The Barter System and Its Difficulties

Before money existed, exchange took the form of barter — the direct exchange of one good or service for another, with no separate medium of exchange acting as a go-between. A farmer with surplus rice who needed cloth had to find a weaver who both had cloth to spare AND wanted rice in return. As trade widened beyond the smallest, most self-sufficient communities, this way of exchanging goods ran into serious, practical obstacles — and removing exactly these obstacles is what money was developed to do.

Difficulties of the barter system:

• Lack of double coincidence of wants — the single biggest problem: an exchange could happen only when each party wanted exactly what the other party offered, at the same time. A shoemaker who wanted rice had to find a rice-grower who, in turn, wanted shoes — a coincidence that grew rarer as the range of goods produced in an economy grew wider.
• Lack of a common measure of value — barter has no single unit in which to express and compare the value of unlike goods. How many mangoes should one goat be worth? Without a common yardstick, every single pair of goods needed its own separately negotiated exchange rate.
• Indivisibility of goods — many goods used in barter (a cow, a plough, a house) cannot be split into smaller units without destroying their value, making it impossible to exchange a large-value good for several smaller-value goods in one fair transaction.
• Lack of a store of value — many barter goods (foodgrain, milk, vegetables) are perishable and cannot be stored for long, so a producer could not reliably save today's surplus for a purchase to be made later.
• Lack of a standard for deferred payments — barter gives no reliable way to fix a future obligation (a loan, a rent, a wage promised for later), because the relative value of the goods involved can itself change unpredictably between the promise and the payment.
• Difficulty of transporting and transferring value — moving bulky or perishable barter goods over distance, to complete a trade or to transfer value to another person, was slow, costly, and often impractical. …