Barter Economy Definition: 3 Examples of Bartering

A barter economy is an economic system dependent on the exchange of goods rather than credit card or cash transactions. Barterers dismiss the idea of using a means of exchange as an unnecessary complication. Instead, they might decide on a different unit of account (or several) with each new transaction.

For example, suppose you have a large store of bread, and your neighbor has a substantial amount of meat. In a monetary economy, you would offer your neighbor a mutual exchange currency (like dollars or gold) for some of their meat. In a barter economy, you could directly offer your neighbor some of your bread in exchange for some of their meat.

Bartering might sound appealing in theory; however, most economists consider it a suboptimal way to form an economic system primarily because each transaction must start from scratch when it comes to establishing a mutual sense of value. In a monetary transaction, there’s no need to do this—the value of the currency exists independent of those seeking to complete the exchange.

While many believe barter economies existed long before the origin of money, anthropologists generally disagree with that idea. The history of money likely stretches back to the most primitive societies, even if the units of exchange were more rudimentary than they are now. In ancient history, bartering seems to have existed alongside monetary exchange rather than in place of it.

Esteemed eighteenth-century economist Adam Smith jump-started the myth that all primitive societies bartered long before they “discovered” money. He proposed the idea in his seminal text The Wealth of Nations, and it remains a common belief among the wider populace, despite the lack of concrete evidence.

Here are just three common traits of barter economies to keep in mind when comparing them to other types of economies:

1. 1. Economic precarity: Especially in recent history, opting to foreground the barter system is often a sign a country’s monetary system is in danger. Financial crises like hyperinflation and deflationary spirals can take root if a government fails at budgeting or a central bank prints too much money. These issues erode the value of a country’s currency, leaving many citizens to trade the goods they have on hand among themselves instead.
2. 2. Mutual interest in goods: Barter transactions rely on a “double coincidence of wants”—each party wanting something the other has. Suppose you have a chair you want to trade your neighbor for their clock. If your neighbor has no need or desire for a chair, they’ll have no incentive to exchange their clock for it.
3. 3. No medium of exchange: In the barter trade, there’s no medium of exchange like dollars, Euros, or other currencies. Economists point out this causes another issue: the indivisibility of certain goods. In a barter economy, there are certain goods you can’t add to or subtract from—for instance, you couldn’t offer up half a couch without destroying the furniture. In a monetary system, however, prices can fluctuate up to the decimal point, establishing a malleable and dynamic sense of value.

Barter economies sprout up in big and small ways throughout the world. Here are three ways you might see people trade goods in a barter economy:

1. 1. Between vendors: Various providers and businesses might barter goods with each other rather than pay for them, especially if both specialize in a field in which the other has an interest. In the United States, the National Association of Trade Exchanges and the International Reciprocal Trade Association oversee these transactions. Additionally, the Internal Revenue Service (IRS) taxes these transactions based on the monetary amount of the exchanged goods.
2. 2. In the aftermath of a crisis: If the usual economic system collapses in a country, the use of money becomes futile. For instance, in the 1920s, the Weimar Republic faced a hyperinflation crisis, causing Deutschmarks to become practically worthless, which led to many Germans bartering goods until the economy could repair itself.
3. 3. In an informal exchange: You might complete a barter exchange without knowing it whenever you and a friend do each other favors. Whenever two people trade goods or services rather than money, they form a miniature barter or gift economy. You might also use time banking—exchanging an hour of work with someone who then completes an hour of work for you.

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