Barter System and its Inconvenience:

The economic system which functions without the use of money is given the name of barter system. In other words the economy which lacks any monetary media and the goods are exchanged with goods directly is a representative of barter system. Accordingly, we find that barter system is furnished with the followings:

(i) There is a direct exchange of goods and money is not employed for transaction of goods and services.

(ii) All the activities pertaining to consumption, distribution and allocation are performed on the basis of values of goods, not on the basis of money.

Barter system remained in operation for a long time. As long as world's population was limited, the desires were not diversified, and the goods were produced on small scale the economic activities were carried under barter system . But with the passage of time the world's population expanded, the narrower and self sufficient life of villages broke; education spread; the era of invention and innovations started; and above all people experienced diversification in their desires. In such phenomenon Barter system failed to respond efficiently, and it had to be abandoned.

Demerits of Barter System:

(i) Lack of Double Coincidence of Wants: Under barter system, the goods were exchanged directly with the goods. But such situation may be attached with the lack of double coincidence of wants in between buyers and sellers. It is explained as:

Suppose a person has cloth while the other has wheat. The wheat man wants to get cloth in exchange for cloth, but the cloth man does not wish to get wheat in exchange for its cloth. In such state of affairs trade will not take place leading to reduction in the welfare of trading parties.

(ii) Difficult to Store the Goods: In barter system the goods served as money or the goods possessed the quality of "reserve purchasing power".  Accordingly, people had to store them for future transactions. But so many goods, particularly which were perishable like milk, eggs, meat, fish, ice cream, and vegetables could not be stored for a long time. Even if the goods are stored or preserved in ware-houses or under the ground their value may deteriorate during the storing period. Moreover during such period, the tastes and likings of the people may also change. All such will affect the economic behavior of people.

(iii) Lack of Common Measure of Values: Under barter system the values of commodities were expressed in terms of some other commodities. For example if in an economic system 1000 goods are produced and this system operates without the use of money, then the value of each one good will have to be represented in the remaining 999 goods. Such situation will be extremely cumbersome.

(iv) Credit Transactions were Difficult: Under barter system perhaps it was not possible to transact the goods on credit, i.e. the goods in exchange will be provided after some time period - a situation contradicting the philosophy of barter system. Moreover in barter system one could hardly represent the future activities and future transactions in some "Measure". Again if the trading parties are agreed upon some common measure then there may rise the issue of their value at the time of payment.

(v) Lack of Counting System: Barter system lacked counting system. Accordingly in this system a firm will have to enter a variety of goods and services in its balance sheet. The costs, revenues and profits will be expressed in goods - such all will be tedious and complicated job. This will restrict the growth of firms and goods could not be produced on large scale. Again the economies of scale could not be reaped because of lack of specialization and division of labor.

(vi) Difficult to Represent Factor Payments: Under barter system it was not possible to represent the factor payments like wages, rent interest and profit. In such situation the factors of production would be getting their payments in the form of goods. But along with changes in the values of goods the factors will not be satisfied with their goods remunerations. Moreover in this system the govt. will have to collect its revenues in the form of goods like vegetables, cattle, meat, eggs, beef, etc. How govt. would store such all goods. Again how govt. will make its expenditures in such state of affairs. Thus because of such problems barter system could not persist and function smoothly and the need for some monetary media was realized.