If cash is king, then barter might be a baron. Cash is universal, trusted and very liquid. Barter on the other hand, can be a reasonable option, economists say, but comes with inherent obstacles.
In an effort to keep as much cash on hand as possible during the recession, small businesses and individuals are increasingly looking to barter. Craigslist, for example, has seen its barter listings grow 120 percent in the last year. Trading on BizXchange, an online bartering network, has climbed 68 percent over the same period.
Straight bartering requires what economists call a double coincidence of wants, which means that unless two people have exactly that which the other wants (not to mention in comparable amounts and at the same time), then there is no deal. In that sense, says Frank Shorfheide, a professor of economics at the University of Pennsylvania, "Bartering is essentially inefficient."
But online bartering exchanges are making the practice more efficient. Bartering has been aided along by firms such as BizXchange, which supplements trades with a currency system and lines of credit that can be used for multiple trades with several participants.
Bob Bagga, CEO of BizXchange, says that the greatest appeal of new bartering is the real revenue and customers it draws to a business by allowing businesses to offload excess ability or stock while attracting otherwise untapped customers as well. "If we weren't bringing in new and incremental revenue, all you're doing is trading dollars, and that doesn't make any sense," Bagga says. Instead, it is the new marketplace offered by the network that makes the service worth a company's time, he says.
By instituting BizX dollars, for example, BizXchange eliminated some of the restriction caused by the double coincidence of wants. "Barter can be just as efficient as having money," says Peter Rousseau, a professor of economics at Vanderbilt University, provided that there is a large enough network of goods, suppliers and consumers. And while this does make bartering much more practical, a company-invented currency will not likely approach the relative level of stability enjoyed by the dollar. "It is definitely not necessary that these kinds of dollars are issued by the government, but on the other hand, it does give some backing and credibility."
Even if a business elects to just trade off its extra inventory rather than completely change its monetary system, Bagga says his system makes financial sense. "There's always some excess capacity out there," he says.