Medium of exchange
People wishing to achieve their ends often have to trade. They can exchange their goods directly, if they have matching preferences and suitable goods, or indirectly, with the help of another good - the medium of exchange.
Jones can trade an apple against two eggs from Brown. But this direct exchange or barter limits the number of exchanges and the extent of social cooperation. Both must have a direct personal need for the goods of the other person (this problem is called the "double coincidence of wants") and the goods must be easily divided. Using another, marketable good between the traded and desired goods and services helps to reduce some of the problems.
Medium of exchange and money
- Main article: Money
Another grave problem with a world of barter is that it is impossible for any business firm to calculate how it's doing, whether it is making profits or incurring losses, beyond a very primitive estimate. Suppose that you are a business firm, and you are trying to calculate your income, and your expenses, for the previous month. And you list your income: "let's see, last month we took in 20 yards of string, 3 codfish, 4 cords of lumber, 3 bushels of wheat. . . etc.," and "we paid out: 5 empty barrels, 8 pounds of cotton, 30 bricks, 5 pounds of beef." How in the world could you figure out how well you are doing? Once a money is established in an economy, however, business calculation becomes easy: "Last month, we took in 500, and paid out 450. Net profit, 50." The development of a general medium of exchange, then, is a crucial requisite to the development of any sort of flourishing market economy.
A commodity that comes into general use as a medium of exchange is money. The concept of a "medium of exchange" is precise. But when exactly comes a medium of exchange into "common" or "general" use is not strictly definable. Whether or not is a medium money can be decided only by the judgment of the historian. Since there is a great tendency on the market for a medium of exchange to become money, it is called money for simplification.
Note that money is still a good - the most marketable good. Money is valuable to the extent that others are willing to accept it in exchange. But, money itself must first have originated as a directly serviceable good before it could become an indirectly serviceable good.
- Ludwig von Mises. "1. Media of Exchange and Money", Chapter XVII. Indirect exchange, Human Action, online edition, referenced 2009-04-27.
- Murray N. Rothbard. The Case Against the Fed (pdf), The Genesis of Money, p.12-15, referenced 2010-03-18.
- Murray N. Rothbard "2. The Emergence of Indirect Exchange" Chapter 3-The Pattern of indirect exchange, Man, Economy and State, online edition, referenced 2009-05-05.
- Dan Mahoney. "Austrian Business Cycle Theory: A Brief Explanation", Mises Institute, referenced 2009-06-17.