Understanding the Advantages of Money as a Medium of Exchange

Money is a universal product that everyone accepts as payment.

Throughout history, many different items have been used as money. Whether it is a conch shell, gold, pack of cigarettes or paper money, all have several things in common. They are scarce enough to have value and they are accepted by others as payment for goods or services.

The Medium of Exchange

Money is a product that everyone recognizes and accepts as payment. Without money society would resort to barter. If there were only two people, one raising corn and the other making pants, barter would be simple. Each produces more than he needs and trades the surplus. But if a third person who catches fish is introduced into this system, trade becomes more complicated. The fisherman may want corn, but the farmer wants pants. Without what economists call a double coincidence of needs, trade is impossible. That is where money as a medium of exchange solves the dilemma, because each person accepts it because he knows the others will, too. Good money has certain characteristics that make it a desirable medium of exchange. It must be easy to recognize and generally accepted -- many people in the U.S. will reject a Canadian coin, for example. Good money should be convenient. Paper money is preferred to conch shells for that reason. Good money should also hold its value and be hard to counterfeit.