The Barter System: How Trade Worked Before Money

Barter is the direct exchange of one good or service for another, without money. A farmer swaps eggs for a neighbour's firewood; a web designer builds a restaurant's site in return for meals. It is the opening chapter of the textbook story of money, and the problem every money solves, bitcoin included.

The textbook story says people bartered until the inconvenience drove them to money. The real history is more interesting. The problem barter poses is real, but the evidence that whole economies ever ran on it is thin.

What is barter?

The IRS defines it in one line: “Bartering is the exchange of goods or services.” Its example is “a plumber exchanging plumbing services for the dental services of a dentist” (IRS). No money changes hands, though each side still has to judge what the other's work is worth.

Adam Smith saw the habit as part of human nature. In The Wealth of Nations (1776) he traced the division of labour to “the propensity to truck, barter, and exchange one thing for another” (Smith, book I, chapter II). Truck is an old word for barter.

The double coincidence of wants

Barter has an obvious weakness, and the economist William Stanley Jevons set it out in 1875: “The first difficulty in barter is to find two persons whose disposable possessions mutually suit each other's wants.” For a swap to happen, he wrote, “there must be a double coincidence, which will rarely happen” (Jevons, Money and the Mechanism of Exchange). Economists still call it the double coincidence of wants.

Smith had described the same trap in 1776. The butcher has more meat than he can eat, and the brewer and the baker would each like some. But they have only beer and bread to offer, and the butcher already has all the bread and beer he needs. So no exchange can be made between them (Smith, book I, chapter IV).

Jevons's most vivid case was a singer from the Théâtre Lyrique in Paris, Mademoiselle Zélie, who gave a concert in the Society Islands for a third of the takings. Her share came to 3 pigs, 23 turkeys, 44 chickens and 5,000 coconuts, besides bananas, lemons and oranges. Money was scarce on the islands and she could not consume much of her fee herself, so in the meantime the fruit went to feed the pigs and poultry.

Jevons named three difficulties in all:

• No double coincidence. Each side must want what the other has, at the same time.
• No measure of value. Without a common unit, every good has to be priced in every other. Between 100 goods there are 4,950 possible rates of exchange, Jevons calculated.
• No easy way to divide. A tailor with a coat to trade cannot cut it into pieces to pay for small things without destroying its value.

Money fixes all three at once. It is the thing everyone accepts, so you only need to find someone who wants what you have. It is the unit every price is quoted in. And it divides into small amounts. Those are the functions of money: a medium of exchange, a unit of account and, because you can hold it until you need it, a store of value.

The 3 functions of money: medium of exchange, unit of account, store of value →

How money grew out of barter: Menger's account

Why would anyone accept a thing they do not want? The Austrian economist Carl Menger gave the classic answer in “On the Origin of Money”, published in English in the Economic Journal in June 1892. Goods differ in how easily they can be sold, which he called their saleableness. A trader who cannot find a direct swap does better to take a good he does not need but that others readily accept, and trade it on. People did this out of self-interest, he argued, “without convention, without legal compulsion” (Menger).

As more people do it, the most saleable goods become more saleable still, until one or two are accepted by everyone. That good is money. Smith listed some that people had used: cattle, salt, shells, dried cod, tobacco, sugar, leather and, in one Scottish village, nails. Metals won out in the end, he wrote, because they keep and can be divided without loss (Smith, book I, chapter IV).

Menger's conclusion is at the heart of the Austrian view of money: “Money has not been generated by law. In its origin it is a social, and not a state-institution.” He allowed that a state could create money by legislation, but said this was “neither the only, nor the primary mode” by which money arose. In his account states did something else: they perfected money once it existed, with coinage, legal standards and guarantees of weight and purity.

Types of money: commodity, representative, fiat and bitcoin →

Did barter economies ever exist?

Here the story runs into the evidence. Smith and Jevons wrote as if barter had once been the normal way to trade, but anthropologists who went looking found little sign of whole societies trading that way. In 1985 the anthropologist Caroline Humphrey wrote that no example of a pure barter economy had ever been described, let alone the emergence of money from one (Humphrey, in Man, as quoted by The Atlantic).

David Graeber made the case at book length in Debt: The First 5,000 Years (2011), whose second chapter is called “The Myth of Barter”. His argument, as his publisher summarises it, is that the first agrarian empires already ran elaborate credit systems, long before coins (Melville House). People traded on promises and kept accounts of what was owed.

Even the Bank of England hedges. Its introduction to money calls the historical origins of money “a matter of considerable debate”, and describes medieval European merchants who dealt with each other in IOUs and settled up at fairs, largely by cancelling debts against each other (Bank of England).

Barter does happen, but mostly where money is missing. Graeber told The Atlantic that in most known cases it takes place between people who are used to money but, for one reason or another, do not have much of it. Jevons's own examples fit: a Paris singer on islands short of coins, and the naturalist Alfred Russel Wallace in parts of the Malay Archipelago with no proper currency, who kept knives, cloth and sago cakes on hand to improve his chances of buying dinner.

The two accounts agree about the problem and differ about the past. Both say that swapping goods directly is clumsy. Menger says people solved it by converging on the most saleable good; the anthropologists say they mostly used credit, recording debts and settling them later. Both end with metal money; they differ on what came before it.

The history of money, from shells to satoshis →

Why did barter fail?

As the whole of an economy, it may never have existed to fail. Where people did rely on it, Jevons's three problems explain why they moved to money as soon as they could: finding a match is hard, every price has to be quoted in every other good, and many goods cannot be split. A shared money removes all three, which is why barter tends to appear where money is scarce and to fade where it is not.

