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 many ways; one of them is that the reciprocal exchange is immediate and not delayed in time. It is usually bilateral, but may be multilateral (i.e., mediated through barter organizations) 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 (e.g., hyperinflation or deflationary spiral) or simply unavailable for conducting commerce.
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. However, no present or past society has ever been seen through ethnographic studies to use pure barter without any medium of exchange, nor the emergence of money from 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 (Time banking) and the LETS system.
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 doesn't require payment in money (when money is in short supply) 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 wher money devalues quickly (hyperinflation).
