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TIT FOR TAT
The oldest method of doing business is making a comeback as hundreds of small Chicago-area companies barter for goods and services
by Jennifer Halperin

When Ron Szekeres and John Hora set up shop in downtown Chicago, they did it in style. Three-quarters of the second floor in the Willoughby Tower on Michigan Avenue, an old haberdashery where, legend has it, Al Capone used to shop. A full kitchen. Marble floors. A high-quality sound system throughout. And the beauty of the deal was that it didn't cost them a dime — at least not in the traditional sense.

Instead, the pair relied on the oldest method of doing business: the barter system. As co-founders of Art of Barter Inc., a company that brokers barter transactions among hundreds of small businesses throughout the Chicago area, Szekeres and Hora were able to trade a wide variety of their members' goods and services to secure snazzy surroundings for themselves, including their lease, architectural services, and construction and other skilled labor.

"It's like a legitimate underground economy," Hora says. "People are trading their goods and services directly, without the middleman of currency."

Like hundreds of barter companies across the country, Art of Barter acts as a bank of sorts for the small businesses that make up the bulk of its clients. It recruits new members, keeps track of the credits and debits each member uses and collects a 5 percent commission on the value of each good or service sold and purchased. Some exchanges charge as much as 8 percent per transaction; several charge a higher rate, but collect only on the sale end.

Hora was introduced to the barter system while working for Circle Fine Art Corp. in Chicago. There he helped arrange trades of museum-quality pieces of art. But he and Szekeres branched off on their own to take advantage of the wider potential for small businesses throughout Chicagoland. "The larger the corporation, the less likely an individual will personally benefit from barter, and so it's unlikely someone within a large company will commit to something unconventional. In small businesses, where you're often dealing with an owner who will personally benefit, the potential gain is more obvious," Hora says.

Although there is no accurate accounting of the number of small businesses that barter in Illinois,

36 ¦ October 1998 Illinois Issues


Susan Groenwald, secretary of Barter Corp. in Chicago, estimates that about 6,000 businesses in Chicago participate in a trade exchange, representing more than $100 million in barter sales. The trade companies in Illinois are located in Chicago or communities nearby, including Joliet and Rockford.

"Chicago is an especially good market for barter because of the dynamic business climate and the diverse array of products and services," Groenwald says. "More conservative business communities may not take to barter as well. In addition, in a climate in which certain types of businesses prevail, such as retail, or entertainment, a trade exchange won't be as successful."

Economists have pointed out that barter trade frequency tends to run against the cycle of the cash economy: In times of recession, when paychecks are worth less, people turn to barter to find a way to use their talents and goods to get what they want but can't afford.

"The cash world is enormous," Hora says. "But doing business through barter, you've got a captive audience who prefer to spend their credits on businesses that are within the same barter system. They'll seek out a member business over others providing the same services. They'll drive an extra two miles to your pancake house — passing five other ones along the way, and steering their friends and families there — because they know you're giving value to the barter system, and are creating a market for their goods in turn."

Although bartering has always been a way of doing business, it gained momentum on a more widespread basis during the early 1960s. The barter credit came into use then, enabling barters to involve more than two parties. Rather than a barber trading a haircut directly to a baker for a cake, he could cut the baker's hair in exchange for a barter credit, then trade it in for something he needed or wanted more within the barter community.

As the idea gained popularity, many regional, national and even international businesses sprang up to broker these barters. The International Reciprocal Trade Association, for example, has hundreds of thousands of clients from more than 150 countries, allowing, say, a box-maker in Brazil to barter for hotel rooms in Amsterdam.

As the number of these transactions rose, the federal government took notice. In 1982, the Tax Equity and Fiscal Responsibility Act took effect, and established barter exchanges on an equal footing with banks, savings institutions and credit card companies as third-party recordkeepers of taxpayers' financial transactions. The law also requires barter exchanges to submit information to the Internal Revenue Service on the barter sales of their clients. These trades are subject to sales and income taxes.

While some saw the requirement that barter transactions be reported to the IRS as a drawback, Hora says the move actually served to legitimize the practice in many minds.

Nonetheless, there are drawbacks to the barter system. For one thing, the values of goods and services are not standard.

Marc Cook, co-founder of Best Satellite and Home Theater in Skokie, says assigning them can be tricky. "I had a guy who offered to trade me a satellite system for a wedding portrait of me and my wife. The cost of all the equipment and labor involved on my end was about $3,000, and that's how much he said the painting would be worth.

"On my end, there were some real out-of-pocket costs that I could assess. He's an artist providing a service that's going to take him I don't know how many hours, and I don't know how to give what he does a nominal value. But you've got to wonder, if the system he wanted had come to $4,000, would the portrait have been worth $4,000?"

"It's not an accurate pricing structure because people tend to inflate the price of their services to make up for time and materials," Cook says. "Which is fair. I don't have a problem with that. But I think that's the reason people went to a currency system to begin with: to set a more standard pricing system."

Even so, Cook continues to participate in barter trades, through a group called the Illinois Trade Association in Niles.

"It's a way to get things you want or need that you may not have the cash for. In that way, it can be a great opportunity."

Jennifer Halperin is the former Statehouse bureau chief for Illinois Issues. She now lives in Columbus, Ohio, where she is an editorial writer for The Columbus Dispatch.

Illinois Issues October 1998 ¦ 37


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