Economic historian Karl Polanyi has argued that where barter is
widespread, and cash supplies limited, barter is aided by the use of
credit, brokerage, and money as a unit of account (i.e. used to price
items). All of these strategies are found in ancient economies including
Ptolemaic Egypt. They are also the basis for more recent barter
exchange systems.
While one-to-one bartering is practiced between individuals and
businesses on an informal basis, organized barter exchanges have
developed to conduct third party bartering which helps overcome some of
the limitations of barter. A barter exchange operates as a broker and
bank in which each participating member has an account that is debited
when purchases are made, and credited when sales are made.
Modern barter and trade has evolved considerably to become an effective
method of increasing sales, conserving cash, moving inventory, and
making use of excess production capacity for businesses around the
world. Businesses in a barter earn trade credits (instead of cash) that
are deposited into their account. They then have the ability to purchase
goods and services from other members utilizing their trade credits –
they are not obligated to purchase from those whom they sold to, and
vice versa. The exchange plays an important role because they provide
the record-keeping, brokering expertise and monthly statements to each
member. Commercial exchanges make money by charging a commission on each
transaction either all on the buy side, all on the sell side, or a
combination of both. Transaction fees typically run between 8 and 15%.
Advantages
- Direct barter doesn't require payment in money (when money is in short supply) hence will be utilized when there is little information about the credit worthiness of trade partners or there is a lack of trust.
- The poor cannot afford to store their small supply of wealth in money, especially in situations where money devalues quickly (hyperinflation)
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