Barter is a system of exchange by which goods or services are directly exchanged for other
goods or services without using a medium of exchange, such as money.
It is distinguishable from gift economies in that the reciprocal exchange is immediate
and not delayed in time.
It is usually bilateral, but may be multilateral and usually exists parallel to monetary systems
in most developed countries, though to a very limited extent.
Barter usually replaces money as the method of exchange in times of monetary crisis, such
as when the currency may be either unstable or simply unavailable for conducting commerce.
David Graeber argues that the inefficiency of barter in archaic society has been used
by economists since Adam Smith to explain the emergence of money, the economy, and hence
the discipline of economics itself.
"Economists of the contemporary orthodoxy... propose an evolutionary development of economies
which places barter, as a 'natural' human characteristic, at the most primitive stage,
to be superseded by monetary exchange as soon as people become aware of the latter's greater
efficiency."
However, extensive investigation by anthropologists like Graeber has since then established that
"No example of a barter economy, pure and simple, has ever been described, let alone
the emergence from it of money; all available ethnography suggests that there never has
been such a thing.
But there are economies today which are nevertheless dominated by barter."
Since the 1830s, direct barter in western market economies has been aided by exchanges
which frequently utilize alternative currencies based on the labour theory of value, and designed
to prevent profit taking by intermediators.
Examples include the Owenite socialists, the Cincinnati Time store, and more recently Ithaca
HOURS and the LETS system.
Economic theory Adam Smith on the origin of money
Adam Smith, the father of modern economics, sought to demonstrate that markets pre-existed
the state, and hence should be free of government regulation.
He argued that money was not the creation of governments.
Markets emerged, in his view, out of the division of labour, by which individuals began to specialize
in specific crafts and hence had to depend on others for subsistence goods.
These goods were first exchanged by barter.
Specialization depended on trade, but was hindered by the "double coincidence of wants"
which barter requires, i.e., for the exchange to occur, each participant must want what
the other has.
To complete this hypothetical history, craftsmen would stockpile one particular good, be it
salt or metal, that they thought no one would refuse.
This is the origin of money according to Smith.
Money, as a universally desired medium of exchange, allows each half of the transaction
to be separated.
Barter is characterized in Adam Smith's "The Wealth of Nations" by a disparaging vocabulary:
"higgling, haggling, swapping, dickering."
It has also been characterized as negative reciprocity, or "selfish profiteering."
Anthropologists have argued, in contrast, "that when something resembling barter does
occur in stateless societies it is almost always between strangers, people who would
otherwise be enemies."
Barter occurred between strangers, not fellow villagers, and hence cannot be used to naturalisticly
explain the origin of money without the state.
Since most people engaged in trade knew each other, exchange was fostered through the extension
of credit.
Marcel Mauss, author of 'The Gift', argued that the first economic contracts were to
not act in one's economic self-interest, and that before money, exchange was fostered through
the processes of reciprocity and redistribution, not barter.
Everyday exchange relations in such societies are characterized by generalized reciprocity,
or a non-calculative familial "communism" where each takes according to their needs,
and gives as they have.
Limitations Barter's limits are usually explained in terms
of its inefficiencies in easing exchange in comparison to the functions of money:
Need for presence of double coincidence of wants
For barter to occur between two people, both would need to have what the other wants.
Absence of common measure of value In a monetary economy, money plays the role
of a measure of value of all goods, so their values can be measured against each other;
this role may be absent in a barter economy.
Indivisibility of certain goods If a person wants to buy a certain amount
of another's goods, but only has for payment one indivisible unit of another good which
is worth more than what the person wants to obtain, a barter transaction cannot occur.
Lack of standards for deferred payments This is related to the absence of a common
measure of value, although if the debt is denominated in units of the good that will
eventually be used in payment, it is not a problem.
Difficulty in storing wealth If a society relies exclusively on perishable
goods, storing wealth for the future may be impractical.
However, some barter economies rely on durable goods like pigs or cattle for this purpose.
Advantages Direct barter does not require payment in
money hence will be utilized when there is little information about the credit worthiness
of trade partners or there is a lack of trust.
