2. The Medium of Exchange—Money

CHAPTER

TWO

The Medium of Exchange—Money

The definition of money is very simple. Money is the general medium of exchange used on the market. Money, the medium of exchange, is something that individuals choose in order to facilitate the exchange of commodities. Money is a market phenomenon. What does that mean? It means that money developed on the market, and that its development and its functioning have nothing to do with the government, the state, or with the violence exercised by governments.

The market developed what is called indirect exchange. The man who couldn’t get what he wanted on the market through direct exchange, through barter, took something else, something that was considered more easily negotiable, something which he expected to trade later for what he really wanted. The market, the people on the market, the people in organizing the division of labor and bringing about the system in which one man produces shoes and another produces coats, brought about the system in which coats can be exchanged against shoes, but only practically on account of the difference of the importance and the value, by the intermediary of money. Thus the market system made it possible for people who could not get today what they needed, what they wanted to buy on the market, to take, in return for what they brought to trade, a medium of exchange—that means something that was more easily used on the market than what they brought to the market to exchange. With a medium of exchange, the originators of the exchange can attain satisfaction finally by acquiring those things which they themselves want to consume.

Money is a medium of exchange because people use it as such. People don’t eat the money; they ask for the money because they want to use it to give it away in a new contract. And this barter or trade is technically possible only if there is a medium of exchange, a money, against which he can exchange what he has for the things he wants and needs. All the mutual givings and receivings that take place on the market, all these mutual exchanges that lead to the development of money, are the voluntary achievements of individual people.

Through a long evolution, governments, or certain groups of governments, have promoted the idea that money is not simply a market phenomenon, but that it is whatever the government calls money. But money is not what the government says. The idea of money is that it is a medium of exchange; somebody who sells something and is not in a position to exchange again immediately for the thing he wants to consume gets something else which he can exchange for this at a later date. This “something else” is a medium of exchange, because the man who sells, let us say, chickens or eggs, does not, or cannot get directly what he wants himself to consume, but must take something else which he uses at a later date in order to get what he needs.

If people say that money is not the most important thing in the world, they may be perfectly right from the point of view of the ideas that are responsible for the conduct of human affairs. But if they say that money is not important, they do not understand what money does. Money, the medium of exchange, makes it possible for everybody to attain what he wants by exchanging again and again. He may not acquire directly the things he wants to consume. But money makes it easier for the individual to satisfy his needs through other exchanges. In other words, people first exchange what they have produced, for a medium of exchange, something which is more easily exchangeable than what they have produced; then through later exchanges, they are able to acquire the things they want to consume. And this is the service which money renders to the economic system; it makes it easier for people to acquire the things they want and need.