Money: Medium of Exchange

Money is a human social construct to solve the problem of commerce. Different people live in different conditions, they acquire different skills someone is a good farmer while some other person is a good shoe maker. No one is self sufficient and no one should try to be self sufficient because it leads to poor efficiency. Besides as Adam Smith elaborates in “The Wealth Of Nations” division of labour is one of the most important characteristic of wealthy nations. Because specialized skills produce better goods and services with greater efficiency. Due to these reasons, commerce i.e exchange of goods and services becomes important.

Commerce happens on debt or cash. Debt occurs when transactions are not settled in real time. Suppose a barber provides his services to a farmer in exchange for grains but grains are produced only seasonally and services are provided over the whole time period. Hence either the farmer provides the grains in advance or the barber provides his services in advance and the second half of the transaction is settled overtime thus debt is created. Such debts existed in society for all goods and services. Money solves the problem of debt and allows transactions to be settled in cash. Lets say the farmer pays the barber each time his services are required and farmer earns the money in lump sum by selling his surplus produce. The money has to preserve its value during the period it is earned/exchanged and when it is used. Only if money preserves its value will it be used for settling transactions in cash.

Money is something which scoiety has accepted to use as an intermediate for commerce. As it is used for commerce, every tradeable good and service has an rate of exchange in terms of unit of money this rate is called the good and service’s price. Price is either fixed by government or determined by the “Market”. Market is an institution for price discovery.

Money is a social contruct of humans to facilitate commerce of goods and services.