Money is something i.e., commonly accepted as medium of exchange.
Before the evolution of money, goods were exchange for goods. This system of exchange was known as barter system. Barter economy is termed as C-C economy, i.e. commodities were exchanged for commodities. Economic exchanges without the mediation of money are referred to as barter exchanges.
DRAWBACKS OF BARTER EXCHANGE SYSTEM
- Lack of Double Coincidence of Wants
It was the major drawback of the barter system. It was very rare when the owner of some goods or services could find someone who wanted his goods or services and at the same time, he possessed that goods or services that the first person wanted.
- Lack of Divisibility
In commodity exchange, difficulty of driving the commodity was common. E.g. If a cow is to be exchanged for four goats, but owner of cow requires two goats only, then the exchange cannot take place, because ‘cow’ cannot be divided.
- Lack of Store of Value
Due to absence of money in barter system, wealth was stored in terms of goods. Storing of goods carried some problems like cost of storage, loss of value, difficult to transfer from one place to other, etc. so, it was difficult for people to store their purchasing power.
- Lack of Common Measure of Value
In barter system, there was absence of a common unit of measurement in which the value of goods and services can be measured. In the absence of common unit, proper valuation was not possible, e.g. Cloth is measured in meter (i.e. length) while milk is measured in litre (i.e. capacity), hence both cannot be measured in a single unit, thereby complicating the process of exchange.
- Lack of Standard of Deferred Payments
Deferred payment means future payments. In barter system it was difficult to return value in future in terms of goods of same quantity and quality. Therefore, future payments regarding interest and loans became different.