What is a Medium Of Exchange?

A medium of exchange is something used as a convenience to facilitate simple and uncomplicated trade. In a pure barter system, one commodity is exchanged for another, and no exchange can occur unless both parties involved desire precisely what the other has to offer. The barter system lacks a universal medium of exchange to simplify the process. With a medium of exchange, such as money, trade is much easier as does not require a precise link between the desires of both parties. One can sell commodities for money and buy other commodities with that money, eliminating the need for a direct exchange of commodities.

There are several criteria that any good medium of exchange should meet; it should be noted that most modern money does, indeed, meet these criteria. It should be transportable; an individual should be able to carry it with him without it being a terrible burden. Additionally, one should be able to carry a relatively small volume of it and still hold a considerable amount of value and buying power. It should be divisible into different amounts, containing a small or large amount of value based on quantity.

Another important feature of any medium of exchange is recognizability; an item must be recognized as valuable to be of any use as a medium of exchange. Usually, then, all money used in a given political system is designed in specific sizes with recognizable colors and shapes. People then can distinguish it and do not need to worry about it holding its value with different people or in different shops. All people in a given system are familiar with it, so there is no debate concerning its value.

One major issue that arises when societies make use of common mediums of exchange is counterfeiting. A society's medium of exchange must be designed to be very difficult to counterfeit. If it is not difficult, then people more easily can create unearned value that does not belong in the system. To prevent counterfeiting, governments typically produce money with intricate and hard to replicate designs on special paper with special inks.

In modern times, the medium of exchange in many societies has, to some degree, even moved beyond paper and coins. Money can be stored electronically and used globally, allowing an equal exchange of goods and value without any physical currency ever changing hands. Intricate methods of encryption prevent counterfeiting and other problems form of exchange.