Does the barter system still exist?

Yes, in three places.

• Barter exchanges. Networks of businesses trade through a central exchange, and the IRS notes that the internet “has provided a medium for new growth in the bartering industry” (IRS). Some keep accounts in credit units: members earn credits for what they supply and spend them on what other members offer (IRS, Publication 525). A credit everyone in the club accepts and prices things in is, in Jevons's terms, a medium of exchange and a measure of value: a small private money.
• Trade between states. Governments and state companies also trade goods for goods, under the wider name of countertrade. A United Nations legal guide published in 1993 notes that “barter” can mean an intergovernmental agreement on trade in particular goods, and that often the main reason for it is that “the use of barter eliminates or reduces the need for currency transfers” (UNCITRAL). One form, the offset, lives on in arms sales: foreign governments that buy American defence equipment may require “industrial compensation arrangements” in return, and the US Bureau of Industry and Security reports on them to Congress every year (BIS).
• Everyday swaps. Neighbours trade skills and favours. The IRS leaves an informal, non-commercial arrangement such as a babysitting co-operative out of its definition of a barter exchange (IRS).

Is bartering legal? How barter is taxed

Bartering is legal, but it is not tax-free. Tax authorities value a swap in money, as if it had been paid for in cash.

• United States. “You must include in gross income in the year of receipt the fair market value of goods or services received from bartering” (IRS, Topic 420). Barter exchanges generally must report their members' trades on Form 1099-B, and the IRS gets a copy. Credits added to a barter-club account count as income when they are added, even if you spend them in a later year (IRS, Publication 525).
• United Kingdom. VAT-registered businesses that barter must each account for VAT “on the amounts you would each have paid for the goods or services if there had been no barter” (HMRC). For business profits, HMRC's manual values stock traded away in a barter at the value of what is received (HMRC, BIM33310).

Even the tax collector, in other words, needs a measure of value.

What are the two types of barter?

There is no official pair, but two distinctions come up most often:

• Direct and indirect. Direct barter is a straight swap between two parties. Indirect barter runs through a go-between, such as a barter exchange that keeps accounts in credits. Taking a more saleable good in order to trade it on, what Menger called “mediate exchange”, is the step from there to money.
• Barter and countertrade. In trade between businesses and states, the UN's guide separates barter in its strict sense, a contract in which goods going one way replace payment for goods going the other, from related deals: counter-purchase, buy-back and offset (UNCITRAL).

Where bitcoin fits

Bitcoin is not barter. Barter means swapping goods directly; bitcoin is a medium of exchange, the thing you accept because you know others will accept it from you. It solves the double coincidence of wants the way every money does: the butcher no longer needs the baker's bread, only something the baker can pay with.

What sets it apart from other money is its supply. Menger's most saleable goods were the ones that kept their value across distance and time. Bitcoin's total can never exceed 21 million, a limit written into the software every full node runs, so no one can dilute it by issuing more. Whether that makes it widely accepted money is still being decided: its price swings widely, and for most people it is not yet a unit of account.

The law, for now, treats it more like a good. The IRS says “digital assets are considered property, not currency” (IRS), and HMRC “does not consider cryptoassets to be currency or money” (HMRC), so paying with bitcoin counts as disposing of an asset (HMRC, CRYPTO22100). New Zealand's Inland Revenue says it outright: a business that accepts crypto for goods or services is making “a barter transaction” (Inland Revenue).

How many bitcoins are there? The live count →

What is money? From first principles →

Questions people ask

What is an example of barter?

The IRS's own: a plumber who fixes a dentist's pipes in return for dental work. Another is a business that supplies goods to a barter exchange and spends the credits it earns on another member's services.

What is the double coincidence of wants?

The condition barter depends on: each side must want what the other has, at the same time. Jevons called it “a double coincidence” and said it would rarely happen. Money removes the need for it.

What came before money?

Textbooks say barter. Anthropologists such as David Graeber say credit: people recorded what they owed each other and settled up later. Both accounts end with metal money; they differ on what came first.

Is bitcoin a form of barter?

No. People take it to spend or save, not to consume, which is what makes something money rather than a bartered good. Tax authorities treat it as property, though, so for tax purposes paying in bitcoin is closer to a barter deal than to paying in dollars or pounds.

Money 101: the reading list →

Sources

• The classical account: Adam Smith, The Wealth of Nations (1776), book I, chapters II and IV; W. Stanley Jevons, Money and the Mechanism of Exchange (1875), chapter I; Carl Menger, “On the Origin of Money”, Economic Journal 2(6), June 1892.
• The anthropologists: Caroline Humphrey, “Barter and Economic Disintegration”, Man 20(1), March 1985; David Graeber, Debt: The First 5,000 Years (Melville House, 2011); The Atlantic, “The Myth of the Barter Economy”, 26 February 2016; Bank of England, “Money in the modern economy: an introduction”, Quarterly Bulletin 2014 Q1.
• Barter and tax: IRS, Topic no. 420, Bartering income; IRS, Publication 525, Taxable and Nontaxable Income (2025 returns); HMRC, VAT: part-exchanges, barters and set-offs; HMRC, Business Income Manual, BIM33310.
• Trade between states: UNCITRAL, Legal Guide on International Countertrade Transactions (United Nations, 1993); US Bureau of Industry and Security, Offsets in Defense Trade.
• Bitcoin and tax: IRS, Digital assets; HMRC, Cryptoassets Manual, CRYPTO10100; HMRC, Cryptoassets Manual, CRYPTO22100; Inland Revenue (New Zealand), Cryptoasset transactions for businesses.