What is a Medium of Exchange?

A medium of exchange is a good that facilitates the exchange of other goods and services within an economy. In the past, items such as stones, shells, pearls, cigarettes, or gold were used as a medium of exchange.

In economics, a medium of exchange is any item that is generally accepted in exchange for goods and services. In the modern economy, the most commonly used medium of exchange is the fia currency, which we also know as CHF, USD, Euro, etc.

Means of exchange as an intermediate instrument

A medium of exchange is an intermediate instrument that facilitates the sale, purchase or trade of goods between parties. The use of a medium of exchange allows for greater efficiency in an economy. In a traditional barter system, trade between two parties can only occur when one party has a good that the other party desires and vice versa. The probability of this being the case at the same time is very low.

For these reasons, fiat currencies evolved into the common means of exchange in modern economies. For a system, such as a currency, to function as a medium of exchange, it must represent a standard of value and keep it as stable as possible in order to better determine its true cost. Furthermore, all parties must accept this standard.

Paper money as a medium of exchange - a Chinese invention?

In China, the so-called «flying money», a predecessor of paper money, was known since the 7th century AD. Probably the system was introduced by the lenders. They attached a certain value to the paper. The authorities arranged to encourage merchants to deposit their metal coins with a government treasury. In exchange, they received official the compensation note, called «fey-thsian» or «flying money». After that, paper money in China continued to develop steadily.

When the merchant Marco Polo, who spent more than 20 years in Beijing in the 13th century, returned to Europe and reported on his journey, people did not believe him when he explained the use of paper money in China. At that time, he said, the use of «worthless paper» as money or a medium of exchange in the Western world was unimaginable.

You think people are going crazy over bitcoin today? Imagine how they freaked out when they were told that from now on trade will be done with a piece of paper instead of gold.

Andreas Antonopoulos

Basic monetary characteristics

A good medium of exchange should have the following characteristics:

• Rarity: The good, which takes over the functions of money, must be limited and not arbitrarily multipliable.

  Example: sand or stones are not suitable because they are widely distributed. Gold or bitcoin, on the other hand, are rare and meet this criterion.

• Durability: The good must still have its original properties after years and must not be changeable.

  Example: since vegetables or other perishable goods can only be kept for a few days, they lose their value after a short time. Since neither gold nor bitcoin spoils, they meet this basic property for a long-term medium of exchange.

• Transferability: The good must be able to be moved from one place to another with little effort.

  Example: land or real estate are immovable goods. Thus, they can be transferred poorly between different parties. In contrast, gold, livestock, fiat money, or bitcoin can be more easily transferred between people.

• Divisibility: The good, despite being divisible, does not have to lose its original properties.

  Example: A cattle cannot be divided without killing it. Therefore, it cannot be divided between different people in the same state, with the same properties. However, gold, silver, or bitcoin can be divided into smaller amounts at will without changing their properties.

• Fungible / Homogeneity: The good must be interchangeable.

  Example: since a chicken is not the same as another chicken (size, age, health, gender, etc.) it cannot simply be exchanged one for one. However, an ounce of gold is readily interchangeable with another ounce of gold. The same is true with bitcoin.

• Falsifiability/Counterfeit-proof: The asset must be counterfeit-proof and verifiable.

  Example: the purity of a precious metal is more difficult to verify than the authenticity of fiat money, which has multiple security features, or bitcoin, which is verified in the blockchain.

• Stability of Value: The commodity must maintain a stable value over the long term.

  Example: many goods deteriorate after a few years, just as fiat money loses purchasing power due to inflation. Gold, on the other hand, has been able to maintain and even increase its value over several centuries. Like gold, bitcoin has a positive long-term trend.

• General Acceptance: The commodity must be recognized by all participants to be accepted as a medium of exchange.

  Example: cigarettes basically have little acceptance as a medium of exchange in society. Immediately after World War II or in a prison, on the other hand, they do. Bitcoin's adaptation is increasing day by day at different levels.

Conclusion

In summary, a medium of exchange is a type of money or asset that is accepted as payment for goods and services in society.

The use of a medium of exchange allows people to trade and exchange without having to barter directly and can facilitate the efficient allocation of resources in an economy.

In the past, various forms of money, such as gold and fiat currencies, were used as a medium of exchange. Today, cryptocurrencies such as bitcoin are emerging as a potential medium of exchange.

> Learn more about money and what different types there are.