Medium of Exchange
A medium of exchange is anything widely accepted in payment for goods and services, held not for its own use but because it can be passed on to someone else. It is the function most people mean by money, and the one that ends the need for barter.
Also called: means of payment · means of exchange · exchange medium
The defining feature is that people accept it in order to spend it. The Bank of England's example is cigarettes in some Second World War prisoner-of-war camps: even non-smokers took them in trade, because they could swap them later for something they did want. A medium of exchange removes the double coincidence of wants that barter requires, splitting one awkward swap into a sale and a later purchase.
In a modern economy the main medium of exchange is not cash but bank deposits. The Bank of England put deposits at 97 percent of the money held by the UK public at the end of 2013. A card payment or bank transfer moves a deposit from one bank's books to another's, and the banks settle between themselves in central bank money.
Acceptance is the test, not legal status. Legal tender rules have a narrow meaning about settling debts; whether something works as a medium of exchange depends on whether the other side will take it. A stablecoin can serve as a medium of exchange among traders and merchants who accept it while having no status as legal tender, which is why acceptance networks and reliable redemption at par matter more to its usefulness than the technology it runs on.
In practice
A medium of exchange must hold its value at least between receipt and spending. Very high inflation can push people to pay in a foreign currency even where the law expects the domestic one.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Medium of Exchange, with more detail and background.
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Commonly confused with
| Term | How it differs |
|---|---|
| Legal tender | Legal tender is a legal status that governs how a debt can be settled. A medium of exchange is defined by acceptance in everyday trade. |
See also
- Unit of AccountA unit of account is the measure in which prices, debts and accounts are expressed: the pound or the dollar today, a weight of silver or a measure of barley in the ancient world. It is one of the three classic functions of money.
- Store of ValueA store of value is an asset that keeps its purchasing power in a reasonably predictable way over time, so that wealth earned today can be spent later. It is one of the three classic functions of money, and many assets do it better than money.
- Double Coincidence of WantsThe double coincidence of wants is the condition barter requires: each party must have what the other wants, at the same time and in the right quantity. Money removes it by letting one side accept something it can spend later elsewhere.
- Legal TenderLegal tender is money that a creditor must accept in settlement of a debt, so that a debtor who offers it in full cannot be sued for non-payment. It does not oblige a shop or anyone else to accept that money for a purchase.
- Commercial Bank MoneyCommercial bank money is the money that exists as deposits at commercial banks. It is a private bank's promise to pay, created when banks lend, and makes up the large majority of the money that households and businesses actually use.