In a system of barter economy, there is no way of storing the purchasing power of the saved income.The money system does not have any of the above problems, and hence it is said that money is the most preferred asset.
THE ECONOMIES of the world long back shifted to the money system. Prior to that there used be a barter system. According to wikipedia, ‘the barter system was one of the earliest forms of trading. It facilitated exchange of goods and services, as money was not invented in those times. The history of bartering can be traced back to 6000 BC.
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 were 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.’ This system exists even now in quite a number of countries, especially in the highlands and remote area that are completely cut off from the market system, and the households are termed as subsistence household that fully depend upon their own work, and exchange whatever they produce with other households for other products. Barter services became popular during The Great Depression in the 1930's, which witnessed a scarcity of money. In the present times if we look at some of the declining countries like Zimbabwe, where, according to Wikipedia ‘hyperinflation began in the early 2000s, and persisted through to 2009. Figures from November 2008 estimated Zimbabwe's annual inflation rate at 89.7 sextillion (1021) percent. By December 2008, inflation was estimated at 6.5 quindecillion novemdecillion percent (65 followed by 107 zeros). In April 2009, Zimbabwe abandoned printing of the Zimbabwean dollar, and the South African rand and US dollar became the standard currencies for exchange. The government does not intend to reintroduce the currency until 2010.’ It is seen that such a staggering inflation rate has completely eliminated the confidence of the people and also of the government in money, and the economy has almost shifted to the barter system. Just imagine that a loaf of bread currently costs about 300 billion Zimbabwean dollars. This has also its aftermath on a number of issues like unemployment rate which has spiked to 94 per cent, meaning that fewer than half a million people in the country are formally employed.Let us briefly look at the barter system:Before money was introduced, it was enormously difficult and inconvenient to exchange one commodity for another. This direct exchange of goods and services without the use of money is called barter. It involves a direct exchange (in the absence of any medium) of what is not wanted for that which is wanted. None of the exchanged goods are held in order to affect another exchange for some other good. As we have said above, in earlier times, most of the goods and services were bought and sold by this system of barter, and even today some of the international transactions are carried our through the system of barter. Barter also exists in the non-monetary sectors of quite a number of developing countries.Barter has many difficulties which are briefly described below: 1. Lack of Double Coincidence of Wants: In order for act of barter to take place, it is necessary that the persons with matching requirements are brought together. If a person A wants what person B has, person B must also want what person A has. This is called the double coincidence of wants, which, as we can see, is very rare to obtain in real life. This difficulty makes barter system very cumbersome, even sometimes impossible, especially in an economy where specialization has taken place; 2. Lack of any Common Unit of Measurement of Value: Once the persons wanting each other’s commodity come together, the next problem is to determine the rate at which the exchange will occur. If A has rice, and B has wheat, then how much of rice will exchange for how much of wheat? Even when we have determined such a rate of exchange between the two given commodities, the problem still remains as to how to determine the rates of exchange between all the various commodities which are available in the barter economy. In case there are 500 different goods and services, we will have to work out 1,24,750 possible ratios of exchange which is an enormously difficult task. Not only this, we will have to adjust these ratios with each other in order to avoid unique profiteering by some traders. All the problems add to the difficulties of the barter system;3. Lack of Means of Sub-division: There are manly kinds of goods (like a shirt, a house, a car etc.) which, when divided, lose their worth. In other words, they are indivisible. In the case of such goods the system of barter fails. If one shirt is exchanged for 2 measures of rice, then to say that half a shirt will exchange for 1 measure of rice has no meaning;4. Lack of any Common Unit in terms of which Contracts and Agreements requiring Future Payments would be written: In a system of barter economy, another set of difficulties arises when one of the commodities (to be exchanged) is not parted with immediately, and requires to be given away at some future sate. In such a case, there is no way in which we can write a contract, or have an agreement to effect this transaction; and5. Lack of any Common Unit in terms of which the Generalized Purchasing Power could be stored: An individual’s income is not always spent, and is sometimes set aside for future use. In a system of barter economy, there is no way of storing the purchasing power of the saved income.The money system does not have any of the above problems, and hence it is said that money is the most preferred asset, and money system is the most preferred system for an economy to go ahead.