Barter is the exchange of one item for another, without using a monetary medium of exchange. For example, two people might barter a luxury car for a speedboat, or one chicken in exchange for 3 bags of groats. Services might also be bartered directly for goods (or for other services).
Many texts on money and economics introduce the concept of barter as a precursor to the development of money. But while bartering undoubtedly has been practiced countless times in situations where a monetary exchange wasn't possible, some scholars believe that very few economies have ever relied exclusively on barter, and that ancient economies more frequently relied on some form of credit system instead.
The Problem of Barter
The scarcity of evidence of early barter economies isn't surprising, since old-fashioned forms of barter exchanges present a number of practical problems. In order for a basic barter transaction to succeed, each party needs to value whatever it is he obtains through barter more than whatever it is he is willing to give away in exchange. This requires a "double-coincidence of wants" between both parties, which—at least in the absence of modern communications technology—is far more rare and unusual than situations in which goods and services are voluntarily traded using an agreed upon form of money as the medium of exchange.
In his 19th century Money & The Mechanism of Exchange, William Stanley Jevons gives an example of such difficulties affecting a certain Mr. Wallace in the Malay Archipelago: "In his most interesting account of his travels, he tells us that in some of the islands, where there was no proper currency, he could not procure supplies for dinner without a special bargain and much chaffering upon each occasion. If the vendor of fish or other coveted eatables did not meet with the sort of exchange desired, he would pass on, and Mr. Wallace and his party had to go without their dinner. It therefore became very desirable to keep on hand a supply of articles, such as knives, pieces of cloth, arrack, or sago cakes, to multiply the chance that one or other article would suit the itinerant merchant."
Barter may also be awkward if one party provides goods or services without specifying a fee, and the other party tenders an unexpected barter payment in the absence of the necessary coincidence of wants. As Jevons relates in another passage, a certain French opera singer known as Mademoiselle Zélie gave a performance in the Society Islands as part of a world tour, and: "In exchange for an air from Norma and a few other songs, she was to receive a third part of the receipts. When counted, her share was found to consist of three pigs, twenty-three turkeys, forty-four chickens, five thousand cocoa-nuts, besides considerable quantities of bananas, lemons, and oranges. ... and as Mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the mean time to feed the pigs and poultry with the fruit."
From Barter to Commodity Money
In the absence of a trusted and well-established credit system to surmount the problem of the simultaneous coincidence of wants, a natural solution to the limitations of barter is to choose some form of commodity money to facilitate exchanges. This also solves the problem deciding upon a common measure of value, without which a bewildering array of commodity and service exchange ratios would have to be calculated and continually adjusted.
In many cases, early cultures are believed to have started using agricultural commodities such as grains as the earliest forms of commodity money, but virtually anything that was capable of being used as an agreed upon store of value and medium of exchange has been used. Notable examples include feathers, shells, cattle, iron spits, whale's teeth, beast-skins, salt, and many other commodities or items, in addition to the more commonly known monetary metals such as gold and silver. In fact, coinage was often not adopted until many centuries after ancient economies already became very advanced in their use of banking and credit based on commodity money, as in the case of the Babylonian & Egyptian grain banks.
Both barter and commodity money also tend to come back into popular use by necessity following incidents in which governments destroy national currencies— regardless of whether this is done by debasing coinage and destroying markets (as was the case in the decaying Roman Empire), or by printing egregious amounts of paper fiat currencies (as has often been the case wherever fiat money has been allowed to come into existence for any substantial length of time).
One of the best-known commodities that came into use first in postwar barter transactions, and then as a preferred form of alternative currency, was cigarettes. After the devastation of the second world war, cigarettes were used as money in Germany, and also in later communist regimes in countries such as Romania. In China, even after major economic reforms and the presence of a functional national currency, cigarettes have still recently been used as a high-valued alternative currency for bribing government officials, in order to do be allowed to business in Chinese cities such as Xi'an.
Large-scale Barter Returns to Modern Economies
Interestingly, barter has been making a large-scale return to popular use in the modern era. Modern economic and monetary systems do not necessarily have to be in dire straights in order for market participants to take advantage of barter transactions: Thanks to many landmark advances in computers and communication technologies, the problem of the double coincidence of wants is much more easily overcome in modern times than it was in the past, making barter a practical proposition in a number of notable cases involving modern governments and multinational corporations.
Barter agreements became increasingly more common between large corporations and governments at least as early as the 1960s. Many of the most lucrative involved deals were arranged between American corporations and the governments of countries that were short of hard currency, or where capital investments were not yet practical.
Barter transactions are more commonly grouped under the heading of modern "countertrades" in these situations. The size of many of these deals became so large that many companies began setting up trading subsidiaries to handle countertrades, including many large-scale barter transactions. General Electric (one of the largest exporters in the US) set up its countertrade department in 1979, after estimating that the international countertrade market was as large as $350 billion at that time.
In some cases barter transactions take place only after one party determines that they have already found a buyer for the goods being exchanged, such as when the Yusoglavian government insisted that General Motors buy $4 million dollars worth of Yugoslav cutting tools before agreeing to close a deal to sell $12 million dollars of engines. After finding a US tool manufacturer who was willing to buy the tools, GM agreed and successfully made the exchange. On another occasion, McDonnell Douglas bartered twenty-two DC-9 airliners and two DC-10 airliners in exchange for large quantities of crystal glassware, cutting tools, leather coats and $3 million worth of canned hams, all of which it estimated it could profitably resell. (The canned hams apparently did not sell as quickly as hoped, however, and were mostly eaten in company cafeterias or sold to company employees.)
The latter example was given in James Rickards' The Death of Money, and cited as an example of modern-day barter transactions that are likely to increase significantly in the future, particularly once it becomes necessary to diversify out of the US dollar, which is currently still the world's primary reserve currency.