Barter accounting in the US during the late eighteenth and early nineteenth centuries

Introduction

Our paper explores the subject of barter accounting, primarily in the eighteenth and nineteenth centuries. Barter accounting has not been covered to any significant extent in the accounting history literature with the notable exception of Stone (1985), who provides an analysis of its evolution from Pacioli to modern times. Stone observed that Pacioli recommended a form of barter accounting that conforms to contemporary practice using fair market values. However, for many years, in light of the emphasis on historical cost, barter transactions were reflected at the book value of the goods relinquished in exchange (Stone, 1985, p. 105). Fair market valuation is the current method of barter accounting, reflecting an accent on measuring the transaction price using the exchange value of the goods given up.

Our study is based on historical account books and early textbooks on accounting as primary sources. The secondary sources include previous articles on this subject in accounting history journals and books. This paper is organised with consecutive sections on: the historical economic conditions during the late 1700s and early 1800s in the US that were conducive to barter, the nature of barter, applications of barter in pre- and post-Colonial America, sample barter transactions from historical account books, and contemporary barter accounting practices.

Historical economic background

In this section, we review economic conditions giving rise to barter, including an insufficient money supply and increased trade domestically and internationally. We also discuss how barter actually occurred. Business conventions developed in America during the colonial period continued to be practised in the new nation.1

Central factors of British mercantilism such as forbidding colonial coinage, the commercial nature of colonial agriculture, and the rise of consumerism in the eighteenth century in the American colonies as well as England contributed to a situation of chronic debt, lack of specie, and the consequent necessity for barter transactions (Rich, 1968, p.301). In the colonies, paper money was called "bills of credit", which were publicly issued as legal tender. In part, such money was used to finance the French and Indian War. Because it was accepted at par by agreement with other New England colonies and because it could be used at times to settle debts with English merchants at market exchange rates, it was over-issued and traded at deep discounts to gold and silver money. Consequently, its further issue for all the American colonies became prohibited by the English Parliament through the Currency Act of 1764, which also called for existing issues of such paper to be retired in a timely fashion (Sosin, 1965, pp.22-31).

Public land banks before and after the American Revolution also proliferated and failed. These enterprises lent "money" in the form of notes collateralised by land to small yeoman farmers (Bordo & Schwartz, 1995, p.6). Growing tobacco quickly used up the land, and western expansion added supply. However, undeveloped land was cheap or practically free (McCusker & Menard, 1985, p.306), and hence the collateral was inadequate, leading to the subsequent failure of land banks. Attempts to monetise commodities (indirect barter) were frequently more successful. In localised domestic markets, especially in frontier communities, desirable British shop goods or even domestically manufactured consumer durables were used. Less bulky, they were more easily transportable than commodities, and were readily marketable (Perkins, 1991, p.490).

During the American Revolution, the issuance of Continental currencies to fund the war effort provided "money", though of questionable value and in too great a quantity. In the years after the war, through the remainder of the century, reductions of this currency and population growth led to a situation in which there was still no money in circulation to conduct commerce adequately (Bouton, 2000, pp.858-64). Since so utterly little specie and reliable currency were available, the value of goods and services that sold "for ready cash" was much lower than their fair market value (Bouton, 2000, p.860). It was far more prudent to trade with a country merchant or to take a personal note. The use of personal notes was both necessary and commonplace. Both before and after the Revolution, merchants frequently either issued notes or acted as clearinghouses for such notes. This was advantageous to the merchants since it further enhanced their range of influence (Pierson, 1992, p.98). The merchant trusted the third-party note. The issuance and ready acceptance of personal notes increased the scope, complexity, and range of business. Also, the third-party note recipient was forced to trust the merchant to baiter and trade fairly with him given that cash settlement was not possible.

After the Revolution, as production of staple products expanded, risks were reduced, and merchants experienced lower costs through economies of scale efficiencies (McCusker & Menard, 1985, p.22) and improvements in transportation (Clark, 1979, p. 179). Unlike the colonial period, in view of significant demand for US agricultural products, American farmers and merchants were no longer indebted to their British traders. Increasing demand, in part due to Anglo-French wars and their embargos (Straka & Straka, 1973, pp.201-3), led to increased production of American products. Farmers benefited, for instance, from trading flour. Merchants also benefited from trading flour and needed goods. The export market along with the dislocating circumstances of war was a source of profitability. Consequently, significant trade occurred. Britain had no direct political control over the US economy at this time. However, in the continued absence of reliable money, barter was used.

