The history of barter (and of money too)
Now that I’ve addressed some of the issues and opportunities associated with modern barter, I thought it would be appropriate to take a step back and look at the beginning of barter (and of money while we’re at it). Turns out the practice of barter is as old as time.
Barter in the early days
Barter is in fact the oldest (consensual) system of exchanging goods and services. Long before the advent of any sort of money, people exchanged their own goods of value for other things they wanted.
As a quick aside, one of the most famous barter transactions occurred on May 24, 1626, when Peter Minuit, a director of the Dutch West India Trading Company, bartered about $24 worth of beads and trinkets to local Indians in exchange for the island of Manhattan.
The advent of currency
Moving on to currency, the earliest forms are not the paper and coinage systems we think of today, but currency in the form of things like livestock—think sheep and cattle (commodity money). You’ve heard of people trading goats for spouses? That happened in some parts of the world—a lot.
There are of course challenges and limitations with these types of transactional systems. First, in the case of direct barter, the buyer and the seller must have what’s called a double coincidence of needs, meaning they must have what each other wants at the same time. Second, it’s very difficult to properly value goods with direct barter—one cow may not produce as much milk as the next. And last, there is no ability to store value. These challenges and limitations are what lead to the development of representative currency.
Representative currency
Representative currency serves primarily as a store of value that can be redeemed against goods or services at a later time. And the more liquid the currency (widely accepted) the more valuable it is.
It first appeared around 1200 B.C. in China in the form of cowry shells. Metal coins followed, along with leather currency and eventually paper notes in the 9th century. Europe finally came around in the 15th century and began using paper notes too. Representative money saw its sweet “golden” era during the 18th and 19th centuries, when the price of most currencies was pegged to the price of gold. But that didn’t last for long.
1971 marked the end of the gold standard in the U.S., and by 1976, most other countries in the world followed suit. What the vast majority of people in the world now use as tender is technically referred to as “fiat money,” which is currency given value by the laws of a government.
Barter exchanges emerge
Getting back to barter (which has for the past several thousand years served as a supplemental form of exchange in currency-based economies), even though it is the oldest form of trade, it has evolved significantly, especially in the last century. The most notable evolution has been the vast growth in scope and number of trade exchanges (like my company, BizXchange).
The most commonly acknowledged first business barter exchange is the WIR system. WIR—which means “we” in German—was founded in 1934 by businessmen Werner Zimmermann and Paul Enz to help cope with currency shortages after the stock market crash of 1929. Within one year of its founding, the WIR system had 3,000 participants, and today the organization is still growing with more than 62,000 members doing over $2 billion a year in B2B barter transactions.
The great advantage of a barter exchange is that it eliminates the need to directly conduct a barter transaction with another party; it eliminates the necessity of a double coincidence of needs. Additional benefits are that valuing products and services becomes much easier due to the expanded market; transactions can be easily tracked and reported; trade revenue can be banked and stored; and the speed of transactions has increased.
Barter 2.0 and beyond
I like to call what has developed in the last 70 years barter 2.0. And I think the progress made from the 1.0 state is akin to the advent of modern-day financial products, such as credit cards, online banking, etc.
What has really accelerated barter exchange systems in the last decade though is the introduction of computer facilitation. Especially in today’s technologically advanced world, the level of security, customization, speed and accessibility associated with the barter software being used by most exchanges makes carrying out trades via a barter exchange easier than ever before. Exchange members can easily and instantly search, buy and sell among their partner members for the goods and services they need, or conversely for prospects that might be looking for goods and services.
There is still of course a very important place for cash in the modern day economy, but it’s evident that more people and businesses are discovering that it makes sense to save cash if what’s needed can be obtained through barter. Especially if you are able to use idle capacity, excess inventory or simply incremental business to pay for goods or services that you would have otherwise paid cash for.
And that pretty much brings us to present day.
So there you have a quick (or not so quick!) summation of the history of barter (and money). So what’s next? Let me know what you think.
