in some regions of Turkey, like Lydia. Around 600 B.C., the Chinese started using paper money. The Europeans started traveling across the globe during the Middle Ages and used barter services to trade their goods like fur and crafts to the East, in exchange of perfumes and silks. People of colonial America did not have enough money for business, which was mainly based on barter services. Most of their business consisted of wheat, skin of male deer (bucks) and musket balls. They were also experts in exchanging services. If members of one family agreed to help their neighbors in harvesting their crops, the latter would help the former in their task, like roofing their building. The history of barter system can also be linked to the initial years of Oxford and Harvard Universities, where students used to pay their fees as food items, firewood or livestock.

Great Depression of the 1930s: Barter services became popular during the Great Depression in the 1930s, which witnessed a scarcity of money. The barter system was used as a way of obtaining things like food and other services. Trading was done between people or through groups, who acted as agents and facilitated third party bartering. These groups were like banks, where people maintained their accounts. In case of sale of any of the items, the account of the owner would be credited and the account of the buyer would be debited. It is worth mentioning that Adolf Hitler also used barter system to collect money for funding the war. He was engaged in barter trading with Greece, Sweden, and Russia. Post World War II, the people of Germany too resorted to bartering, as the German currency had lost its value. The advent of paper money lead to an increase in international trade. Today, physical currency is not required, as electronic money is widely used for monetary transactions.

Pros and Cons

As mentioned above, barter system does not require you to pay in money. This system will be beneficial for those who are running short of cash. You just have to exchange the item you want to sell with an item you want to buy. The disadvantage is that you have to find out a person who wants to sell the item you need, at the same time, he should be ready to buy the item you have. Locating such a person may sometimes get difficult. Another drawback is fixing a value for the items you want to buy and sell. In today's economy, this is not impossible, as the values can be calculated in terms of money. In case of a barter economy, storage of wealth is not always possible, especially in case of perishable goods. There was no assurance with regard to the quality of the products traded.