From 1775 through 1790 (McCusker & Menard, 1985, p.361), there was a long transition from war to peace. The 1780s marked the beginning of direct foreign trade with the British Empire and beyond, including Continental Europe and Asia. The economy grew from the 1790s to the War of 1812. Also, the popular consumerism which engulfed England quickly transferred to the US, and was clearly an impetus to economic growth (Lemire, 1991, p.67). Americans had a burning desire to get ahead and succeed (Perkins, 1991, p.501). Even the poor prospered because of barter (Perkins, 1991, p.506) for either labor or agricultural production. A credit revolution emerged in the late 1700s. An acute need existed for currency to settle accounts and to replace the cumbersome system of barter. By the 183Os, barter transactions declined in importance (Bodenhorn, 1997, p.517). Interest-bearing notes, if not cash itself, were used to settle transactions directly. Also, double-entry accounting became more popular.

The nature of barter

There are three types of barter: direct, indirect, and credit. Direct barter is defined by Cocker (1758, p.166) as:

a rule among merchants, which in the Exchange of one commodity for another informs them ... to proportion the rates, as that neither may sustain loss.

Direct barter is simply the trading of a good or commodity for another good or commodity.

A requirement is a double coincidence of demand with an instantaneous settlement. Neither cash nor any other monetary commodity is involved in direct barter. The participants are the end users. Trades occur because of differences in the demand and substitution elasticities for specific goods and commodities (Prendergast & Stole, 2001, p.23). While direct barter promotes a self-sufficient economy, it is inefficient and inconvenient. It necessitates reflecting each product in terms of the other products for which it could be exchanged. Generally, few trades occur given these parameters. Also, time and uncertainty as well as the costs of exchange, transportation, production, future payment, and delivery are market realities.

Indirect barter, on the other hand, does not require a double coincidence of demand, but necessitates an intermediate broker or trader inventorying goods and creating "the right sequence of intermediate trading to the final demander" (Ostroy, 1973, p.603). Put another way, the participants are intermediaries, not the final product users. Intermediate goods are held to provide for more advantageous exchanges (Brunner & Meltzer, 1971, p.803). Indirect barter can exist in domestic markets and also in exports if the goods are not perishable. Using a commodity such as tobacco or sugar in lieu of cash also typically characterises this form of barter. When such a commodity is used, in view of its liquidity, it assumes the nature of money since it constitutes a store of value held for its purchasing power and thus becomes the unit of account against which other goods are valued (Calsoyas, 1948, p.342). Such commodity money creates accounting balances and warehouse warrants or in other terms "delayed reciprocity" (Pryor, 1977, p.392). Without such a commodity, indirect barter could be accounted for using lists and descriptions of the products involved.

Even where a monetary economy or ultimately a cash market exists, barter may persist. In early America, both colonial and post-Revolutionary, direct and indirect barter existed alongside cash markets because most people simply did not have cash. Where the unit of account in indirect barter is money, this trading is called barter credit. Stated differently, this form of barter can be considered indirect barter with money as the denominator. In such an economy, commitments to pay "bridge the gap between receipts and payments" (Brunner & Meltzer, 1971, p.785).

Mutton (1778, p.91) offers a definition of barter credit:

exchanging of commodities; and as neither party is supposed to sustain any loss, when the commodities exchanged are not of equal value, the defect is supplied with money.

With long-distance export and import, cash is invariably the facilitator. Such trading requires barter credit, the exchange of goods or services for a credit balance to be settled in cash. The fair market value of bartered goods is based on trading prices. This form of barter served to create liquidity and market participation for a cash-starved populace, enhancing economic welfare (Prendergast & Stole, 2001, p.2).

To sum up, reflecting one good in terms of another, direct barter involves no cash and no commodity exchange mechanism such as tobacco or sugar. The participants are the end users. Indirect barter is characterised by a "trading post" economy with intermediate agents who exchange goods to be acquired by end users. This form of barter may involve a commodity money, that is, a liquid store of value, exemplified by tobacco, but no cash is involved. Barter credit can be viewed as indirect barter with each transaction denominated in terms of cash. IOUs or notes are used. Both indirect barter and barter credit may involve delays in final settlement. The notion of barter, regardless of its specific form, is concerned with exchange value, that is, the value of a good in terms of another good, a commodity money, or cash itself.

