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How the barter economy works

Barter trading involves the exchange of goods and services without monetary involvement.

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When you hear the word "bartering", you most likely picture a bustling trade market with buyers and sellers alike arguing over prices. And while bartering has in fact existed since 6000 BC, forming the basis of our modern trade system, it still exists in many forms today, most commonly through ecommerce sites online. This guide will take you through a quick history of the barter system, including its pros and cons.

What is barter trading?

Bartering is a system of trade that was used before money. It involves trading goods and services without the exchange of money. Everything boils down to the theory of supply and demand; if you have something that I want, or vice versa, we could trade using the barter system.

This wasn't just an individual affair. Countries would exchange essential goods in order to obtain resources that they lacked. This often depended on factors like geographical proximity, climate and diplomatic relations. It was impossible for a country to produce everything it needed, so barter trading was an effective alternative. This same practice exists today, just with the added involvement of cash.

And what about peer-to-peer modern bartering? The barter trade system still has its place in today's economy. Individuals from all corners of the globe can gather on online marketplaces to swap goods and services. Both buyers and sellers negotiate a fair exchange and, following an agreement, the goods are swapped.

A brief history of barter trading

Introduced by Mesopotamian tribes, bartering took the world by storm in 6000 BC. The practice was then picked up by the Phoenicians, who sailed the seas to barter with merchants from other nations. Babylonians took this system further, using the barter system to obtain essential goods like weapons and spices. As civilisations became more advanced, the goods and services that were bartered changed as well. Beyond trading basic goods, Europeans of the Middle Ages bartered with furs, silk and fragrances, for example.

Although the popularity of bartering decreased when the monetary system took over, it never fully disappeared. In fact, a resurgence of bartering was seen during the Great Depression. Deflation made money practically worthless so barter trade was used by people to obtain basic goods and services.

The barter system versus the monetary system

Both systems involve exchanging goods and services. However, the "goods" in the barter system are actual items, while the "goods" in the monetary system could be cash. For example, you pay money at a store to get salt. The product you receive is salt, but the product the seller receives is cash. He can then use this to trade for an item that he wants later. Cash simply acts as an intermediary token. It represents value, but unlike food or other resources, it has no inherent value.

Besides this, barter trade involves negotiation. This aspect of negotiating may apply to some monetary transactions, often in an informal exchange or when the seller has the authority to do so. For instance, a farmer can negotiate the price of his wheat, but an employee at your regular supermarket can't negotiate the price of breakfast cereal on behalf of the organisation.

There are certain ways to get around this limitation in the modern world. You can still find a lower price, even if you can't barter for it. For example, you can use smart money management tools to hunt down the best deals that fit your price range. Instead of negotiating with your nearest seller, you now have the resources to seek out the seller with the lowest prices.

The Finder app, for example, is an online tool that helps you keep track of your finances and search for the best deals available. It allows you to connect your bank accounts, credit cards, loans and investments to a centralised dashboard. You can also track the amount you've spent and your credit score, and get notified of the best deals available – all for free. This beats haggling with an unwilling seller or settling for an undesirable price.

The pros and cons of bartering

So why was the barter system mostly replaced by the monetary system? And why does bartering still exist in some forms today?

Pros

  • No cash involved
  • More room for negotiation
  • Can offer a service in exchange for goods, which presents you with more opportunities to trade

Cons

  • Depends on trust between buyer and seller – without consumer protection services, you could easily receive faulty or defective items
  • Prices are subjective and unregulated – sellers do not need to offer consistent prices, which makes it unfair if one buyer gets an easier exchange than another

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