What is a Medium of Exchange?

Daniel Liden

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 such as money, trade is much easier as does not require a precise link between the desires of both parties. A person can sell commodities for money and buy other commodities with that money, eliminating the need for a direct exchange of commodities.

The U.S. government has put a number of anti-counterfeiting measures into its banknotes to prevent the mediums of exchange from being copied illegally.
The U.S. government has put a number of anti-counterfeiting measures into its banknotes to prevent the mediums of exchange from being copied illegally.

There are several criteria that any good medium of exchange should meet, and it should be noted that most modern money does, indeed, meet these criteria. The medium should be transportable; an individual should be able to carry it with him without it being a terrible burden. Additionally, a person 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 is recognizability; an item must be recognized as valuable to be of any use. Usually, then, all money used in a given political system is designed in specific sizes with recognizable colors and shapes. People then can easily spot 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 the particular medium, so there is no debate concerning its value.

One major issue that arises when societies make use of common mediums of exchange is counterfeiting. The medium must be designed to be very difficult to counterfeit, or people might create their own version that does not have the same value. 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.

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Discussion Comments


Does anyone know when the trading and barter system began to be replaced by some form of money exchange for items? Maybe the two systems continued side by side. I'm thinking that there was a lot of barter with shipping and trading to far away places. There wouldn't have been a common money system and the accounting may have been too difficult.

Actually not too many years ago, bartering services was common. Someone who was skilled at carpentry might re-do someone's kitchen, and that person might do some landscaping for the carpenter. That way no money was exchanged.


Today, we're lucky to have small light coins and feather weight bills to use as our medium of exchange. And to make things even easier, we have our credit and debit cards to use for in person purchases or online services.

In decades past, a lot of people used gold and silver pieces as a medium of exchange. A silver dollar was pretty heavy. But then, things didn't cost so much in those days, so they didn't have to carry around too much silver and gold.

As a child, I remember my grandfather reaching into his coin purse to get a gold piece to buy something for me. I loved those shiny gold pieces.

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