Goods were exchanged for goods prior to invention of money. Barter system worked on certain conditions mentioned below.
· Each party to barter must have surplus stocks for the trade to take place.
· Both the buyers and sellers should require the goods each other desperately i.e., double coincidence of wants
· Buyer and seller should meet personally to effect the exchange.
The barter system envisages mutual exchange of one’s goods to other without the intervention of money as a medium of exchange. It imposes certain constraints in the smooth flow of trade as explained below.
Unless two persons who have surplus have the demand for the goods possessed by each other, barter could not materialize. For instance ‘A’ is having a surplus of groundnut and ‘B’ is possessing rice in surplus. In this case A should be in need of rice possessed by B as the latter should desperately need groundnut possessed by A. If this “coincidence of wants” does not exist, Barter cannot take place.
Barter system could not determine the value of commodities to be exchanged as they lacked commonly acceptable measures to evaluate each and every commodity. It was difficult to compare the values of all articles in the absence of an acceptable medium of exchange.
It was not possible for buyers and sellers to meet face to face in many contexts for exchanging the commodities for commodities. This hindered the process of barter in all practical sense.
Absence of surplus stock was one of the impediments in barter system. If the buyers and sellers do not have surplus then no barter was possible.
All the aforesaid constraints were addressed by the invention of money as medium of exchange. Besides there are other hindrances in the smooth exchange of goods from the place of production to the place of consumption like place, time, risk, knowledge, finance and so on. These are addressed by various mechanisms in detail in the subsequent sections of this chapter.