- Bob
Barter Brethren – Retail Barter Exchanges vs. Corporate Barter Transactions
I’ve received a lot of questions recently about retail vs. corporate barter and what is best for a particular business. The short answer is that things are not one size fits all, or to be more accurate, things are not one type of barter fits all transactions. For small to medium sized businesses that want to integrate barter as a strategic business tool, enrolling in a barter exchange is the best way to go. This approach is referred to as retail barter. For larger businesses that may have unique instances of needing to move large amounts of excess or slow-moving inventory, a corporate barter transaction is the best bet. Here are brief descriptions of how each work.
Retail Barter
The first step to conducting retail barter transactions is to join a barter exchange. These organizations are usually made up of between 200 and 10,000 members that conduct indirect barter transactions with each other by way of a credit/debit system. Clients of the exchange are simply agreeing to accept an additional form of currency for payment. Members are free to purchase any product or service within the network—they do not have to accept each other’s merchandise directly. Most exchanges are within a specific geographic area—a city or region—and are made up of members offering both products and services. It is not uncommon to have an extremely broad representations of companies in an exchange—from media organizations, construction companies, dentists, restaurants, attorneys, printers, hotels, ad agencies, graphic designers and plastic surgeons to small consumer-oriented businesses like dry cleaners, flower shops and so on.
There are currently about 400 retail barter exchanges in the U.S. and another 200 worldwide, most with around 1,000 businesses as members. In total, the business-to-business network of barter exchanges represents over 450,000 companies.
Corporate Barter
Larger companies trade goods and services through corporate barter, which is sometimes called accounts receivable (AR) barter. Like with retail barter, these types of transactions also take place through a third party barter company that acts as a broker. A corporate barter transaction is usually a good alternative to liquidation.
Here’s how it usually works: an asset that has lost value or is in excess is identified by a company. A barter firm takes a position in the client’s excess inventory or underutilized capacity and provides them with trade credits up to the full original value. The client then uses the trade credits to offset in full or in part budgeted cash expenses while meeting their current benchmark pricing.
By using the trade credits provided by a barter firm, a much higher value is restored to the client’s assets than would typically be the case using traditional liquidation methods.
In addition, the assets acquired by the barter firm are sold under terms and guidelines specified by the client. More specifically, non-competing channels are used to protect the brand and to ensure that cannibalization of sales does not occur.
The trade credits can be used by the company to purchase a wide range of products and services for which a company normally must pay cash, including advertising, printing, travel and entertainment, construction materials, etc.
Barter is a business solution. No two trade transactions are ever alike. The use of barter as a business tool can vary greatly depending on the needs, financial goals, assets and fulfillment desired by the company. There are many ways in which barter can be incorporated into a business model to increase efficiency and improve the bottom line.
- Bob
Change and more of the same – the future looks bright for barter
The economy took a nosedive and suddenly barter is getting a lot of attention. What happened is that the downturn led many companies—small, medium and large—to discover barter for the first time. As a result, barter is growing faster than ever and receiving the media coverage to match.
In my opinion, though, the positive press and attention is overdue. I say this because I’ve long stated that barter is not only for the tough times. It’s a strategic tool that should be used during economic expansions and contractions. This is because preserving cash and moving excess inventory and capacity will always enable a business to grow faster and become more profitable, no matter what the prevailing economic conditions. Why wouldn’t a business want that arrow in its quiver in good times?
What I’m excited about is that once things turn around, I suspect the majority of companies that turned to barter to help their businesses grow during the downturn will continue to use it as a tool. Why would a company work to become more efficient and then allow itself to backslide? (I’m sure it happens, but it isn’t smart business.) The only difference today is that businesses are forced to be more efficient. Savvy companies have been using barter out of choice for decades.
At its base, barter is an efficiency tool, which is why so many companies are now discovering it—everyone’s working to become more efficient to weather the storm. People are discovering they can use barter to pay for a wide variety of products and services for which they are accustomed to writing checks, including advertising, capital expenditures, commodities and assets. They’re also realizing that using barter helps bring in new cash-paying customers.
When things turn around, none of these things will change.
- Bob
About Bob
Bob Bagga is the President and Chief Executive Officer of BizXchange and is recognized internationally for his accomplishments in the barter industry. More...
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By N2H