Barter is a rude form of exchange, based upon directly swapping goods for goods without the intermediary of money.
Exchange becomes more important as individuals specialize in the production of goods and services. Money considerably facilitates exchange because everyone accepts it in trade. In a money economy, individuals devoting all their energies and skills to the production of one commodity, such as cattle, can trade cows for money, and take money to town and buy groceries, televisions, automobiles, etc. In an economic system based upon barter, a cattle rancher must find someone who wants to trade cows for everything else he or she may want to acquire. Wanting to buy a television, the cattle rancher would have to find someone with more televisions than he or she needs for personal use, and who is in need of a cow. The cattle rancher, having more cows than needed for personal use, will trade a cow for a television. Economists call this conglomeration of circumstances a double coincidence of wants.
Barter exchange is necessarily time consuming and inefficient. It is hard to imagine someone working in a propeller shop making propellers for airplanes, and receiving pay in a bundle of propellers, and then trading propellers for everything they needed to maintain themselves. Money simplifies exchange and results in a constant ratio in the exchange rate between propellers, say, and televisions.
Historically, barter exchange precedes the use of money, but it has experienced resurgence at times. During the Middle Ages, metallic coinage became scarce in Europe, and barter exchange began to play a larger role. Serfs paid manor lords in certain hours of labor, and a noble would make payment in military service. In the American colonies, barter flourished because of a shortage of metallic currency. During the 1970s in the United States, barter again grew in popularity as a means of avoiding income taxes. Individuals with goods to sell, or services to be rendered, formed bartering organizations, with lists of goods that could be bartered.
In the 1990s an antiquated system of barter appeared in Russia just at the time that Western observers expected the emergence of a market economy. Some estimates suggest that as high as 70 percent of the transactions in Russia involve barter. City taxes may be paid in the form of clothes for policemen. Farmers bring food to factories in exchange for sheet metal, paint, and other useful items, and the factories pay workers in the food supplied by the farmers. Workers may be paid in kind: Workers at a timber factory received a bundle of plywood on payday. About 50 percent of industrial sales take the form of barter. A cannery trades its finished product, 12-ounce cans of meat, for livestock to slaughter, aluminum to make the cans, canning machinery, electricity, and cardboard boxes suitable for shipping canned meat.
In a country such as Russia barter emerges only after a complete breakdown of the currency. Companies must arrange deals involving several other companies in order to pay their own suppliers. They must find out what goods their suppliers will accept in payment, then set out to trade what they have to some other company that will accept these goods in order to get what their suppliers need. All kinds of imbalances develop. A police department might receive a large shipment of woolen socks but no new shoes.
Despite the obvious advantages of money exchange over barter exchange, metallic coinage, the most acceptable medium of exchange, was not freely embraced by ancient societies. Complaints against money were perhaps best expressed by the Chinese scholar Gong Yu (ca. 45 b.c.), who favored the abolition of coinage. He wrote:
Since the appearance of the uruzhu coins over seventy years ago, many people have been guilty of illicit coining. The rich hoard housefuls of coins, and yet are never satisfied. The people are restless. The merchants seek profit. Though you give land to the poor, they must still sell cheaply to the merchant. They become poorer and poorer, then become bandits. The reason? It is the deepening of the secondary occupations and the coveting of money. That is why evil cannot be banned. It arises entirely from money.
Ancient Chinese scholars were not alone in voicing skepticism about money. The New Testament has the often repeated refrain that the “love of money is the root of all evil.” The ancient Spartans legislated that only huge round metal discs could serve as money, hoping to discourage the accumulation and carrying of large sums of money. Metallic coinage was often blamed for the vices associated with the large seaport cities.
Despite reservations about money use, economies based upon money exchange rather than barter exchange support a much higher level of specialization among individuals, businesses, and regions, and this specialization fosters productivity. Greater specialization requires greater exchange, and money facilitates exchange. Economies using money are more efficient and productive, eclipsing economies based upon barter exchange.