In trade, barter (derived from bareter) is a system of exchange in which participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money. Barter is considered one of the earliest systems of economic exchange, used before the invention of money. Economists usually distinguish barter from gift economies in many ways; barter, for example, features immediate reciprocal exchange, not one delayed in time. Barter usually takes place on a bilateral basis, but may be multilateral (if it is mediated through a trade exchange). In most developed countries, barter usually exists parallel to monetary systems only to a very limited extent. Market actors use barter as a replacement for money as the method of exchange in times of monetary crisis, such as when currency becomes unstable (such as hyperinflation or a deflationary spiral) or simply unavailable for conducting commerce.
No ethnographic studies have shown that any present or past society has used barter without any other medium of exchange or measurement, and anthropologists have found no evidence that money emerged from barter. Nevertheless, economists since the times of Adam Smith (1723–1790) often imagined pre-modern societies for the sake of showing how the inefficiency of barter explains the emergence of money and the economy, and hence the discipline of economics itself.Modern barter is practised by barter exchanges that have hundreds or thousands of businesses as members who agree to barter their products and services on a third-party basis. Barter exchanges in the U.S. were legalized by the passage of the 1982 Tax Equity and Fiscal Responsibility Act (TEFRA) which categorized barter exchanges as third party record keepers and mandated that they report the annual sales of their barter exchange members to the IRS via a 1099B From, "Proceeds From Barter Exchange and Brokerage Transactions". See: www.IRS.gov/Form1099B. Estimated annual retail barter exchange transactions worldwide are between three and four billion dollars, per the International Reciprocal Trade Association, the barter industry's global trade association, see www.irta.com
Economic theory
Adam Smith on the origin of money Adam Smith sought to demonstrate that markets (and economies) pre-existed the state. He argued 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: "haggling, swapping, dickering". It has also been characterized as negative reciprocity, or "selfish profiteering".
David Graeber's theory Anthropologists such as David Graeber 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 who 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 not to 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.
Features of bartering Often the following features are associated with barter transactions:
There is a demand for things of a different kind.
Most often, parties trade goods and services for goods or services that differ from what they are willing to forego.
The parties of the barter transaction are both equal and free.
Neither party has advantage over the other, and both are free to leave the trade at any point in time.
The transaction happens simultaneously.
The goods are normally traded at the same point in time. Nonetheless delayed barter in goods may rarely occur as well. In the case of services being traded however, the two parts of the trade may be separated.
The transaction is transformative.
A barter transaction "moves objects between the regimes of value", meaning that a good or service that is being traded may take up a new meaning or value under its recipient than that of its original owner.
There is no criterion of value.
There is no real way to value each side of the trade. There is bargaining taking place, not to do with the value of each party's good or service, but because each player in the transaction wants what is offered by the other.
Advantages Since direct barter does not require payment in money, it can be utilized when money is in short supply, when there is little information about the credit worthiness of trade partners, or when there is a lack of trust between those trading.
Barter is an option for those who cannot afford to store their small supply of wealth in money, especially in hyperinflation situations where money devalues quickly.
Barter economies are usually free from interest and usury. The German-Argentine economist Silvio Gesell created a Robinson Crusoe economy thought experiment in Part V of The Natural Economic Order which showed that interest rates are a purely monetary phenomenon that tends to be absent from barter economies.
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/ No Standard Unit of Account In a monetary economy, money plays the role of a measure of the 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 sheep or cattle for this purpose.Robert E. Wright and Vincenzo Quadrini. Money and Banking.Chapter 3, Section 1: Of Love, Money, and Transactional Efficiency Accessed 29 June 2012
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 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 strangers. In rural parts of India, informal barter systems still exist, particularly in agriculture and tribal communities.Sharma, Ankit. "How Barter Systems Still Work in Rural India." The Hindu, 2022.
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).
An example of this would be during the Crisis in Bolivarian Venezuela, when Venezuelans resorted to bartering as a result of hyperinflation. The increasingly low value of bank notes, and their lack of circulation in suburban areas, meant that many Venezuelans, especially those living outside of larger cities, took to trading over their own goods for even the most basic of transactions.
Additionally, in the wake of the 2008 financial crisis, barter exchanges reported a double-digit increase in membership, due to the scarcity of fiat money, and the degradation of monetary system sentiment.
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 practised 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.