Barter system india

Barter is a system of exchange where goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. It is distinguishable from gift economies in many ways; one of them is that the reciprocal exchange is immediate and not delayed in time. It is usually bilateral, but may be multilateral (i.e., mediated through barter organizations) and, in most developed countries, usually only exists parallel to monetary systems to a very limited extent. Barter, as a replacement for money as the method of exchange, is used in times of monetary crisis, such as when the currency may be either unstable (e.g., hyperinflation or deflationary spiral) or simply unavailable for conducting commerce.

Economists since Adam Smith, looking at non-specific archaic societies as examples, have used the inefficiency of barter to explain the emergence of money, the economy, and hence the discipline of economics itself. However, ethnographic studies have shown no present or past society has used barter without any other medium of exchange or measurement, nor have anthropologists found evidence that money emerged from barter, instead finding that gift-giving (credit extended on a personal basis with an inter-personal balance maintained over the long term) was the most usual means of exchange of gifts and services.

Since the 1830s, barter in some western market economies has been aided by exchanges that use alternative currencies based on the labour theory of value, and are designed to prevent profit taking by intermediators. Examples include the Owenite socialists, the Cincinnati Time store, and more recently Ithaca HOURS (Time banking) and the LETS system.

Economic theory

Adam Smith on the origin of money

Adam Smith, the father of modern economics, sought to demonstrate that markets (and economies) pre-existed the state, and hence should be free of government regulation. He argued (against conventional wisdom) that money was not the creation of governments. Markets emerged, in his view, out of the division of labour, by which individuals began to specialize in specific crafts and hence had to depend on others for subsistence goods. These goods were first exchanged by barter. Specialization depended on trade, but was hindered by the "double coincidence of wants" which barter requires, i.e., for the exchange to occur, each participant must want what the other has. To complete this hypothetical history, craftsmen would stockpile one particular good, be it salt or metal, that they thought no one would refuse. This is the origin of money according to Smith. Money, as a universally desired medium of exchange, allows each half of the transaction to be separated.

Barter is characterized in Adam Smith's "The Wealth of Nations" by a disparaging vocabulary: "higgling, haggling, swapping, dickering." It has also been characterized as negative reciprocity, or "selfish profiteering."

Anthropologists have argued, in contrast, "that when something resembling barter does occur in stateless societies it is almost always between strangers." Barter occurred between strangers, not fellow villagers, and hence cannot be used to naturalistically explain the origin of money without the state. Since most people engaged in trade knew each other, exchange was fostered through the extension of credit. Marcel Mauss, author of 'The Gift', argued that the first economic contracts were to not act in one's economic self-interest, and that before money, exchange was fostered through the processes of reciprocity and redistribution, not barter. Everyday exchange relations in such societies are characterized by generalized reciprocity, or a non-calculative familial "communism" where each takes according to their needs, and gives as they have.

Limitations

The limitations of barter are often explained in terms of its inefficiencies in facilitating exchange in comparison to money.

It is said that barter is 'inefficient' because:

• There needs to be a 'double coincidence of wants'

For barter to occur between two parties, both parties need to have what the other wants.

• There is no common measure of value

In a monetary economy, money plays the role of a measure of value of all goods, so their values can be assessed against each other; this role may be absent in a barter economy.

• Indivisibility of certain goods

If a person wants to buy a certain amount of another's goods, but only has for payment one indivisible unit of another good which is worth more than what the person wants to obtain, a barter transaction cannot occur.

• Lack of standards for deferred payments

This is related to the absence of a common measure of value, although if the debt is denominated in units of the good that will eventually be used in payment, it is not a problem.

• Difficulty in storing wealth

If a society relies exclusively on perishable goods, storing wealth for the future may be impractical. However, some barter economies rely on durable goods like pigs or cattle for this purpose.

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)

History 

Silent trade

Other anthropologists have questioned whether barter is typically between "total" strangers, a form of barter known as "silent trade". Silent trade, also called silent barter, dumb barter ("dumb" here used in its old meaning of "mute"), or depot trade, is a method by which traders who cannot speak each other's language can trade without talking. However, Benjamin Orlove has shown that while barter occurs through "silent trade" (between strangers), it also occurs in commercial markets as well. "Because barter is a difficult way of conducting trade, it will occur only where there are strong institutional constraints on the use of money or where the barter symbolically denotes a special social relationship and is used in well-defined conditions. To sum up, multipurpose money in markets is like lubrication for machines - necessary for the most efficient function, but not necessary for the existence of the market itself

 In his analysis of barter between coastal and inland villages in the Trobriand Islands, Keith Hart highlighted the difference between highly ceremonial gift exchange between community leaders, and the barter that occurs between individual households. The haggling that takes place between strangers is possible because of the larger temporary political order established by the gift exchanges of leaders. From this he concludes that barter is "an atomized interaction predicated upon the presence of society" (i.e. that social order established by gift exchange), and not typical between complete strangers

Times of monetary crisis

As Orlove noted, barter may occur in commercial economies, usually during periods of monetary crisis. During such a crisis, currency may be in short supply, or highly devalued through hyperinflation. In such cases, money ceases to be the universal medium of exchange or standard of value. Money may be in such short supply that it becomes an item of barter itself rather than the means of exchange. Barter may also occur when people cannot afford to keep money (as when hyperinflation quickly devalues it)

Exchanges

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%.