Medium of exchange

Medium of exchange is one of the three fundamental functions of money in mainstream economics. It is a widely accepted token which can be exchanged for goods and services. Because it can be exchanged for any good or service it acts as an intermediary instrument and avoids the limitations of barter; where what one wants has to be exactly matched with what the other has to offer.A barter transaction is the exchange of one valuable good for another of equivalent value. William Stanley Jevons described how a widely accepted medium allows each barter exchange to be split into three difficulties of barter. A medium of exchange eliminates the need for a coincidence of wants.The ideal medium of exchange should be spread throughout the marketplace so that anyone with stuff to exchange can buy and sell. When money also serves the function of a store of value, as fiat money does, there are conflicting drivers of monetary policy, because a store of value can become more valuable if it is scarce in the marketplace. When the medium of exchange is scarce, traders will pay to rent it (interest), which acts as an impedance to trade and a net transfer of wealth from poor to rich.Fiat currencies' most important and essential function is to provide a 'measure of value'... Hifzur Rab has shown that the market measures or sets the real value of various goods and services using the medium of exchange as unit of measure i.e., standard or the yard stick of measurement of wealth. There is no other alternative to the mechanism used by the market to set, determine, or measure the value of various goods and services. Determination of price is an essential condition for justice in exchange, efficient allocation of resources, economic growth, welfare and justice. The most important and essential function of a medium of exchange is to be widely acceptable and have relatively stable purchasing power (real value). Therefore, it should possess the following characteristics:Although the unit of account must be in some way related to the medium of exchange in use, e.g. coinage should be in denominations of that unit making accounting much easier to perform, it has often been the case that media of exchange have no natural relationship to that unit, and must be 'minted' or in some way marked as having that value. Also there may be variances in quality of the underlying good which may not have fully agreed commodity grading. The difference between the two functions becomes obvious when one considers the fact that coins were very often 'shaved', precious metal removed from them, leaving them still useful as an identifiable coin in the marketplace, for a certain number of units in trade, but which no longer had the quantity of metal supplied by the coin's minter. It was observed as early as Oresme, Copernicus and then in 1558 by Sir Thomas Gresham, that bad money drives out good in any marketplace (Gresham's Law states 'Where legal tender laws exist, bad money drives out good money'). A more precise definition is this: 'A currency that is artificially overvalued by law will drive out of circulation a currency that is artificially undervalued by that law.' Gresham's law is therefore a specific application of the general law of price controls. A common explanation is that people will always keep the less adultered, less clipped, sweated, less filed, less trimmed coin, and offer the other in the marketplace for the full units for which it is marked. It is inevitably the bad coins proffered, good ones retained.