Medium of Exchange - Definition

Definition

Money is the common Medium of Exchange and its most important and essential function is that it is 'measure of value'... Hifzur Rab has shown that market measures or sets value of various goods and services using the medium of exchange/money as 'unit' i.e., standard or the Yard Stick of Measurement of Wealth. There is no other alternative to the mechanism used by market to set or determine or measure value of various goods and services and therefore wealth. Just determination of prices is an essential condition for justice in exchange, efficient allocation of resources, economic growth welfare and justice.Money helps us in gaining power of buying. Thus, this is the most important and essential function of money. To be widely acceptable, a medium of exchange should have stable purchasing power (Value) and therefore it should possess the following characteristics:

1. value common assets
2. constant utility
3. low cost of preservation
4. transportability
5. divisibility
6. high market value in relation to volume and weight
7. recognisability
8. resistance to counterfeiting

To serve as a measure of value, a medium of exchange, be it a good or signal, needs to have constant inherent value of its own or it must be firmly linked to a definite basket of goods and services. It should have constant intrinsic value and stable purchasing power. Gold was long popular as a medium of exchange and store of value because it was inert, was convenient to move due to even small amounts of gold having considerable value, had a constant value due to its special physical and chemical properties, and was cherished by men.

Critics of the prevailing system of fiat money argue that fiat money is the root cause of the continuum of economic crises, since it leads to the dominance of fraud, corruption, and manipulation precisely because it does not satisfy the criteria for a medium of exchange cited above. Specifically, prevailing fiat money is free float and depending upon its supply market finds or sets a value to it that continues to change as the supply of money is changed with respect to the economy's demand. Increasing free floating money supply with respect to needs of the economy reduces the quantity of the basket of the goods and services to which it is linked by the market and that provides it purchasing power. Thus it is not a unit or standard measure of wealth and its manipulation impedes the market mechanism by that it sets/determine just prices. That leads us to a situation where no value-related economic data is just or reliable. On the other hand, Chartalists claim that the ability to manipulate the value of fiat money is an advantage, in that fiscal stimulus is more easily available in times of economic crisis.