The poor cannot afford to store their small supply of wealth in money, especially in situations
where money devalues quickly.
History Silent trade
Other anthropologists have questioned whether barter is typically between "total" strangers,
a form of barter known as "silent trade".
Silent trade, also called silent barter, dumb barter, or depot trade, is a method by which
traders who cannot speak each other's language can trade without talking.
However, Benjamin Orlove has shown that while barter occurs through "silent trade", it also
occurs in commercial markets as well.
"Because barter is a difficult way of conducting trade, it will occur only where there are
strong institutional constraints on the use of money or where the barter symbolically
denotes a special social relationship and is used in well-defined conditions.
To sum up, multipurpose money in markets is like lubrication for machines - necessary
for the most efficient function, but not necessary for the existence of the market itself."
In his analysis of barter between coastal and inland villages in the Trobriand Islands,
Keith Hart highlighted the difference between highly ceremonial gift exchange between community
leaders, and the barter that occurs between individual households.
The haggling that takes place between strangers is possible because of the larger temporary
political order established by the gift exchanges of leaders.
From this he concludes that barter is "an atomized interaction predicated upon the presence
of society", and not typical between complete strangers.
Times of monetary crisis As Orlove noted, barter may occur in commercial
economies, usually during periods of monetary crisis.
During such a crisis, currency may be in short supply, or highly devalued through hyperinflation.
In such cases, money ceases to be the universal medium of exchange or standard of value.
Money may be in such short supply that it becomes an item of barter itself rather than
the means of exchange.
Barter may also occur when people cannot afford to keep money.
Exchanges
Economic historian Karl Polanyi has argued that where barter is widespread, and cash
supplies limited, barter is aided by the use of credit, brokerage, and money as a unit
of account.
All of these strategies are found in ancient economies including Ptolemaic Egypt.
They are also the basis for more recent barter exchange systems.
While one-to-one bartering is practiced between individuals and businesses on an informal
basis, organized barter exchanges have developed to conduct third party bartering which helps
overcome some of the limitations of barter.
A barter exchange operates as a broker and bank in which each participating member has
an account that is debited when purchases are made, and credited when sales are made.
Modern barter and trade has evolved considerably to become an effective method of increasing
sales, conserving cash, moving inventory, and making use of excess production capacity
for businesses around the world.
Businesses in a barter earn trade credits that are deposited into their account.
They then have the ability to purchase goods and services from other members utilizing
their trade credits – they are not obligated to purchase from those whom they sold to,
and vice-versa.
The exchange plays an important role because they provide the record-keeping, brokering
expertise and monthly statements to each member.
Commercial exchanges make money by charging a commission on each transaction either all
on the buy side, all on the sell side, or a combination of both.
Transaction fees typically run between 8 and 15%.
Utopian socialism
The Owenite socialists in Britain and the United States in the 1830s were the first
to attempt to organize barter exchanges.
Owenism developed a "theory of equitable exchange" as a critique of the exploitative wage relationship
between capitalist and labourer, by which all profit accrued to the capitalist.
To counteract the uneven playing field between employers and employed, they proposed "schemes
of labour notes based on labour time, thus institutionalizing Owen's demand that human
labour, not money, be made the standard of value."
This alternate currency eliminated price variability between markets, as well as the role of merchants
who bought low and sold high.
The system arose in a period where paper currency was an innovation.
Paper currency was an I.O.U.
circulated by a bank.
Both merchants and an unstable paper currency created difficulties for direct producers.
An alternate currency, denominated in labour time, would prevent profit taking by middlemen;
all goods exchanged would be priced only in terms of the amount of labour that went into
them as expressed in the maxim 'Cost the limit of price'.
It became the basis of exchanges in London, and in America, where the idea was implemented
at the New Harmony communal settlement by Josiah Warren in 1826, and in his Cincinnati
'Time store' in 1827.
Warren ideas were adopted by other Owenites and currency reformers, even though the labour
exchanges were relatively short lived.
In England, about 30 to 40 cooperative societies sent their surplus goods to an "exchange bazaar"
for direct barter in London, which later adopted a similar labour note.
The British Association for Promoting Cooperative Knowledge established an "equitable labour
exchange" in 1830.
