Money and Banking — Economics STD 12 Commerce — Question

Barter system of exchange is a system in which goods are exchanged for goods. If (as a farmer) you have surplus production of rice, you are to look for a person who needs rice and at the same time possesses (say) cloth, which you need to have. It means ‘double coincidence of wants’: your want for cloth must coincide with somebody’s want for rice and you must have surplus of rice and somebody must have surplus of cloth.. The economy having the barter system was called 'C-C economy', i.e. commodity is exchanged for commodity.
The various drawbacks of the barter system are as follows:

1. Difficulty of double coincide of wants: Double coincide of wants is a pre-condition for the barter system of exchange. Double coincide of wants implies that goods in possession of two different individuals are needed by each other. But it is not always so simple. It is difficult to find a person who wants your horse and at the same time possesses a cow that you want to buy. Accordingly, under the barter system, exchange remained extremely limited. Money as a medium of exchange was invented to overcome the problem of double coincide of wants.
2. Lack of common unit of value: What is the value of your car? You can reply: Rs 5 lakh. Can you give the same answer in a barter system of exchange? Certainly not. Under such system, your car would be valued in terms of horses, cows or buffaloes, simply because there is no money. Evolution of money offered a common unit of value and therefore a system of accounting.
3. Lack of a system for a future payments or Contractual payments: These days you hire a worker and strike a contract to pay him say 5000 per month. What do you do in the barter system? Would you decide to pay him in terms of tables or chairs, in terms of rice or wheat, in terms of drugs or chocolates? Contractual payments or future payments would certainly be very difficult under barter system of exchange. Evolution of money was to facilitate contractual payments.
4. Lack of system of storage and transfer of value: You tend to save a part of your present earnings. You save for investment as well as your future security. Because of lack of money in the C-C economy, wealth is stored in terms of goods. But it involves some problems such as high cost of storage and loss of value. Further, what happens if you are to transfer your savings from one place to another? Obviously, you are transfer the goods. Which again is a difficult task. Evolution of money made storage and transfer of value much easier.