Key Points

• The use of money spans a very large part of our everyday life.
• In many transactions, goods are being bought and sold with the use of money.
• For some, there might not be any actual transfer of money taking place now but a promise to pay money later.
• A person holding money can easily exchange it for any commodity or service that he or she might want.
• Thus everyone prefers to receive payments in money and then exchange the money for things that they want.

PROBLEMS CREATED BY THE BARTER SYSTEM

• Barter system was a system of exchange that was prevalent before the use of money in ancient and medieval period.
• It was a system in which good was exchange with other good. There was no common medium of exchange.
• This created many problems which can be illustrated by an example.
• Take the case of a shoe manufacturer. He wants to sell shoes in the market and buy wheat.
• Imagine how much more difficult it would be if the shoe manufacturer had to directly exchange shoes for wheat without the use of money.
• He would have to look for a wheat growing farmer who not only wants to sell wheat but also want to buy the shoes in exchange.
• That is, both parties have to agree to sell and buy each other’s commodities.
• This is known as double coincidence of wants. What a person desires to sell is exactly what the other wishes the need for double coincidence to buy.
• In a barter system where good are directly exchanged without the use of money, double coincidence of wants is an essential feature.