Drawbacks Of The Barter System
Centuries ago when there was no perception of money, people traded goods with goods and goods with services. For example, a farmer directly exchanged vegetables with cloth produced by weavers or he used to exchange fruits with meat etc.
At that time everybody looked for a person for the trading of goods and services, but the double coincidence of human wants used to take place rarely. For example, a person having wheat looked for a person having cloth and is ready to exchange it with wheat.
This rarely happened. What happened so often was that a person having cloth used to be ready to get it exchanged but not with wheat. In this way inadequacy of dual coincidence of wants involved a lot of wastage of time and even then it was hard to easily exchange goods with goods/services. But what are the actual drawbacks of the barter system? Read this tape daily article to find out.
Inadequacy Of Familiar Measure Of Value
In the barter system, there was no common yardstick to measure the value of different products for the purpose of trade. To explain the point we suppose that two persons had the dual coincidence of wants and were ready to trade wheat with the cloth.
The problem was how much wheat be exchanged with how much cloth? In the absence of money, they were unable to solve the problem. Thus, the amount of good to be exchanged was determined by the extent of desire, a person had for the good to be obtained in exchange.
Indivisibility Of Certain Articles
Supposing people were in a position to overcome the mentioned drawbacks of the barter system, even they were unable to overcome their problems. Another drawback of the system was indivisibility of the products having a large size. For example, if a person had a buffalo and wanted to exchange it with 100 meters of cloth and 20 kg of fruit owned by two different persons.
In this situation, he was unable to cut buffalo into two pieces to get the above mentioned two products from two different persons. Hence in this case exchange was not possible.
Inadequacy Of Stock Of Value
In a budgetary economy like the one we have these days, the value of money (or purchasing power) can be stored in a saving account of a bank to use it to buy goods and services in future. In old days it was not possible to store the value of a product in the barter system because most of the products traded during those days were perishable in nature e.g wheat, fruits, and vegetables etc. Hence they lacked the characteristics of a store of value.
Difficulties In Lending And Borrowing
The barter system created difficulties in lending and borrowing of different goods. For example, if a person borrowed a goat from another person to exchange it with wheat then after sometime it was not possible for him to get the same goat to pay back the loan. Hence people generally avoided to get/give loans.
Difficulties In Transportation
Under barter system of trade, people used to travel from one area to another along with goods and animals to get them traded for other goods. It was highly difficult to do so because they had to face many mishaps on their way. Hence, their business cycle remained limited and also the markets of goods and services could not be extended.
Evolution Of Money
We have noted above various drawbacks of the barter system. In order to overcome these drawbacks, there was a need to evolve suitable medium of exchange so that goods and services are transacted easily. People at the time tried many commodities e.g animals, salt, stone, skin etc as the commonplace of trade.
These commodities failed to perform the functions of money or the commonplace of exchange because some of them lacked double durability, other lacked characteristics of indivisibility. After a long time, people ultimately found a suitable medium of exchange in the form of gold and silver metals. In this way, metallic money in the pattern of metallic coins came into existence.
In the eighteenth century, there was an outbreak of industrial revolution in all countries of Europe due to which economies expanded. Therefore the use of money also extended. Metallic money couldn’t meet the requirements because it was difficult to make large payments in coins and their transference from one area to another was difficult.
To overcome these problems paper money was evolved. With the further expansion of economies, even the paper money fell short of the requirements due to the advancement of heavy loans to different sectors of the economy. Hence another form called credit money was evolved. This is widely used in different economies of the world.
The evolution of money discussed above indicates that there are three forms of money which are presently in circulation
- Metallic Money
- Paper Money
- Credit Money
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