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فارسی (Persian) 
Türkçe (Turkish)
Medium of exchange means exchange of value or means of exchange and is one of the main measures of money. In fact, the transaction of goods for goods is a direct transaction in which the seller gives his manufactured goods directly to the buyer and takes the manufactured goods of the buyer. Considering that the exchange of goods for goods is the only possible way to meet the needs in small communities, it can definitely help them to live according to the limited needs of these people.
The exchange of goods for goods has always existed in human societies and is still seen in some situations. The problem of exchanging goods for goods is its impracticality. Only this exchange is done under special conditions. In such a way that both parties fully understand each other and coordinate their needs, time, scale, etc.
Due to the problems of barter transactions such as scale incompatibility, time incompatibility and location incompatibility, humans needed a third product or an intermediary to carry out their transactions. Therefore, the concept of medium of exchange was used. In this article, I will discuss more about Medium of exchange and its features.
What is medium of exchange?
Medium of exchange is an intermediary system or a tool that is used to facilitate the buying and selling of goods and services between parties. For a system to function as a medium of exchange, it must represent a measure of value. In addition, all parties to the transaction must accept that standard. In the modern economy, it is a medium of exchange.
Throughout history, gold has served as a medium of exchange and store of value. Medium of exchange is actually a portable tool that is used as an intermediary to facilitate the purchase and sale of goods between parties.
In order for a currency to function as a medium of exchange, it must remain constant in value over time. If its value becomes unstable, it can no longer be called a medium of exchange.
Read more: What does Store of Value mean?
Barter transactions problems
As we said, the medium of exchange is actually the third goods or intermediaries that the buyer and seller need at the same time. However, the smaller the community, the more limited the needs of Friday people and the fewer the specialties. For example, consider a tailor in a small village. This tailor does all the work related to clothes.
While in larger societies, needs expand and specializations increase. Imagine the previous example for a large city. So that a tailor is only an expert in sewing pants. The bigger the community, the bigger the market, and at the same time, the opportunity for more specializations and exchanges will increase. As a result of this expansion of the society and the increase of opportunities and exchanges, it will be more difficult to meet the needs.
In general, it will be much easier to meet the needs in small communities than in large communities. In general, bartering creates three major problems for human society:
- Scale mismatch
- Time mismatch
- Spatial mismatch
lack of conscience of scales
The first problem caused by barter transactions is lack of conscience of scales. To better understand this problem, consider a farmer who produces onions and wants to buy a house. Now, this person can’t offer an onion to the owner of the property to buy a house. It is in this situation that the problem of scale mismatch occurs. Incomparability of comparisons means that the product produced by a person does not match the product he needs in terms of scale and it becomes impossible to do the transaction.
Time mismatch (lack of conscious of timeframes)
Another problem of traditional barter transactions was lack of consciousness of timeframes. To better understand this problem, imagine that you are a producer of a perishable product and at the same time you intend to buy a durable product.
For example, you are an onion producer and you want to pay the owner for the amount of an onion property. But the owner of the property wants you 3 months to vacate and deliver the house. Meanwhile, your product, which is onion, will definitely spoil and rot in 3 months, when it is time to make the deal. As a result, this transaction cannot be done.
Lack of conscious of location
Among other problems of barter transactions, we can point out lack of awareness of location. In the previous example, if you intend to buy a property near your onion farm, this transaction will not be possible due to the location mismatch.
As a result, barter transactions are not possible due to the existence of these three problems. These kinds of restrictions have brought human transactions to a standstill. Therefore, humans were forced to change their transactions from direct to indirect. For this purpose, he needed a third product or an intermediary to carry out transactions, which we refer to as Medium of exchange.
How does a medium of exchange work?
A traditional barter system only works when both parties to the transaction have the goods that each other needs. But for the medium of exchange to work, both parties must agree on the value of their goods. For example, consider a small community. Every person in this small society will not be able to do all the work and provide all their needs. As a result, it needs to exchange value.
For example, a farmer who produces onions should keep some of the onions for himself and sell the rest and buy other products he needs. As a result, he can meet his needs in the same way. As a result, he performs the desired value exchange by giving one product and taking another product. This process is called commodity exchange.
Therefore, the introduction of a medium of exchange allows more efficiency in the economy. It will also increase overall business activity. In addition to exchanging goods for goods, one or both parties can sell their product for a number of gold coins; Then use the obtained coins to buy the products they want.
Money as medium of exchange
Over time, human beings came to the conclusion that it is better for this third and intermediary goods accepted by the buyer and seller to be a number of special goods or, in the best case, a special good. As a result, this is how money was invented. In fact, the first characteristic of money is the medium of exchange.
In another expression, it can be said that a commodity that is widely used in a society as a medium of exchange will be called money.
Medium of exchange features
An effective medium of exchange has certain characteristics.
Medium of exchange must have a constant value over time. Currencies as a medium of exchange have the feature of being exchangeable with other world currencies.
Another feature of the medium of exchange is that it can be divided into smaller parts. In fact, a product that is introduced as a medium of exchange, such as currencies, can be divided into a number of smaller units so that they can be equal to the payment received for a specific service or a product.
Governments that are responsible for issuing currencies should consider these features. For example, they must ensure that the currency is widely available to the public, cannot be easily copied or duplicated, and is available in sufficient quantities when needed.
Some features of Medium of exchange may also apply to digital currencies such as Bitcoin. Of course, the extreme fluctuations of the digital currency market may prevent their widespread use as a medium of exchange.
The objectives of a medium of exchange
As mentioned, the main purpose of a medium of exchange is to facilitate transactions between parties. An effective medium of exchange has a relatively stable value that is recognized and accepted by the parties to the transaction. This relative stability gives the currency, as a medium of exchange, another important purpose. Currency can be stored for a long time. The concepts of savings and investment evolved from the potential of currencies to serve in the long term as stores of value.
Alternative currencies as a medium of exchange
Alternative currencies have emerged over time during periods of economic stress to strengthen a currency or stimulate national trade. In 1907, bank failures caused widespread liquidity shortages. Meanwhile, companies had to issue corporate bonds and other forms of emergency currency to pay their workers.
Workers can redeem these bonds for food and services. They can also hold it for future redemption once USD becomes available. Such informal money substitutes are little more than an IOU and depend on the reputation of the issuer for their acceptance as a form of payment.
An example of an alternative medium of exchange
Across the United States, local currencies have sprung up with the primary goal of fostering economic growth and sustainability in a region. The best-known case of a thriving local currency is BerkShares, which launched in 2006 and is still accepted by about 350 businesses in the Berkshires of Massachusetts.
The value of BerkShares is tied to the value of the dollar, but the notes are issued at a discount. BerkShares can be redeemed at participating bank branches (not three local bank branches) at a rate of 95 cents per US dollar.
A medium of exchange works when its value is instantly recognizable, stable and portable. It then fulfills its purpose as an intermediary for the exchange of goods or services between two parties.
Out of control inflation, political instability and government mismanagement are reflected in the value and stability of a country’s currency. For example, the worst currency in the world right now, according to World Atlas, is the Venezuelan bolivar. Once a strong currency, hyperinflation has rendered the bolivar almost worthless as a medium of exchange for its citizens.
The first medium of exchange may have been a coin that was issued about 2600 years ago in Lydia, an ancient kingdom in what is now western Turkey. This coin was made of gold and silver alloy, it was stamped with an official government image, and the metal had a guaranteed weight and purity. Gold and other metals may have already been used as a medium of exchange, but the Lady was the first to issue it in standard form.
