Medium of Exchange
MEDIUM OF EXCHANGE
A medium of exchange is money or any other agreed upon item used in the sale of goods and services. Whether the product being sold is a hamburger, a new car, or a movie ticket, something must be given to transfer value from the buyer to the seller. In modern economies, money serves this purpose. In more primitive economies or in special circumstances other mediums of exchange may develop. In prisoner of war camps, for example, cigarettes have served as a medium of exchange, with inmates trading food or other desired goods for a given number of smokes. For a market to operate efficiently, everyone must agree on the medium of exchange. Early in the history of the United States, banks and not the government issued paper money, and there were endless disagreements over whether one bank's notes would be accepted at another bank or in another state. Finally, to avoid such confusion, the government began to issue the nation's money, which is now used as a medium of exchange for virtually all transactions. It is important to note that credit cards and personal checks are not really a medium of exchange, but merely a stand-in for the real medium of exchange, which is money.