A:

The primary difference between barter and currency systems is that a currency system uses an agreed-upon form of paper or coin money as an exchange system rather than directly trading goods and services through bartering. Both systems have advantages and disadvantages, although currency systems are more widely used in modern economies.

Basics of Bartering

Since the beginning of known history, humans have directly exchanged goods and services with one another in a trading system called bartering. Traditionally, bartering systems were used within the local community, but advances in technology and transportation make it possible for modern society to barter on a global level.

A farmer with eggs and milk can trade them to the local baker for a birthday cake and a loaf of bread. The baker then uses the milk and eggs to bake more bread, which she gives to the appliance repairman as payment for repairing her oven. Bartering makes it easier to negotiate, but lacks the flexibility of a currency system. Many small businesses accept non-monetary payments for their services and the IRS treats these bartered transactions the same as currency transactions for tax-reporting purposes. (For related reading, see: The Tax Implications of Bartering.)

The Introduction of Currency

Bartering has its limitations. The local blacksmith needs two loaves of bread, but if the baker needs plumbing services instead of new shoes for her horse, the blacksmith must find a plumber who needs new tools to make the trade. Currency systems were developed to eliminate this hassle. In early civilizations, common agreed-upon goods, such as animal skins or salt, served as currency that individuals could exchange for goods and services.

As currency systems progressed over time, governments created coins and paper notes to support their economies and to encourage trade within the region. Most countries now use a monetary currency system, but individuals can still barter or adopt another agreed-upon currency system. These alternatives may be used in addition to or as a replacement for the national monetary system in place. (For related reading, see: History of Money: From Barter to Banknotes.)

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