Before evolution of money, goods were exchanged for goods, this system of exchange was known as barter system.
The major drawbacks of the barter system were:
(i) Lack of double coincidence of wants It was a major drawback of the barter system. It was very rare when the owner of some goods or services could find someone who wanted his goods or services and possessed that goods or services that the first person wanted. No exchange was possible, if the double coincidence of wants was not there.
(ii) Lack of common measure of value In barter system, there was absence of a common unit of measurement in which the value of goods and services can be measured. In the absence of common unit, proper valuation was not possible.
(iii) Lack of standard for deferred payments Deferred payment means future payments. In barter system, it was difficult to return value in future in terms of goods of same quantity and quality. Therefore, future , payments regarding interest and loans became difficult.
(iv) Lack of store of value Due to absence of money in barter system, wealth was stored in terms of goods. Storing of goods carried some problems like cost of storage, loss of value, transfer from one place to other, etc. So, in case of commodities, it was difficult for people to store their purchasing power.
(v) Lack of divisibility In commodity exchange, difficulty of dividing the commodity has been arised. e.g. if car is to be exchanged for a scooter, then car cannot be divided. Similarly, animals cannot be divided into smaller units.
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