An important issue is what constitutes a commodity money. All sorts of items were used in barter credit as is shown later in this paper in merchant account books. The point is that if something were useful to others, it would have value in exchange and represent a store of value. Both indirect barter and barter credit require by definition an intermediate trader or merchant and exchanges to occur within the context of a market. In a broader sense, the development from direct barter to barter credit and cash markets represents a transition to capitalism that occurred in the eighteenth and early nineteenth centuries in America, which has largely been explored by "market historians" focusing on the economic development of market structures (Kulikoff, 1989, p. 130).

Another perspective adding to our understanding of this subject is provided through the study of "social history" and its focus on "non-capitalistic and even non-commercial relationships" during this period (Merrill, 1995, p.315). This social historical perspective is useful since it explores non-market or personalised and kinship exchanges (Rothenberg, 1988, p.539) and the maintenance of "established social relations" through trade (Henretta, 1978, p.16). Here the emphasis is on the value in use as opposed to value in the market place and on the early American household and their communities (Clark, 1991, p.28) as well as their responses to the demands of markets (Kulikoff, 1993, p.349). Use value is defined in terms of a product satisfying a particular need (Merrill, 1977, p.53). From the market perspective, this represents direct barter exchange between end user relatives and neighbors within local communities. In a non-commercial setting, for all intents and purposes, use value and exchange value are identical.

Throughout the colonial period and into the early nineteenth century, market and non-commercial exchanges co-existed, with little if any real differences (Bushman, 1998, pp.362-3). Account books of merchants of this period often include accounts of their relatives. What we see is "a complex economic order, filled with [an apparently] confusing amalgam of forms of exchange" (Kulikoff, 1989, p.291). As Bushman observes (1998, p. 362):

Even the extensive barter that went on among neighbors ... was qualitatively different from exchange production that passed through storekeepers into broader markets. But that distinction is hard to maintain. Exchanges with storekeepers scarcely differed from exchanges with neighbors ... . In the cash-poor economies of rural New England, farmers often paid in labor, and a farm enabled a storekeeper to use that labor. The storekeeper was simply one more player in the intricate network of village exchange ... .

Bushman (1998, p.374) recognises the multiple economies in early America and develops this complex order into a "composite farm" approach, which "allows for varying shades of market involvement", extending from subsistence to market exchange, thus reducing the ideological disparity between exchange value and use value.

Applications of barter

In the US during the late 1700s, direct barter, indirect barter, barter credit, and cash transactions all occurred. Three-way transactions, since they are monetised, provided effective liquidity to the market.

As an example of indirect credit, the merchant received wheat from farmers. The merchant often owned the grinding mill and thus converted wheat to flour, making it more compact to ship. He delivered it, say, to Richmond, Virginia, where he traded it to a city merchant either for goods or account credit, or better yet put it on a merchant vessel that he owned or had a time-partnership in to be delivered to Britain or Scotland, a centre of international trading goods. If silks from India were desired, they would also be acquired in London. Merchant houses served as trading organisations, accepting flour and exchanging it for other products and commodities such as tea, unavailable in America. Such transactions were common in this period (Matson, 1994, p.409), when the US was 90 per cent agrarian (Walton & Rockoff, 1998, p.52). Therefore, most of what was farmed beyond domestic sustenance was for export. The US merchant then delivered the goods received on this vessel back to this country, some of which was sold or traded in a port city such as Richmond; the rest he brought back to his store, say, in Lexington, Virginia. If balances were shown in terms of money, then this transaction would illustrate "barter credit".

In cases where the merchant lacked a proprietary interest in a ship, he tended to sell or trade his flour in Richmond with a fellow merchant, who later shipped it to a merchant house, usually in London. Thus, for all intents and purposes, international trade was effectuated directly or indirectly by a merchant who dealt directly with farmers (Pierson, 1992, p.100). The London merchant house sold the flour to the British government for its war efforts, to local merchants for British consumption, or in turn either sold it or used it for trade in other parts of the British empire.

A complex system of barter could not prevail without the merchant who accepted merchandise with credits given in return and engaged in various multiparty transactions. If a merchant did not want a particular farmer's products, he would find other debtor parties willing to accept such products or goods to settle their accounts.2 If X owed Y, but Z also owed X, and Y owed Z, the three-way transaction could be extinguished by offsetting - assuming equal amounts involved in all aspects of this transaction. Account books of the late 1700s and early 1800s show multiparty transactions were frequent (see Baxter, 1965, pp.25-6). Such transactions reflect barter credit if they are denominated in terms of money; if denominated in terms of a commodity, they reflect indirect barter.

