NationMaster - Encyclopedia: Medium of exchange

A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system. Image File history File links Question_book-3. ... Image File history File links Wikitext. ... It has been suggested that Commerce be merged into this article or section. ... Barter is a type of trade that do not use any medium of exchange, in which goods or services are exchanged for other goods and/or services. ...

By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade - the one must want exactly what the other has to offer, when and where it is offered, so that the exchange can occur. A medium of exchange permits the value of a good to be assessed and rendered in terms of the intermediary, most often, a form of money widely accepted to buy any other good. [William Stanley Jevons] William Stanley Jevons (September 1, 1835 - August 13, 1882), English economist and logician, was born in Liverpool. ... The coincidence of wants problem (often double coincidence of wants) is an important category of transaction costs that impose severe limitations on economies lacking money and thus dominated by barter or other in-kind transactions. ... For other uses, see Money (disambiguation). ...

From barter to exchange

A longer term obligation need not be measured in the same terms as the immediate medium is, that is, the medium need not be a standard of deferred payment. Many currencies in periods of high inflation have become unacceptable as denominations of debt - creditors demand contracts that specify US dollars, or a quantity of gold or food perhaps, but continue to use the unstable local currency as the daily medium of exchange. The standard of deferred payment tends to trade at a premium in such circumstances, and some goods are not available to those who deal in the medium of exchange currency only. A standard of deferred payment is the accepted way (in a given market) to settle a debt. ... For other uses, see Debt (disambiguation). ... The United States dollar is the official currency of the United States. ... GOLD refers to one of the following: GOLD (IEEE) is an IEEE program designed to garner more student members at the university level (Graduates of the Last Decade). ...

Although the unit of account must be in some way related to the medium of exchange in use, e.g. coinage should be in denominations of that unit making accounting much easier to perform, it has often been the case that media of exchange have no natural relationship to that unit, and must be 'minted' or in some way marked as having that value. Also there may be variances in quality of the underlying good which may not have fully agreed commodity grading. The difference between the two functions becomes obvious when one considers the fact that coins were very often 'shaved', precious metal removed from them, leaving them still useful as an identifiable coin in the marketplace, for a certain number of units in trade, but which no longer had the quantity of metal supplied by the coin's minter. It was observed as early as Oresme, Copernicus and then in 1558 by Sir Thomas Gresham, that bad money drives out good in any marketplace (Gresham's Law states "Where legal tender laws exist, bad money drives out good money"). A more precise definition is this: "A currency that is artificially overvalued by law will drive out of circulation a currency that is artificially undervalued by that law." Gresham's law is therefore a specific application of the general law of price controls. A common explanation is that people will always keep the less adultered, less clipped, sweated, less filed, less trimmed coin, and offer the other in the marketplace for the full units for which it is marked. It is inevitably the bad coins proffered, good ones retained. A unit of account is a standard numerical unit of measurement for the market value of goods, services, and other transactions. ... For current exchange rates, see exchange links. ... It has been suggested that Accounting scholarship be merged into this article or section. ... This article does not cite any references or sources. ... Nicolas Oresme (c. ... Nicolaus Copernicus (in Latin; Polish Mikołaj Kopernik, German Nikolaus Kopernikus - February 19, 1473 – May 24, 1543) was a Polish astronomer, mathematician and economist who developed a heliocentric (Sun-centered) theory of the solar system in a form detailed enough to make it scientifically useful. ... Portrait by Anthonis Mor, c. ... Greshams law is commonly stated as: When there is a legal tender currency, bad money drives good money out of circulation. or more accurately Money overvalued by the State will drive money undervalued by the State out of circulation. ...

The fact that a bank or mint has always been able to generate a medium of exchange marked for more units than it is worth as a store of value, is the basis of banking. Central banking is based on the principle that no medium needs more than the guarantee of the state that it can be redeemed for payment of debt as "legal tender" - thus, all money equally backed by the state is good money, within that state. As long as that state produces anything of value to others, its medium of exchange has some value, and its currency may also be useful as a standard of deferred payment among others, even those who never deal with that state directly in foreign exchange. For other uses, see Bank (disambiguation). ... A mint is a facility which manufactures coins for currency. ... For other uses, see Bank (disambiguation). ... A central bank is an entity responsible for monetary policy of its country (or in the case of the EU, group of member countries). ... For other uses, see Debt (disambiguation). ... Legal tender or forced tender is payment that cannot be refused in settlement of a debt denominated in the same currency by virtue of law. ... In general, the economic value of something is how much a product or service is worth to someone relative to other things (often measured in money). ...

Of all functions of money, the medium of exchange function has historically been the most problematic because of counterfeiting, the systematic and deliberate creation of bad money with no authorization to do so, leading to the driving out of the good money entirely. A counterfeit is an imitation that is made with the intent to deceptively represent its content or origins. ...

Other functions rely not on recognition of some token or weight of metal in a marketplace, where time to detect any counterfeit is limited and benefits for successful passing-off are high, but on more stable long term social contracts: one cannot easily force a whole society to accept a different standard of deferred payment, require even small groups of people to uphold a floor price for a store of value, still less to re-price everything and rewrite all accounts to a unit of account (the most stable function). Thus it tends to be the medium of exchange function that constrains what can be used as a form of financial capital. John Lockes writings on the Social Contract were particularly influential among the American Founding Fathers. ... In brief, financial capital is money used by entreprenuers and businesses to buy what they need to make their products (or provide their services). ...

It was once common in the United States to widely accept a check as a medium of exchange, several parties endorsing it perhaps multiple times before it would eventually be deposited for its value in units of account, and thus redeemed. This practice became less common as it was exploited by forgers and led to a domino effect of bounced checks - a forerunner of the kind of fragility that electronic systems would eventually bring: Look up check in Wiktionary, the free dictionary. ... The domino effect refers to a small change which will cause a similar change nearby, which then will cause another similar change, and so on in linear sequence, by analogy to a falling row of dominoes standing on end. ...

In the age of electronic money it was, and remains, common to use very long strings of difficult-to-reproduce numbers, generated by encryption methods, to authenticate transactions and commitments as having come from trusted parties. Thus the medium of exchange function has become wholly a part of the marketplace and its signals, and is utterly integrated with the unit of account function, so that, given the integrity of the public key system on which these are based, they become to that degree inseparable. This has clear advantages - counterfeiting is difficult or impossible unless the whole system is compromised, say by a new factoring algorithm. But at that point, the entire system is broken and the whole infrastructure is obsolete - new keys must be re-generated and the new system will also depend on some assumptions about difficulty of factoring. Electronic money (also known as electronic cash, electronic currency, digital money, digital cash or digital currency) refers to money or scrip which is exchanged only electronically. ... Encrypt redirects here. ... PKC, see PKC (disambiguation) Public-key cryptography is a form of modern cryptography which allows users to communicate securely without previously agreeing on a shared secret key. ...

Due to this inherent fragility, which is even more profound with electronic voting, some economists argue that units of account should not ever be abstracted or confused with the nominal units or tokens used in exchange. A medium is just that, a medium, and should not be confused for the message. Electronic voting machine by Premier Election Solutions (formerly Diebold Election Systems) used in all Brazilian elections and plebiscites. ... This is an alphabetical list of notable economists, that is, experts in the social science of economics. ...

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See also

From barter to exchange