Before introduction of money, there existed barter system. It indicates exchange of goods and services with goods and services eg rice for cloth, milk etc.
Primitive man had few and simple wants. He was self sufficient and independent and therefore there was no exchange. There existed a self sufficient village economy based on division of labour. Exchange between people was on the basis of customs and traditions eg Baluta system; and the surplus goods which people had were exchanged for other goods and services.
With progress in civilization wants increased and became complex. Man was no longer self sufficient and independent. Exchange became necessary. However was restricted to a certain local area. Few goods were exchanged ie transactions were few. Therefore barter system was adopted.
With further growth the quantity and complexity of wants increased. There was an increase in goods and services produced. Division of labour was adopted. Production and trade increased and it was no longer restricted to a local area. Exchange of goods and services became difficult.
Many difficulties were faced in barter system and therefore indirect exchange was adopted ie exchange ie exchange with the help of money. Monetary system therefore replaced barter system.
Features of barter system
1) Barter exchange
2) Primitive system of exchange.
3) Moneyless economy.
4) Simple economy based on customs and traditions.
5) Restricted area of transactions.
Conditions of barter system-
1) Each party must have a surplus in their possession.
2) Personal or face to face meeting is essential.
3) Demand ie wants of both the parties must coincide.
Difficulties of barter system-
1) Double coincidence of wants.
2) Problem of fractional payments.
3) Lack of unit of account or common measure of value.
4) Payments of all types of services difficult.
5) Lack of standard of differed payments.
6) Lack of store of wealth or value.
7) Division of labour not possible, therefore large scale production not possible.
8) Lack of surplus stock.
9) Lack of direct contact between producers and consumers.
10) Lack of warehousing facilities.
11) Absence of transport facilities.
12) Qualities of commodities exchanged not considered.