Before introducing money there was a barter system in society. According to Professor Chandler, “Barter system is the direct exchange of economic goods one for another”.
For example, a farmer exchanges his produced rice for a weaver’s produced cloth. A fisherman exchanges fish for meat traders’ meat. In this way, the direct exchange of one commodity for another is termed as the barter system.
How money has removed the difficulties of the barter system? For the introduction of money, all difficulties of the barter system have been removed, and the exchange system has become simple and easier.
Inconsistency of wants is removed
The main barrier of the barter system is the lack of consistency in the wants of each other. In this system, consistency between the wants of both is essential.
If a rice seller needs cloth, then he must not reach an ordinary cloth seller; rather, he must select a cloth seller who needs rice, which is much more difficult.
At present, all goods are sold in exchange for money. For example, the rice seller sells rice for money, and the earned money is spent to buy cloth from any cloth seller, which makes the transaction very easy.
The problem of indivisibility is removed
One of the most important problems of the barter system was the indivisibility of goods. Some goods can’t be divided into small parts, and partial exchange of goods is not possible.
Suppose an individual has a cow and he requires 1 kg of rice, but the exchange of his cow for 1 kg of rice is not possible. In this situation, an exchange between the seller of the cow and the seller of the rice is not possible.
But through the introduction of money, the problem of these types of exchange has been solved. Because money can be divided into small parts. The problem of indivisibility in the barter system is solved through introducing money.
The problem of a standard measure of value is solved
In the barter system, there was no standard measuring scale for the valuation of goods. For that, determining the amount that would be exchanged with other commodities was a great problem. But at present, the price of every good can easily be expressed in terms of money.
Consequently, relative prices of different goods can easily be determined, and problems regarding determining prices have been removed.
The problem of savings has been solved
In the barter system, the problem of savings is an important issue. The storage of surplus goods on one side is costly and complex, and on the other side, it is most difficult due to the perishability of goods. By introducing money, this problem of savings has been removed.
The problem of transferring value has been solved
In the barter system, assets could not be transferred from one place to another. But for introducing money, transferring value from one place to another has become easier.
A person can sell his assets and purchase assets in another place by using the earned money. Thus, the problem of transferring value in society has been removed.
The problem of portability has been removed
Before introducing money, the transferring of goods to remote places was very difficult. For introducing money, for transportation and communication from one place to another, the goods are not necessary to carry everywhere. By spending money, people can collect things even from remote places. Thus, with money, problems of portability have been removed.
The problem of credit transactions has been solved
In the barter system, transactions regarding credit were so complex. Because of the exchange of credit by goods, the debtor or creditor has the chance of being a loser.