This was expanded as the National Equitable Labour Exchange in 1832 on Grays Inn Road
in London.
These efforts became the basis of the British cooperative movement of the 1840s.
In 1848, the socialist and first self-designated anarchist Pierre-Joseph Proudhon postulated
a system of time chits.
In 1875, Karl Marx wrote of "Labor Certificates" in his Critique of the Gotha Program of a
"certificate from society that [the labourer] has furnished such and such an amount of labour",
which can be used to draw "from the social stock of means of consumption as much as costs
the same amount of labour."
Twentieth century experiments
The first exchange system was the Swiss WIR Bank.
It was founded in 1934 as a result of currency shortages after the stock market crash of
1929.
"WIR" is both an abbreviation of Wirtschaftsring and the word for "we" in German, reminding
participants that the economic circle is also a community.
In Spain there is a growing number of exchange markets.
These barter markets or swap meets work without money.
Participants bring things they do not need and exchange them for the unwanted goods of
another participant.
Swapping among three parties often helps satisfy tastes when trying to get around the rule
that money is not allowed.
Michael Linton originated the term "local exchange trading system" in 1983 and for a
time ran the Comox Valley LETSystems in Courtenay, British Columbia.
LETS networks use interest-free local credit so direct swaps do not need to be made.
For instance, a member may earn credit by doing childcare for one person and spend it
later on carpentry with another person in the same network.
In LETS, unlike other local currencies, no scrip is issued, but rather transactions are
recorded in a central location open to all members.
As credit is issued by the network members, for the benefit of the members themselves,
LETS are considered mutual credit systems.
Modern developments According to the International Reciprocal
Trade Association, the industry trade body, more than 450,000 businesses transacted $10
billion globally in 2008 – and officials expect trade volume to grow by 15% in 2009.
It is estimated that over 450,000 businesses in the United States were involved in barter
exchange activities in 2010.
There are approximately 400 commercial and corporate barter companies serving all parts
of the world.
There are many opportunities for entrepreneurs to start a barter exchange.
Several major cities in the U.S. and Canada do not currently have a local barter exchange.
There are two industry groups in the United States, the National Association of Trade
Exchanges and the International Reciprocal Trade Association.
Both offer training and promote high ethical standards among their members.
Moreover, each has created its own currency through which its member barter companies
can trade.
NATE's currency is the known as the BANC and IRTA's currency is called Universal Currency.
In Canada, the largest barter exchange is Tradebank, founded in 1987.
In the United States, the largest barter exchange and corporate trade group is International
Monetary Systems, founded in 1985, now with representation in various countries.
In Australia and New Zealand the largest barter exchange is Bartercard, founded in 1991, with
offices in the United Kingdom,United States, Cyprus,UAE and Thailand.
Corporate barter focuses on larger transactions, which is different from a traditional, retail
oriented barter exchange.
Corporate barter exchanges typically use media and advertising as leverage for their larger
transactions.
It entails the use of a currency unit called a "trade-credit".
The trade-credit must not only be known and guaranteed, but also be valued in an amount
the media and advertising could have been purchased for had the "client" bought it themselves.
Soviet bilateral trade is occasionally called "barter trade", because although the purchases
were denominated in U.S. dollars, the transactions were credited to an international clearing
account, avoiding the use of hard cash.
Tax implications In the United States, Karl Hess used bartering
to make it harder for the IRS to seize his wages and as a form of tax resistance.
Hess explained how he turned to barter in an op-ed for The New York Times in 1975.
However the IRS now requires barter exchanges to be reported as per the Tax Equity and Fiscal
Responsibility Act of 1982.
Barter exchanges are considered taxable revenue by the IRS and must be reported on a 1099-B
form.
According to the IRS, "The fair market value of goods and services exchanged must be included
in the income of both parties."
Other countries though do not have the reporting requirement that the U.S. does concerning
proceeds from barter transactions, but taxation is handled the same way as a cash transaction.
If one barters for a profit, one pays the appropriate tax; if one generates a loss in
the transaction, they have a loss.
Bartering for business is also taxed accordingly as business income or business expense.
Many barter exchanges require that one register as a business.
See also