Meaning of Barter System – A system in which goods and services are directly exchanged for other goods without the use of money is called barter system. In other words, it is the direct exchange of goods produced by one person in return for goods produced by another person. By doing this, both persons obtain the more essential thing in exchange. According to Prof. Jevens “Exchange of more necessary commodity in return for a relatively less necessary commodity, is barter system”.
Example – Cloth is exchange for milk, and milk is exchanged for cloth, etc. This is known as barter system.

Disadvantages of barter system – Barter system played a very important role in initial stages of human development, and made the obtaining of various necessary commodities in society easy, but as human needs grew rapidly, many difficulties arose in this system, which are given below :

(i) Problem of Double Coincidence of Wants – Double coincidence of wants means what one person wants to sell and buy must coincide with what some other person’s want to buy and sell. This coincidence is difficult. If a farmer wants grams in exchange of surplus wheat, then he will have to find such a person who has surplus of grams and who wants to exchange it for wheat. This coincidence is very difficult in practical life, and unless it is found, barter cannot take place for a less necessary thing.

(ii) Difficulty in Value Measurement – There was no universally accepted value standard measure in barter system, because of which price had to be determined for each new exchange deal – how much milk to accept in exchange for how much wheat, or how much grams to take for how much wheat, and it was difficult for both parties to agree on these prices. Due to lack of agreement, exchange was not possible. Because of this, barter system became a very complicated process.

(iii) Difficulty in storage of value – Every person wants to keep aside a part of his income as savings to secure his future, but this was difficult and risky to do in barter system, since most commodities were perishable and they could spoil or easily be stolen. In addition, storage required large space. Especially milk, fruits, vegetables, etc. food items could not be stored for a long time. Therefore, future storage of excess products was not possible in this system.

(iv) Problem of Divisibility – Some commodities are such that they cannot be divided. If at all they are divided, their utility becomes zero.

This problems arises also when buying an expensive thing in return of a cheap commodity. For example, if a person has a horse and wants to obtain wheat, rice, cloth, etc. It is difficult to find all these three things with one person. If these things have to be obtained from three separate persons, how would the horse be divided. In addition, it is also not necessary that these people would be agreeable to accept the horse. This was a great problem in- barter system.

(v) Problem of Difficulty in deferred payment – In barter exchange, credit transactions were very difficult because it was not possible to calculate the future prices of the commodity. Without credit transactions, trade does not develop, and no economic progress happens in the society.

(vi) Difficulty in Transfer of Value – One of the difficulties that existed in the barter system, was to transfer value from one place to another. Example – If a person wants to relocate himself from Kota to Ajmer, then the price of house received in form of goods would be very difficult to carry to Ajmer.