Money: A medium of exchange

People use money almost every day — maybe to buy lemonade at a drinks stand, to buy an app online, or to pay the taxi driver. The vendor, the app developer and the taxi driver can then use the money to buy things they want or need. But why is money accepted in return for things we want? Where does money get its value in the first place? To understand how money works, let’s go to a time and place without it.

Omar is a lumberjack and Sara is an egg farmer. Omar would like some eggs to eat for supper, and Sara would like some wood to build a hut. Sara asks Omar to trade her some wood for some eggs. The two agree on a trade of ten eggs for one large log. This system of swapping one good for another is called bartering.

Bartering helps two people get what they need, but it doesn’t work for long... Enter Kai, a potato farmer. Sara would like to buy some of Kai’s potatoes. But Kai doesn’t want any chickens or eggs. He wants wood.

Sara will have to trade for some wood with Omar before she can trade for some potatoes with Kai. And this is the problem with bartering. To barter, you have to find someone who has what you want and wants what you have. The more people who live in a community, the more complicated bartering becomes. To make trading easier, people need to find something to trade with that everyone will accept.

Like... seashells. Omar will give Sara 10 seashells for five eggs and Sara finds Kai will take five seashells for a bag of potatoes. Kai can use these seashells to buy something he’d like. The seashells become a medium of exchange, otherwise known as...

money! Money is any item that a whole group of people — say, everyone within a country — will accept as payment for goods and services. Over the centuries, money has taken many different forms from seashells, to tobacco, to gold and silver. Eventually, the most practical form of physical money turns out to be coins and banknotes, or cash. Today, money often goes from one person to another with no cash passed between them.

We might pay with a card, or using our phone, for instance. But even then, the exchange of money still takes place — instead of going from one person to another, it simply goes from one bank account to another, digitally. Though money looks different in different times and different places, it is always really the same thing: something accepted as payment for goods or services, — a medium of exchange.