The initial stage of exchange is known as barter exchange. Under barter economy, the goods are exchanged for goods. This implies that if one wants some commodity, this can be exchanged only by giving some other commodity in exchange.
In short, barter economy, signifies the exchange of goods through the medium of goods. These days, barter transactions have virtually disappeared.
Many difficulties were faced during barter transactions. Generally, the main difficulties faced were as follows:
1. Lack of Double Coincidence of Wants:
Barter transactions can be possible only when two persons desiring exchange of commodities should have such commodities which are mutually needed by each other. For example, if Ram wants cloth, which Shyma has, then Ram should have such commodity which Shyam wants. In the absence of such coincidence of wants, there will be no exchange. However, it is very difficult to find such persons where there is coincidence of wants. One had to face such difficulties in barter economy because of which this system had to be abandoned.
2. Luck of Division:
The second difficulty of barter exchange relates to the exchange of such commodities which cannot be divided. For example, a person has a cow and he wants cloth, food grains and other items of consumption. Under such a condition, exchange can be possible only when he discovers a person, who is in need of a cow and has all such commodities, but it is very difficult to get such a person. Then how to affect the exchange.
Similarly the second problem relates to the exchange of such commodities which cannot be divided into pieces, because in this kind of situation, a big commodity like cow cannot be divided into small pieces for making payment of the goods of smaller value.
3. Lack of a Common Measure of Value:
The biggest problem in the barter exchange was the lack of common measure of value i.e., there was no such commodity in lieu of which all commodities could be bought and sold. In such a situation, while facilitating the exchange of a commodity its value was to be expressed in all commodities, such as one yard cloth is equal to ½ kilogram of potato etc. It was a very difficult proposition and made exchange virtually impossible. Now, with the discovery of money, this difficulty has been totally eliminated.
4. Lack of Store of Value:
In a barter economy, the store of value could be done only in the form of commodities. However, we all know that commodities are perishable and they cannot be kept for a long time in the store. Because of this difficulty, the accumulation of capital or store of value was very difficult and without the accumulation of capital, economic progress could not be made. It is because of this reason that as long as barter system continued, significant progress was not made in the world anywhere.