Here is an example of a four-way barter transaction: A purchases sundries from B. Both A and B have accounts payable to C. The transaction is recorded by C as an increase in C's account receivable from A and a decrease in C's account receivable from B, which is a double-entry transaction and in that respect unusual in account books of this period, typically single-entry in nature, containing only accounts receivable and payable. There were no other assets in those books. Another example of double-entry in these books is a transfer of balances from one ledger to another. These ledgers were never closed. The account books existed for the stewardship needs of the merchant, for him to know how much he owed whom and who owed him what amounts. Assuming these transactions are denominated in terms of money, they reflect barter credit.

Only by extending credit and by being sensitive could a merchant hope to be successful (Fanelli, 1981, p.222). Jones (1992, p.17) observes with respect to Rhode Island in particular, although applicable to New England and the US generally after the Revolutionary War:

Sales were usually made by means of account-book credit ... . Since payment never occurred immediately, each purchase was in effect a debt owed by the purchaser to the vendor. Every year or so, each pair of trading partners would compare their credits and debits and "settle" their accounts by a small exchange of cash. But interest was never charged on what was effectively a months-old debt. Indeed, book-accounting systems of purchase and credit were so informal that it would have been difficult, even if desired, to assess interest accurately ... . Instead, they trusted the veracity of their debtors' own bookkeeping to ensure that all accounts were accurately balanced ... .

Jones is undoubtedly referring to barter credit.

Storekeepers or merchants accepted all kinds of barter including wheat, iron, wool, yarn, cattle, and labor. In some cases, special offers of one product for another were made by storekeepers (Schumacher, 1975, p.84). Besides storekeepers, there were travelling peddlers who engaged in barter transactions, usually goods for farm products (Schumacher, 1975, p.87). Schumacher (1975, p.82) asserts:

The storekeeper might lend money, difficult for farmers to obtain from city capitalists, and customarily advanced the "usual" credit - thereby obligating farmers to market their produce through his store.

Merchants also functioned as bankers, providing loans to farmers who could not afford to pay cash. As in an agrarian economy, wealth was gained primarily from land development, not actual farming. Merchants frequently owned land, often taken as settlement of transactions with farmers usually as estate settlements or in some cases through foreclosure. Transactions would not have otherwise occurred, and long-term trading relationships would have been impossible.

In view of the complexity of barter transactions, not to mention the widespread illiteracy of farmers and artisans, many had to rely solely on the merchant's records to keep track of these transactions. As Baxter observes (1965, p.21):

[B]arter might work smoothly enough if both merchants were generous in the matter of credit, and over some time could make use of nearly equal amounts of the other's wares. But the system was marked by endless delays and much bickering. An unscrupulous shopkeeper could doubtless fleece his country debtors by under-valuing their produce ... . On the other hand, [there is evidence from the account books] ... of the creditor's weary efforts to gel his dues; and ... the longer a debtor could put off payment, the fewer goods might he need to hand over to square a liability for so much money.

The benefits of barter credit notwithstanding, it could also be abused.

Examples of barter transactions in early account books

Barter accounting can be complex. Describing barter in terms of two, three, and four party transactions does not adequately capture the inherent complexity of these transactions. It has been our experience that early account books do not outwardly reveal the full complexity of these transactions. Only the underlying correspondence, wastebooks, and diaries show how intricate barter transactions can really be.

Goods were bartered based on their market value in exchange. Under barter, any good or service could serve as a monetary commodity. Multiparty transactions involving barter are settled by offsetting debts of one party with each other party. Many transactions in these account books reflect barter, though it is often difficult, if not impossible, to discern the specific nature of the barter from examining accounts without studying the underlying correspondence, diaries, and wastebooks (that is, forerunners of journals, memorandum in nature), if any are available. To the extent there is a number of transactions in an account, the nature of the barter settlements becomes even more difficult to discern.

The following examples including barter transactions are taken from the account book of William Caruthers, kept at the John Carroll University Library, in University Heights, Ohio. This post-American Revolution book contains mostly accounts receivable and a few accounts payable maintained by this general store owner and entrepreneur in Lexington, Virginia from 1796 to December 1797. These examples reflect the variety and complexity of barter accounting transactions, some involving more than two parties with different methods of settlement.

