What is a medium of exchange?

Magnifying glass on a coral background

One of the key functions of money, a medium of exchange, simplifies the process of trading by allowing value to be transferred or exchanged between a buyer and seller because it is widely accepted as an appropriate payment.

Before this function appeared, people would barter for goods and services they needed. If Billy and Bob each had something the other wanted, they would then agree to trade. As you can imagine this was not very efficient and made it difficult to find a trading partner if your needs did not match. This problem is also called a double coincidence of wants (link).

For example, if you had bananas but wanted potatoes, you’d have to find someone who had potatoes but also a hunger for fresh bananas. Even if you found someone willing to trade, you’d then have to devise a way to figure out how many bananas are worth a certain number of potatoes. Easier said than done.

Past mediums of exchange

Before money, history was littered with many examples of other mediums of exchange from beaver pelts in the US to salts, pepper or other spices in shipping and trade.

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