Mediumexchange

A mediumexchangean intermediary usedtradeavoidinconveniences ofpure barter system.

In suchsystem, there must becoincidencewants before two people can trade -must want exactly whatother hasoffer, whenwhere itoffered, so thatexchange can occur. A mediumexchange permitsvalue ofgoodbe assessedrenderedterms ofintermediary, most often,formmoney widely acceptedbuy any other good.

To serve asmediumexchange,good or signal need not have any inherent valueits own, that is,need not be effective asstorevalueitself. Paper money isuseful mediumexchangepart becausehas no such value, thus,cannot lose that value if damaged,so damaged paper moneyeasily replaced. Gold waspopular asmediumexchange and storevalue becausewas convenientmove large quantitieswas inert,so would not tarnish or lose weight or value.

A longer term obligation need not be measured insame terms asimmediate medium is, that is,medium need not bestandarddeferred payment. Many currenciesperiodshigh inflation have become unacceptable as denominationsdebt - creditors demand contracts that specify paymentssome stable currency such asUS dollar, orquantitygold or food perhaps, but continueuseunstable local currency asdaily mediumexchange. The standarddeferred payment tendstrade atpremiumsuch circumstances,some goodsnot availablethose who deal inmediumexchange currency only.

Althoughunitaccount must besome way related tomediumexchangeuse, e.g. coinage should bedenominationsthat unit making accounting much easierperform,has often beencase that mediaexchange have no natural relationshipthat unit,must be 'minted' orsome way marked as having that value. Also there may be variancesquality ofunderlying good which may not have fully agreed commodity grading. The difference betweentwo functions becomes obvious when one considersfact that coins were very often 'shaved', precious metal removed from them, leaving them still useful as an identifiable coin inmarketplace, forcertain numberunitstrade, but which no longer hadquantitymetal supplied bycoin's minter. It was observed as early as Oresme, Copernicusthen1558 by Sir Thomas Gresham, that bad money drives out goodany marketplace (Gresham's Law states "Where legal tender laws exist, bad money drives out good money"). A common explanationthat people will always keepless adultered, less clipped, sweated, less filed, less trimmed coin,offerother inmarketplace forfull unitswhich itmarked. Itinevitablybad coins proffered, good ones retained.

The fact thatbank or mint has always been ablegeneratemediumexchange markedmore units than itworth asstorevalue, isbasisbanking. Central bankingbased onprinciple that no medium needs more thanguarantee ofstate thatcan be redeemedpaymentdebt as "legal tender" - thus, all money equally backed bystategood money, within that state. Asas that state produces anythingvalueothers, its mediumexchange has some value,its currency may also be useful asstandarddeferred payment among others, even those who never dealthat state directlyforeign exchange.

Of all functionsmoney,mediumexchange function has historically beenmost problematic becausecounterfeiting,systematicdeliberate creationbad moneyno authorizationdo so, leading todriving out ofgood money entirely.

Other functions rely not on recognitionsome token or weightmetal inmarketplace, where timedetect any counterfeitlimitedbenefitssuccessful passing-offhigh, but on more stableterm social contracts: one cannot easily forcewhole societyacceptdifferent standarddeferred payment, require even small groupspeopleupholdfloor price forstorevalue, still lessre-price everythingrewrite all accounts tounitaccount (the most stable function). Thustendsbemediumexchange function that constrains what can be used asformfinancial capital.

It was once common inUnited Stateswidely acceptcheck asmediumexchange, several parties endorsingperhaps multiple times beforewould eventually be depositedits valueunitsaccount,thus redeemed. This practice became less common aswas exploited by forgersled todomino effectbounced checks -forerunner ofkindfragility that electronic systems would eventually bring:

Inageelectronic moneywas,remains, commonuse verystringsdifficult-to-reproduce numbers, generated by encryption methods,authenticate transactionscommitments as having come from trusted parties. Thusmediumexchange function has become whollypart ofmarketplaceits signals,is utterly integrated withunitaccount function, so that, givenintegrity ofpublic key system on which thesebased,becomethat degree inseparable. This has clear advantages - counterfeitingdifficult or impossible unlesswhole systemcompromised, say bynew meansprime number factoring. But at that point,entire systembroken andwhole infrastructureobsolete - new keys must be re-generated andnew system will also depend on some assumptions about difficultyfactoring.

Duethis inherent fragility, whicheven more profoundelectronic democracy andvoting machine, some economists argue that unitsaccount should not ever be abstracted or confused withnominal units or tokens usedexchange. A mediumjust that,medium,should not be confused formessage.