Contemporary barter accounting and taxation in the US

Stone (1985) observed that while Pacioli proposed that barter accounting reflects fair values, which it does in contemporary practice, for many years due to the emphasis on historical cost, that was not the case. Traditional accounting has clung tenaciously to historical costs in asset valuation because such costs are generally more reliable in terms of their verifiability, that is, based on arm's length transactions, than uncertain market values. Also, the assets acquired are used generally in the operations of the business rather than sold. On the other hand, it may be asserted that assets should be valued in terms of their exchange equivalent net resale prices or exit values (Chambers, 1969), as one form of fair valuation. Additionally, as Chambers (1977, p.10) observes:

It is futile to expect a "financial position" to be "fairly presented" if the asset components are represented variously by actual money amounts ..., by historical costs ..., and by such other odd amounts as ... the lower of cost and market prices, and so on ... .

Measuring assets in current cash equivalents puts all assets in terms of the same attribute and also avoids arbitrary cost allocations such as depreciation, thus reflecting the "adaptability" of the enterprise to changing economic conditions (Chambers, 1966). Exit value accounting reflects the cash secured from selling an asset in an orderly, non-distress liquidation. Market resale values or exit values indicate the firm's ability to adapt to a changing environment, thus representing measures of the firm's opportunity costs. Exit values are relevant for decision making - whether to continue to use the assets or to sell them and even whether to stay in business or liquidate the entire firm (see also, Sterling, 1981).

Historical costs are past transaction amounts, which though objective are not relevant for decision making. By contrast, the current exchange equivalent of an asset is relevant, even though it may fall short on reliability. Barter accounting, with its emphasis on market values, appears to conform to current cash equivalent accounting, but conflicts with conventional historical cost accounting.

An alternative valuation model to which barter accounting also conforms is current cost, the amount of cash that would have to be paid to replace assets currently used by the firm or to acquire equivalent service potential (Bloom & Debessay, 1984, pp.138-9). Appraisal values or specific price indexes may be used to estimate the current cost. This model applies to the productive assets of the firm, including inventories, property, plant, and equipment and their cost allocations -cost of goods sold and depreciation. The current cost model is especially helpful in matching current costs against current revenues on the income statement and in providing a relevant measure of the future cost of replacing a productive asset on the balance sheet. The model also reflects realised and unrealised holding gains and losses from such assets.

If the subject of barter accounting in historical perspective were covered in accounting courses, the instructor might wish to relate this topic to contemporary barter accounting, which deals with "barter credit". Contemporary barter accounting is typically covered in the first Intermediate Accounting course while barter taxation may be considered in the traditional Federal Income Tax Course.

Sterling and Flaherty (1971) argue that current barter accounting is inconsistent with other generally accepted accounting principles. However, some of those principles have been severely criticised as previously indicated (especially historical cost, stable dollar and revenue recognition). Using the fair market value of goods received to record a transaction requires recognition of gains and losses when that value differs from the original cost. This practice conforms to generally accepted practice for a sale of goods. However, if the transaction were a purchase, a gain or loss should not be reflected. See the Appendix for more specifics on contemporary generally accepted accounting on barter.

Conclusion

When currency is scarce, barter is necessary for domestic and international trade to occur. Despite its shortcomings, barter may have facilitated American economic growth in the post-Revolutionary Federalist period when currency was scarce. Barter involved goods, services, notes, and other forms of credit. It should be noted that barter credit transactions in the United States during the eighteenth and nineteenth centuries as well as in the twentieth century have been reflected at fair market values.

Barter accounting is complex and cumbersome, often considerably more so than non-barter accounting. Early account books do not outwardly reveal the complexity of such transactions. The greater the number of entries in any account, the more difficult it is to discern the nature of barter underlying them. To understand barter accounting, a trail of correspondence underlying the transactions, often unavailable, should be followed. Also particular attention ought to be paid to the individual parties involved to locate "offsetting" transactions, especially settlements. We traced barter transactions in an account book from one account to another and to other account books as well. We also examined correspondence to corroborate our findings (see, for example, Caruthers, 1809, and Jefferson, 1809).

The merchants at this time showed ingenuity in devising a complex system of barter and accounting for it. Barter transactions can be very intricate. Accordingly, it is not clear to what extent barter facilitated or impeded economic growth because it was so cumbersome. However, that question is left for economic historians to ponder.