Barter System is that system in which goods are exchanged for goods. In ancient times when money was not invented trade as a whole was on barter system. This was possible only in a simple economy but after the development of economy, direct exchange of goods without the use of money, was not without defects. There were various defects in this system. These were the following;
1. Double Coincidence of Wants:
Exchange can take place between two persons only if each possesses the goods which the other wants e.g., if a weaver needs shoes and he has cloth to offer in exchange he should not only find a cobbler who makes shoes, but find such cobbler who needs cloth and is prepared to give shoes in exchange for it. In this case, it was difficult to find such a person.
2. Absence of Standard Value:
Under barter system there was no measure of value. Even if two persons met together who wanted each other goods, they could not find a satisfactory equilibrium price. Under such conditions one party had to suffer.
3. Indivisibility of Commodities:
It was difficult to divide a commodity without loss in its value e.g., a man who wants to purchase cloth equal to half the value of his cow and other commodities for the rest half value of cow; he could not divide his cow.
4. Absence of Store of Value:
Wealth cannot be easily stored for future use in the form of commodities because they perish in the long run.
In the modern economy barter system cannot succeed. Money is indispensable for large scale production. The functions of money are the same which were defects in barter system. Its functions in modern economy are:
a) Money is a matter of functions four
b) A medium, a measure, a standard and Store
Now it is clear that functions of money have removed those difficulties which were in barter system.